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Exam 26: Capital Investment Analysis

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Question 41

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All of the following qualitative considerations may influence capital investment analysis except the investment proposal's impact on

A) the time value of money
B) employee morale
C) product quality
D) manufacturing flexibility

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Question 42

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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 $100,000. 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 compute the present value of the future cash flows is less than 12%.
C) The desired rate of return used to compute the present value of the future cash flows is more than 12%.
D) The desired rate of return used to compute the present value of the future cash flows is equal to 12%.

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Question 43

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Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

Match each of the methods that follow with the correct category (a-b). -Cash payback method A)Methods that do not use present values B)Methods that use present values

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

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 of this investment: ​ -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: ​ -The cash payback period for this investment is

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.

Match each phrase that follows with the term (a-f) it describes. -A measure of the average annual income as a percent of the average investment A)Capital rationing B)Annuity C)Capital investment analysis D)Internal rate of return method E)Payback period F)Accounting rate of return

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

Match each phrase that follows with the term (a-f) it describes. -Uses present value concepts to compute the rate of return on an investment from a capital investment proposal based on its expected net cash flows A)Capital rationing B)Annuity C)Capital investment analysis D)Internal rate of return method E)Payback period F)Accounting rate of return

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow.

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.

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

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 inflows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3 years.

Sensitivity analysis assigns likelihoods (probabilities) to various inputs, thus incorporating uncertainty directly into the output (answer).

Match each of the methods that follow with the correct category (a-b). -Net present value method A)Methods that do not use present values B)Methods that use present values

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 $200,000 over the 5 years. The expected average rate of return is 25%.

A qualitative characteristic that may influence capital investment analysis is the investment proposal's impact on product quality.

Using the following partial table of present value of $1 at compound interest, the present value of $15,000 to be received 3 years hence with earnings at the rate of 6% a year is