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Exam 12: Capital Investment Decisions and the Time Value of Money

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Question 41

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Silver Creations is evaluating a project that would require an initial investment of $36,000. The present value of the net cash inflows associated with this project would be $43,200. The profitability index for this project would be closest to

A) 0.83.
B) 1.20.
C) 0.20.
D) 5.00.

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Question 42

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Runnin' Wild Family Fun Center bought new go-karts for its recreation facility. The useful life is 6 years. The go-karts had a total cost of $5,100 and will generate $1,700 total cash inflows each year for the life of the go-karts. The residual value of the go-karts is $650. The payback period in years is closest to

A) 3.38.
B) 3.00.
C) 2.62.
D) 2.17.

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Question 43

Multiple Choice

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The following are all methods of analyzing capital investments except

The net present value method assumes that all cash inflows are immediately reinvested at a rate of return equal to the internal rate of return.

The term ________ is best described as "the length of time required to recover the cost of an investment."

(Present value tables are required.) Figgey, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $52,000 and would have a residual value of $5,000 at the end of its 8 year life. The annual operating expenses of the new extruder would be $8,000. The other option that Figgey has is to rebuild its existing extruder. The rebuilding would require an investment of $30,000 and would extend the life of the existing extruder by 8 years. The existing extruder has annual operating costs of $11,000 per year and does not have a residual value. Figgey discount rate is 14%. Using net present value analysis, which option is the better option and by how much?

You win the lottery and must decide how to take the payout. Use an 8% discount rate. What is the present value of $15,000 a year received at the end of each of the next six years?

The Future Value of $1 table is used to calculate how much $100 in hand today would be worth in 5 years.

(Present value tables are required.) Renfroe Corporation is considering the purchase of a machine that would cost $22,712 and would have a useful life of 5 years. The machine would generate $6,300 of net annual cash inflows per year for each of the 5 years of its life. The internal rate of return on the machine would be closest to

When the profitability index is less than 1.00 for a project, that project has a positive net present value.

One dollar to be received in the future is worth more than one dollar today.

A company finds that the residual value of $8,000 for the equipment in a capital budgeting project has been inadvertently omitted from the calculation of the net present value (NPV) for that project. How does this omission affect the NPV of that project?

The ________ is generally considered to be the most superior method for making capital budgeting decisions.

Suppose Whole Foods is considering investing in warehouse-management software that costs $600,000, has $60,000 residual value and should lead to cash cost savings of $130,000 per year for its five-year life. In calculating the ARR, which of the following figures should be used as the equation's denominator?

The present value of an investment is affected by which of the following?

The residual value is considered in a net present value computation.

The ________ capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations.

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available: The payback period for the Indiana proposal is closest to

(Present value tables are needed.) Family Fun Park is evaluating the purchase of a new game to be located on its Midway. Family Fun has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. What is the net present value of the Wacky Water Race game?

The discounted cash flow methods for capital budgeting are generally considered inferior to the payback period and the ARR because they consider the time value of money.