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Exam 11: Capital Investment Analysis

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Question 31

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The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is

A) cash payback method
B) net present value method
C) internal rate of return method
D) average rate of return method

E) C) and D)
F) None of the above

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Question 32

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The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines and has asked the accountant to analyze them to determine the best average rate of return.

A) Machine B
B) Machine C
C) Machine B or C
D) Machine A

E) B) and C)
F) C) and D)

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Question 33

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If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted.

All of the following are factors that may complicate capital investment analysis except

Average rate of return equals estimated average annual income divided by average investment.

Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment?

A company is considering purchasing a machine for $21,000.  The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500.  The payback period for the new machine is 10.5 years.

Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a useful life of 9 years. What is one widely used method to make the net present values of the proposals comparable?

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: The average rate of return for this investment is

A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality.

Methods that ignore present value in capital investment analysis include the cash payback method.

The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability: The cash payback period for this investment is

Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Tipper Company.

Methods that ignore present value in capital investment analysis include the average rate of return method.

Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: The company's minimum desired rate of return for net present value analysis is 15%. The present value of $1 at compound interest of 15% for 1, 2, 3, and 4 years is 0.870, 0.756, 0.658, and 0.572, respectively. Determine (a) the average rate of return on investment, using straight-line depreciation, and (b) the net present value.

Match each of the methods that follow with the correct category (a-b).

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow.

A project has estimated annual net cash flows of $80,000. It is estimated to cost $600,000. Determine the cash payback period.

A company is contemplating investing in a new piece of manufacturing machinery.  The amount to be invested is $100,000.  The present value of the future cash flows at the company's desired rate of return is $100,000.  The IRR on the project is 12%.  Which of the following statements is true?

Below is a table for the present value of $1 at compound interest. Below is a table for the present value of an annuity of $1 at compound interest. Using the tables above, what would be the present value of $8,000 to be received 1 year from today, assuming an earnings rate of 12%?