Chapter 25(10): Capital Investment Analysis
107.
The management of California Corporation is considering the purchase of a new machine costing $400,000. 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 of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
40,000
120,000
3
20,000
100,000
4
10,000
90,000
5
10,000
90,000
The present value index for this investment is
a. 0.88
b. 1.45
c. 0.98
d. 0.70
Chapter 25(10): Capital Investment Analysis
The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. 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:
Year
Income from
Operations
Net Cash
Flow
1
$18,750
$93,750
2
18,750
93,750
3
18,750
93,750
4
18,750
93,750
5
18,750
93,750
108.
The present value index for this investment is
a. 1.00
b. 0.95
c. 1.25
d. 1.05
109.
The net present value for this investment is
a. $(118,145)
b. $118,145
c. $19,875
d. $(19,875)
110.
Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash
flows are expected to be $40,000 annually for 7 years. The present value factors for an annuity of $1 for 7 years at
interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for
this investment is
a. 10%
b. 6%
c. 12%
d. 8%
111.
By converting dollars to be received in the future into current dollars, the present value methods take
into
consideration that money
a.
has an international rate of exchange
b.
is the language of business
c.
is the measure of assets, liabilities, and stockholders’ equity on financial statements
d.
has a time value
Chapter 25(10): Capital Investment Analysis
Below is a table for the present value of $1 at compound interest.
6%
10%
12%
0.943
0.909
0.893
0.890
0.826
0.797
0.840
0.751
0.712
0.792
0.683
0.636
0.747
0.621
0.567
Below is a table for the present value of an annuity of $1 at compound interest.
6%
10%
12%
0.943
0.909
0.893
1.833
1.736
1.690
2.673
2.487
2.402
3.465
3.170
3.037
4.212
3.791
3.605
112.
Using the tables above, what would be the present value of $25,000 (rounded to the nearest dollar) to be received
4
years from today, assuming an earnings rate of 10%?
a. $19,800
b. $17,075
c. $79,250
d. $15,525
113.
Using the tables above, what would be the present value of $30,000 to be received 3 years from today, assuming
an
earnings rate of 6%?
a. $25,200
b. $26,700
c. $23,760
d. $80,190
114.
Using the tables above, what is the present value of $3,000 (rounded to the nearest dollar) to be received at the end
of each of the next 4 years, assuming an earnings rate of 12%?
a. $10,815
b. $7,206
c. $9,111
d. $1,908
115.
Using the tables above, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a
year
for the next 4 years, what would be the net present value of the investment, assuming an earnings rate of
10%?
a. $23,500
b. $16,050
c. $25,360
d. $1,860
116.
Using the tables above, what would be the internal rate of return of an investment that required an investment of
$227,460 and would generate an annual cash inflow of $60,000 for the next 5 years?
a.
6%
b.
10%
c.
12%
d. cannot be determined from the data given
117.
Using the tables above, what would be the internal rate of return of an investment of $210,600 that would
generate
an annual cash inflow of $50,000 for the next 5 years?
a.
6%
b. 10%
c. 12%
d. 14%
118.
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 4 years. The present value factors for an annuity of $1 for 4
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
a.
9%
b.
10%
c.
12%
d. 3%
119.
Using the following partial table of present value of $1 at compound interest, determine the present value of
$50,000
to be received 3 years hence with earnings at the rate of 12% a year:
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
a. $37,550
b. $31,800
c. $35,600
d. $39,850
120.
The rate of earnings is 12% and the cash to be received in 2 years is $10,000. Determine the present value amount,
using the following partial table of 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
a. $8,930
b. $7,120
c. $7,970
d. $8,260
121.
The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. 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 of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
40,000
120,000
3
20,000
100,000
4
10,000
90,000
5
10,000
90,000
The net present value for this investment is
a. $16,400
b. $25,200
c. $(99,600)
d. $(126,800)
122.
The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. 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 of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
40,000
120,000
3
20,000
100,000
4
10,000
90,000
5
10,000
90,000
The present value index for this investment is
a. 1.08
b. 1.45
c. 1.14
d. 0.70
Chapter 25(10): Capital Investment Analysis
Below is a table for the present value of $1 at compound interest.
6%
10%
12%
0.943
0.909
0.893
0.890
0.826
0.797
0.840
0.751
0.712
0.792
0.683
0.636
0.747
0.621
0.567
Below is a table for the present value of an annuity of $1 at compound interest.
6%
10%
12%
0.943
0.909
0.893
1.833
1.736
1.690
2.673
2.487
2.402
3.465
3.170
3.037
4.212
3.791
3.605
123.
Using the tables above, what would be the present value of $15,000 to be received at the end of each of the next 2
years, assuming an earnings rate of 6%?
a. $27,495
b. $26,040
c. $30,000
d. $25,350
124.
Using the tables above, what would be the present value of $8,000 to be received 1 year from today, assuming
an
earnings rate of 12%?
a. $7,544
b. $7,120
c. $7,272
d. $7,144
125.
Using the tables above, what is the present value of $6,000 to be received at the end of each of the next 4
years,
assuming an earnings rate of 10%?
a. $20,790
b. $19,020
c. $14,412
d. $25,272
126.
Using the tables above, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a
year
for the next 4 years, what would be the present value of the investment cash inflows, assuming an earnings
rate of
12%?
a. $20,352
b. $3,969
c. $22,190
d. $21,259
127.
