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Exam 25: Capital Investment Analysis

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Question 1

Multiple Choice

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An anticipated purchase of equipment for $490,000 with a useful life of 8 years and no residual value is expected to yield the following annual net incomes and net cash flows: $\begin{array} { c c c } \text { Year } & \text { Net Income } & \text { Net Cash Flow } \\1 & \$ 60,000 & \$ 110,000 \\2 & 50,000 & 100,000 \\3 & 50,000 & 100,000 \\4 & 40,000 & 90,000 \\5 & 40,000 & 90,000 \\6 & 40,000 & 90,000 \\7 & 40,000 & 90,000 \\8 & 40,000 & 90,000\end{array}$ What is the cash payback period?

A) 5 years
B) 4 years
C) 6 years
D) 3 years

E) B) and C)
F) A) and B)

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Question 2

Multiple Choice

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Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash flow of $150,000, and annual operating income of $87,500. What is the estimated cash payback period for the machine?

A) 3.5 years
B) 4 years
C) 4.5 years
D) 5 years

E) All of the above
F) A) and C)

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Question 3

Multiple Choice

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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: $\begin{array} { c l l } & \text { Income from } & \text { Net Cash } \\\text { Year } & \text { Operations } & \text { Flow } \\1 & \$ 100,000 & \$ 180,000 \\2 & 40,000 & 120,000 \\3 & 40,000 & 100,000 \\4 & 10,000 & 90,000 \\5 & 10,000 & 120,000\end{array}$ -The cash payback period for this investment is

Match each of the methods that follow with the correct category a-b) . -Internal rate of return method

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 $105,000. The IRR on the project is 12%. Which of the following statements is true?

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 37.5%.

The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. 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: $\begin{array} { l l l } \text { Year } & \text { Income from } & \text { Net Cash } \\\text { Operations } & \text { Flow } \\1 & \$ 100,000 & \$ 180,000 \\2 & 40,000 & 120,000 \\3 & 20,000 & 100,000 \\4 & 10,000 & 90,000 \\5 & 10,000 & 90,000\end{array}$ The present value index for this investment is

Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is involved and operations could be affected for many years.

Match each of the methods that follow with the correct category a-b) . -Net present value method

All of the following qualitative considerations may impact upon capital investment analysis except

The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $10,560,000 over the 20 years is

The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation straight-line method) , with a useful life of 4 years, no residual value, and an expected total income yield of $25,300, is

A project has estimated annual cash flows of $95,000 for 4 years and is estimated to cost $260,000. Assume a minimum acceptable rate of return of 10%. Using the following tables determine the a) net present value of the project and b) the present value index, rounded to two decimal places. Below is a table for the present value of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636 \\5 & 0.747 & 0.621 & 0.567\end{array}$ Below is a table for the present value of an annuity of $1 at compound interest. $\begin{array} { l l l l } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 1.833 & 1.736 & 1.690 \\3 & 2.673 & 2.487 & 2.402 \\4 & 3.465 & 3.170 & 3.037 \\5 & 4.212 & 3.791 & 3.605\end{array}$

An anticipated purchase of equipment for $520,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: $\begin{array}{lll}\text { Year } &\text {Net Income } &\text { Net Cash Flow }\\1 & \$ 60,000 & \$ 120,000 \\2 & 50,000 & 110,000 \\3 & 50,000 & 110,000 \\4 & 40,000 & 100,000 \\5 & 40,000 & 80,000 \\6 & 40,000 & 80,000 \\7 & 40,000 & 60,000 \\8 & 40,000 & 60,000\end{array}$ What is the cash payback period?

A series of equal cash flows at fixed intervals is termed an annuity.

The methods of evaluating capital investment proposals can be separated into two general groups-present value methods and

The cash payback method can be used only when net cash inflows are the same for each period.

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. $\begin{array} { | l | l | l | l | } \hline & \text { Machine } A & \text { Machine B } & \text { Machine C } \\\hline \text { Estimated average income } & \$ 40,000 & \$ 50,000 & \$ 75,000 \\\hline \text { Average investment } & \$ 300,000 & \$ 250,000 & \$ 500,000 \\\hline\end{array}$

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

Match each definition that follows with the term a-f) it defines. -The length of time it will take to recover through cash inflows the dollars of a capital outlay