Chapter 25(10): Capital Investment Analysis
167.
An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next 4– years. What is
the investment’s internal rate of return?
Below is a table for the present value of $1 at compound interest.
Year
6%
10%
12%
15%
1
0.943
0.909
0.893
0.870
2
0.890
0.826
0.797
0.756
3
0.840
0.751
0.712
0.658
4
0.792
0.683
0.636
0.572
5
0.747
0.621
0.567
0.497
Below is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
15%
1
0.943
0.909
0.893
0.870
2
1.833
1.736
1.690
1.626
3
2.673
2.487
2.402
2.283
4
3.465
3.170
3.037
2.855
5
4.212
3.791
3.605
3.353
Chapter 25(10): Capital Investment Analysis
168.
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
$280,000
2
100,000
300,000
3
109,000
200,000
4
36,000
120,000
$320,000
$900,000
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.
169.
A $550,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated
net
cash flows are as follows:
Year
Net Cash Flow
1
$300,000
2
280,000
3
208,000
4
180,000
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 0.893, 0.797, 0.712, and 0.636, respectively.
1
2
280,000
3
208,000
4
170.
Sunrise Inc. is considering a capital investment proposal that costs $227,500 and has an estimated life of 4
years
and no residual value. The estimated net cash flows are as follows:
Year
Net Cash Flow
1
$97,500
2
80,000
3
60,000
4
40,000
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 0.909, 0.826, 0.751, and 0.683, respectively.
Determine the net
present value. Round interim answers to the nearest dollar.
ANSWER:
171.
The net present value has been computed for Proposals P and Q. Relevant data are as follows:
Proposal P
Proposal Q
Amount to be invested
$245,000
$460,000
Total present value of net cash flow
296,500
425,000
Determine the present value index for each proposal. Round your answers to two decimal places.
172.
A $400,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated
net
cash flows are as follows:
Year
Net Cash Flow
1
$200,000
2
150,000
3
90,000
4
80,000
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 0.893, 0.797, 0.712, and 0.636, respectively.
Determine the net present value.
80,000
173.
Briefly describe the time value of money. Why is the time value of money important in capital investment analysis?
174.
Project A requires an original investment of $50,000. The project will yield cash flows of $15,000 per year for 7
years. Project B has a calculated net present value of $13,500 over a 4-year life. Project A could be sold at the end
of 4 years for $25,000. (a) Using the table below, determine the net present value of Project A over a 4-year life
with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present
value?
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
175.
Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for 7
years. Project B has a calculated net present value of $5,500 over a 5-year life. Project A could be sold at the end
of 5 years for a price of $30,000. (a) Using the table below, determine the net present value of Project A over a 5–
year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest
net
present value?
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
Chapter 25(10): Capital Investment Analysis
Match each of the methods that follow with the correct category (a–b).
a.
Methods that does not use present value
b.
Methods that uses present value
DIFFICULTY: Easy
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.26-01 – 26–01
ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 – Payback/ARR Methods
ACCT.ACBSP.APC.38 – NPV/IRR Methods
ACCT.IMA.15 – Investment Decisions
BUSPROG: Analytic
176.
Cash payback method
177.
Internal rate of return method
178.
Average rate of return method
179.
Net present value method
Chapter 25(10): Capital Investment Analysis
Match each definition that follows with the term (a–e) it defines.
a.
Capital investment analysis
b.
Time value of money concept
c.
Net present value method
d.
Average rate of return
e.
Cash payback period
DIFFICULTY: Easy
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.26-01 – 26–01
ACCT.WARD.16.26-02 – 26–02
ACCT.WARD.16.26-03 – 26–03
ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 – Management Functions
ACCT.ACBSP.APC.37 – Payback/ARR Methods
ACCT.ACBSP.APC.38 – NPV/IRR Methods
ACCT.IMA.15 – Investment Decisions
BUSPROG: Analytic
180.
Recognizes that a dollar today is worth more than a dollar tomorrow
181.
Often referred to as the discounted cash flow method
182.
Also referred to as capital budgeting
183.
Average income as a percentage of average investment
184.
Can be determined by initial cost divided by annual net cash inflow of an investment
Chapter 25(10): Capital Investment Analysis
Match each definition that follows with the term (a–f) it defines.
a.
Capital rationing
b.
Annuity
c.
Capital investment analysis
d.
Internal rate of return method
e.
Payback period
f.
Accounting rate of return
DIFFICULTY: Easy
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.26-01 – 26–01
ACCT.WARD.16.26-02 – 26–02
ACCT.WARD.16.26-03 – 26–03
ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 – Management Functions
ACCT.ACBSP.APC.37 – Payback/ARR Methods
ACCT.ACBSP.APC.38 – NPV/IRR Methods
ACCT.IMA.15 – Investment Decisions
BUSPROG: Analytic
185.
A measure of the average income as a percent of the average investment
186.
The process by which management allocates funds among various capital investment proposals
187.
A stream of equal cash flow amounts
188.
A formal means of analyzing long-range investment decisions
189.
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
190.
The length of time it will take to recover through cash inflows the dollars of a capital outlay