The production department is proposing the purchase of an automatic insertion machine. It has identified 3
machines and have asked the accountant to analyze them to determine which of the proposals (if any) meet or
exceed the company’s policy of a minimum desired rate of return of 10% using the net present value method.
Each
of the assets has an estimated useful life of 10 years. The accountant has identified the following data:
Machine A
Machine B
Machine C
Present value of future cash flows
computed using 10% rate of
$305,000
$295,000
$300,000
Amount of initial investment
300,000
300,000
300,000
Which of the investments are acceptable?
a.
Machines A & C
b.
Machines B & C
c.
Machine B only
d.
Machine A only
128.
The production department is proposing the purchase of an automatic insertion machine. It has identified 3
machines,
each with an estimated life of 10 years. Which machine offers the best internal rate of return?
Machine A
Machine B
Machine C
Annual net cash flows
$50,000
$40,000
$75,000
Average investment
$250,000
$300,000
$500,000
a.
Machine B only
b.
Machine C only
c.
Machines A and B
d.
Machine A only
129.
T-Bone Company is contemplating investing in a new piece of manufacturing machinery. The amount to be
invested is $150,000. The present value of the future cash flows is $141,000. Should the company invest in
this
project?
a.
yes, because net present value is +$9,000
b.
yes, because net present value is –$9,000
c.
no, because net present value is +$9,000
d.
no, because net present value is –$9,000
130.
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
131.
A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is
$210,000. The present value of the future cash flows is $225,000. The company’s desired rate of return used in the
present value calculations was 12%. Which of the following statements is true?
a.
The project should not be accepted because the net present value is negative.
b.
The internal rate of return on the project is less than 12%.
c.
The internal rate of return on the project is more than 12%.
d.
The internal rate of return on the project is equal to 12%.
132.
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 $105,000. 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 calculate the present value of the future cash flows is less than 12%.
c.
The desired rate of return used to calculate the present value of the future cash flows is more than 12%.
d.
The desired rate of return used to calculate the present value of the future cash flows is equal to 12%.
133.
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 calculate the present value of the future cash flows is less than 12%.
c.
The desired rate of return used to calculate the present value of the future cash flows is more than 12%.
d.
The desired rate of return used to calculate the present value of the future cash flows is equal to 12%.
134.
All of the following qualitative considerations may impact upon capital investment analysis except
a.
manufacturing productivity
b.
manufacturing sunk cost
c.
manufacturing flexibility
d.
market opportunities
135.
All of the following qualitative considerations may impact upon capital investment analysis except
a.
time value of money
b.
employee morale
c.
the impact on product quality
d.
manufacturing flexibility
136.
Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a
useful
life of 9 years. What is one widely used method to make the net present values of the proposals
comparable?
a.
Ignore the fact that Proposal F has a useful life of 6 years and treat it as if it has a useful life of 9 years.
b.
Adjust the life of Proposal J to a time period that is equal to that of Proposal F by estimating a residual
value
at the end of year 6.
c.
Ignore the useful lives of 6 and 9 years and find an average (7 1/2 years).
d.
Ignore the useful lives of 6 and 9 years and compute the average rate of return.
137.
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?
a.
deductions for individuals
b.
depreciation deduction
c.
minimum tax provision
d.
charitable contributions
138.
Which of the following is not considered a complicating factor in capital investment decisions?
a.
income tax
b.
lease versus purchasing options
c.
equal proposal lives
d.
qualitative factors
139.
Periods in time that experience increasing price levels are known as periods of
a.
inflation
b.
recession
c.
depression
d.
deflation
140.
Which of the following would not be considered a good managerial tool in making a decision for
determining a
capital investment?
a.
evaluating further assets that are dissimilar in nature or have different useful lives
b.
using only quantitative measures to evaluate asset purchases
c.
analyzing lease versus purchase option
d.
considering income tax ramifications
141.
All of the following are factors that may complicate capital investment analysis except
a.
possible leasing alternatives
b.
changes in price levels
c.
sunk costs
d.
federal income tax ramifications
142.
The process by which management allocates available investment funds among competing investment proposals
is
called
a.
investment capital
b.
investment rationing
c.
cost-volume-profit analysis
d.
capital rationing
143.
In capital rationing, an initial screening of alternative proposals is usually performed by establishing
minimum
standards. Which of the following evaluation methods are often used?
a.
cash payback method and average rate of return method
b.
average rate of return method and net present value method
c.
net present value method and cash payback method
d.
internal rate of return and net present value methods
144.
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
145.
What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?
146.
Determine the average rate of return for a project that is estimated to yield total income of $600,000 over 4
years,
cost $840,000, and has an $80,000 residual value. Round percentage answers to one decimal place.
147.
Proposals L and K each cost $600,000, have 6-year lives, and have expected total cash flows of $720,000.
Proposal
L is expected to provide equal annual net cash flows of $170,000, while the net cash flows for Proposal
K are as
follows:
Year 1
$250,000
Year 2
200,000
Year 3
100,000
Year 4
50,000
Year 5
100,000
Year 6
20,000
$720,000
Determine the cash payback period for each proposal. Round your answers to two decimal places.
148.
Jimmy Co. is considering a 12-year project that is estimated to cost $1,050,000 and has no residual value. Jimmy
Co. seeks to earn an average rate of return of 18% 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 Jimmy Co.
149.
Determine the average rate of return for a project that is estimated to yield total income of $250,000 over 4
years,
cost $480,000, and has a $20,000 residual value.