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Exam 10: Capital Investment Analysis

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Question 81

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The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing.

A) True
B) False

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Question 82

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

A) past value methods
B) straight-line methods
C) reducing value methods
D) methods that ignore present value

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

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Question 83

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Proposals M and N each cost $600,000, 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:

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The accounting rate of return for the machine is 50%.

The accounting rate of return is a measure of profitability computed by dividing the average annual cash flows from an asset by the average amount invested in the asset.

The management of River Corporation is considering the purchase of a new machine costing $380,000. 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 in this situation: The average rate of return for this investment is:

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, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next 4 years, what would be the net present value (rounded to the nearest dollar) of the investment, (assuming an earnings rate of 10%) ?

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 is the present value of $6,000 (rounded to the nearest dollar) to be received at the end of each of the next 4 years, assuming an earnings rate of 10%?

What is the present value of $8,000 to be received at the end of six years, if the required rate of return is 15%?

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 four years, no residual value, and an expected total income yield of $21,600, is:

Which of the following are two methods of analyzing capital investment proposals that both ignore present value?

Determine the average rate of return for a project that is estimated to yield total income of $400,000 over four years, cost $720,000, and has a $70,000 residual value. Round answers in percentage to one decimal place.

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

In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of:

A project has estimated annual cash flows of $90,000 for three years and is estimated to cost $250,000. 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.

In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values.

BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows:

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period.

In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation method(s) are often used?

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?