Chapter 25(10): Capital Investment Analysis
150.
An 8-year project is estimated to cost $400,000 and have no residual value. If the straight-line depreciation
method
is used and the average rate of return is 5%, determine the estimated annual net income.
151.
Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated
life
of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:
Year
Net Income
Net Cash Flow
1
$ 75,000
$285,000
2
100,000
290,000
3
109,000
190,000
4
36,000
125,000
$320,000
$890,000
The company’s minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for
1,
2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.
Determine the average rate of return on investment, including the effect of depreciation on the investment.
152.
Proposals M and N each cost $550,000, 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:
Determine the cash payback period for each proposal.
Year 1
$250,000
Year 2
200,000
Year 3
150,000
Year 4
75,000
Year 5
50,000
Year 6
25,000
153.
A 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method
is
used and the average rate of return is 12%, determine the estimated annual net income.
154.
A project has estimated annual net cash flows of $80,000. It is estimated to cost $600,000. Determine the cash
payback period.
155.
Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value.
Tipper
seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary average
annual
income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to
Tipper
Company.
156.
Proposals A and B each cost $600,000 and have 5-year lives. Proposal A is expected to provide equal annual
net
cash flows of $159,000, while the net cash flows for Proposal B are as follows:
Year 1
$150,000
Year 2
140,000
Year 3
110,000
Year 4
150,000
Year 5
50,000
$600,000
Determine the cash payback period for each proposal. Round answers to two decimal places.
157.
A project has estimated annual net cash flows of $60,000. It is estimated to cost $240,000. Determine the cash
payback period.
158.
Identify four capital investment evaluation methods discussed in the chapter and discuss the strengths
and
weaknesses of each method.
159.
Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an
estimated
life of 4 years and no salvage value. The estimated net income and net cash flow from the project are
as follows:
Year
Net Income
Net Cash Flow
1
$ 90,000
$210,000
2
80,000
200,000
3
40,000
160,000
4
30,000
150,000
$240,000
$720,000
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 1, 2, 3, and 4 years 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.
160.
BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of
4
years and no salvage value. The estimated net income and net cash flow from the project are as follows:
Year
Net Income
Net Cash Flow
1
$ 75,000
$285,000
2
102,000
290,000
3
109,500
190,000
4
36,000
125,000
$322,500
$890,000
The company’s minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for
1,
2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.
Determine: (a) the average rate of return on investment, including the effect of depreciation on the investment, and
(b) the net present value.
161.
A project has estimated annual cash flows of $95,000 for 4 years and is estimated to cost $260,000. 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.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
0.890
0.826
0.797
3
0.840
0.751
0.712
4
0.792
0.683
0.636
5
0.747
0.621
0.567
Below is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
162. A project has estimated annual cash flows of $90,000 for 3 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.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
0.890
0.826
0.797
3
0.840
0.751
0.712
4
0.792
0.683
0.636
5
0.747
0.621
0.567
Below is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
163. A project is estimated to cost $273,840 and provide annual net cash flows of $60,000 for 7 years. Determine the
internal rate of return for this project, using the following present value of an annuity table.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
6
4.917
4.355
4.111
7
5.582
4.868
4.564
8
6.210
5.335
4.968
9
6.802
5.759
5.328
10
7.360
6.145
5.650
164.
A project is estimated to cost $248,400 and provide annual cash flows of $50,000 for 8 years. Determine
the
internal rate of return for this project, using the following present value of an annuity table.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
6
4.917
4.355
4.111
7
5.582
4.868
4.564
8
6.210
5.335
4.968
9
6.802
5.759
5.328
10
7.360
6.145
5.650
165.
What is the present value of $8,000 to be received at the end of 6-years if the required rate of return is 15%?
Below is a table for the present value of $1 at compound interest.
Year
15%
Year
15%
1
0.870
6
0.432
2
0.756
7
0.376
3
0.658
8
0.327
4
0.572
9
0.284
5
0.497
10
0.247
Below is a table for the present value of an annuity of $1 at compound interest.
Year
15%
Year
15%
1
0.870
6
3.785
2
1.626
7
4.160
3
2.283
8
4.487
4
2.855
9
4.772
5
3.353
10
5.019
166.
Norton Company is considering a project that will require an initial investment of $750,000 and will return
$200,000
each year for 5- years.
(a)
If taxes are ignored and the required rate of return is 9%, what is the project’s net present value?
(b) Based on this analysis, should Norton Company proceed with the project?
Below is a table for the present value of $1 at compound interest.
Year
9%
Year
9%
1
0.917
6
0.596
2
0.842
7
0.547
3
0.772
8
0.502
4
0.708
9
0.460
5
0.650
10
0.422
Below is a table for the present value of an annuity of $1 at compound interest.
Year
9%
Year
9%
1
0.917
6
4.486
2
1.759
7
5.033
3
2.531
8
5.535
4
3.240
9
5.995
5
3.890
10
6.418