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Exam 10: Capital Investment Analysis

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Question 1

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What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?

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Capital investment analysis is the proce...

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Question 2

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In calculating the present value of an investment in equipment, the present value of the residual value should be added to the cash inflows.

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For Years 1-5, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively.The cash payback period is 3 years.

Which of the following is a present value method of analyzing capital investment proposals?

Project A requires an original investment of $50,000.The project will yield cash flows of $15,000 per year for 7 years.Project B has a calculated net present value of $13,500 over a 4-year life.Project A could be sold at the end of 4 years for $25,000.a Using the table below, determine the net present value of Project A over a 4-year life with salvage value assuming a minimum rate of return of 12%.b Which project provides the greatest net present value? 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.

In calculating the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows.

Using the tables above, what is the present value of $3,000 rounded to the nearest dollar to be received at the end of each of the next 4 years, assuming an earnings rate of 12%?

The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method.

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

A project is estimated to cost $248,400 and provide annual cash flows of $50,000 for 8 years.Determine the internal rate of return for this project, using the following present value of an annuity table.

The expected average rate of return for a proposed investment of $650,000 in a fixed asset, with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is

Proposals M and N each cost $550,000, have 6-year lives, and have expected total cash flows of $750,000.Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows: Determine the cash payback period for each proposal.

Which of the following is true of the cash payback period?

Periods in time that experience increasing price levels are known as periods of

The management of California Corporation is considering the purchase of a new machine costing $400,000.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 of this investment: The present value index for this investment is

Using the tables above, what would be the present value of $25,000 rounded to the nearest dollar to be received 4 years from today, assuming an earnings rate of 10%?

Which of the following is not an advantage of the average rate of return method?

The net present value has been computed for Proposals P and Q.Relevant data are as follows: Determine the present value index for each proposal.Round your answers to two decimal places.

The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.

Match each definition that follows with the term a-f it defines. -A formal means of analyzing long-range investment decisions