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Exam 25: Capital Investment Analysis

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Question 31

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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?

A) The project should not be accepted because the net present value is negative.
B) The desired rate of return used to calculate the present value of the future cash flows is less than 12%.
C) The desired rate of return used to calculate the present value of the future cash flows is more than 12%.
D) The desired rate of return used to calculate the present value of the future cash flows is equal to 12%.

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

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Question 32

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A $550,000 capital investment proposal has an estimated life of four years and no residual value. The estimated net cash flows are as follows: The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is .893, .797, .712, and .636, respectively. Determine the net present value.

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Question 33

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Assume in analyzing alternative proposals that Proposal F has a useful life of six years and Proposal J has a useful life of nine years. What is one widely used method that makes the proposals comparable?

An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years. What is the investment's internal rate of return? 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.

The process by which management allocates available investment funds among competing investment proposals is called:

Identify four capital investment analysis models discussed in the chapter and discuss the strengths and weaknesses of each model.

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $143,000. Should the company invest in this project?

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 in this situation: The cash payback period for this investment is:

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 in this situation: The cash payback period for this investment is:

Sunrise Inc. is considering a capital investment proposal that costs $227,500 and has an estimated life of four years and no residual value. The estimated net cash flows are as follows: The minimum desired rate of return for net present value analysis is 10%. The present value of $1 at compound interest rates of 10% for 1, 2, 3, and 4 years is .909, .826, .751, and .683, respectively. Determine the net present value.

Proposals A and B each cost $500,000 and have 5-year lives. Proposal A is expected to provide equal annual net cash flows of $109,000, while the net cash flows for Proposal B are as follows: Determine the cash payback period for each proposal. Round answers to two decimal places.

The cash payback method of capital investment analysis is one of the methods referred to as a present value method.

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.

Which of the following is not considered as a complicating factor in capital investment decisions?

The management of Indiana 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 in this situation: The average rate of return for this investment is:

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

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

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 30%.

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%) ?

A qualitative characteristic that may impact upon capital investment analysis is manufacturing flexibility.