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Exam 25: Capital Investment Analysis

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Question 101

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Brunette Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $180,000. The present value of the future cash flows generated by the project is $163,000. Should they invest in this project?

A) yes, because the rate of return on the project exceeds the desired rate of return used to calculate the present value of the future cash flows
B) no, because the rate of return on the project is less than the desired rate of return used to calculate the present value of the future cash flows
C) no, because net present value is +$17,000
D) yes, because the rate of return on the project is equal to the desired rate of return used to calculate the present value of the future cash flows

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Question 102

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

A) present value
B) nonfinancial factors
C) maximum cost
D) net cash flow

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Question 103

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Which of the following are present value methods of analyzing capital investment proposals?

If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis.

Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. 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 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 Years 1 through 4 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.

Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for four years. The present value factors for an annuity of $1 for four years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is

If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis.

Match each definition that follows with the term (a-f) it defines. -The process by which management allocates funds among various capital investment proposals

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