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Exam 10: Planning for Capital Investments

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Question 21

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Shenandoah Springs Company is considering two investment opportunities whose cash flows are provided below: $\begin{array} { l c c } \text { Year } & \text { Investment A } & \text { Investment B } \\0 & \$ ( 15,000 ) & \$ ( 9,000 ) \\1 & 5,000 & 5,000 \\2 & 5,000 & 4,000 \\3 & 5,000 & 3,000 \\4 & 4,000 & 1,000\end{array}$ The company's hurdle rate is 12%.What is the present value index of Investment B? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.Do not round your intermediate calculations.Round your answer to two decimal points.)

A) 1.01
B) 1.16
C) 0.86
D) None of these answers are correct.

E) B) and D)
F) B) and C)

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Question 22

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Cash outflows from a capital investment project include:

A) increases in operating expenses.
B) the reduction in the amount of working capital.
C) salvage value.
D) All of these answers are correct.

E) None of the above
F) A) and B)

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Question 23

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The present value of an annuity of $1 table could be constructed using the factors contained in the present value of $1 table.

When a capital investment is expected to provide unequal annual cash inflows,the payback period can be calculated by accumulating the incremental cash inflows until the sum equals the amount of the original investment.

A series of equal cash flows at fixed intervals is termed a(n) :

Five years ago,Burton Company purchased equipment with an expected useful life of 5 years.The initial cost of the equipment was $160,000.Burton's cost of capital is 12%; when it purchased the equipment,Burton computed a net present value of $15,824 for the investment.During the current year,the equipment reached the end of its useful life.Burton determined that,over the 5-year life,the equipment had generated annual cash inflows of $46,000. Required: Conduct a post-audit to determine whether the equipment achieved the net present value the company had expected.Based on the results actually achieved,was the asset in fact an acceptable investment? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)

An investment that costs $5,000 will produce annual cash flows of $2,000 for a period of 4 years.Given a desired rate of return of 8%,what is the present value index? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.Do not round your intermediate calculations.Round your answer to three decimal points.)

Finnegan Company plans to invest in a new operating plant that is expected to cost $500,000.The projected incremental income from the investment is as follows: $\begin{array} { l c } \text { Year } & \text { Net Income After Tax } \\1 & \$ 30,000 \\2 & \$ 45,000 \\3 & \$ 50,000 \\4 & \$ 55,000 \\5 & \$ 40,000 \\6 & \$ 20,000\end{array}$ The unadjusted rate of return on the initial investment would be approximately:

Indicate whether each of the following statements is true or false. Internal rate of return measures the difference between an investment's rate of return and the company's required rate of return.______ A spreadsheet program is useful in doing internal rate of return analyses.______ Capital investment analyses should take tax consequences into account.______ Depreciation on equipment or a building has the effect of sheltering some of a corporation's income from income taxes.______ The amount of a depreciation tax shield is calculated by multiplying the amount of depreciation by (1 - the tax rate).______

An investment that costs $20,000 will produce annual cash flows of $5,000 for a period of 6 years.Further,the investment has an expected salvage value of $3,000.Given a desired rate of return of 12%,what will the investment generate? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.Do not round your intermediate calculations.Round your answer to the nearest whole dollar.)

In performing capital budgeting analysis that takes time value of money into account,cash flows generated by a capital project are assumed to be reinvested at the project's rate of return.

When a capital investment is expected to provide unequal annual cash inflows,the payback period cannot be calculated.

Omicron Company is considering purchasing equipment that would cost $60,000 and have a useful life of 5 years.The equipment is expected to provide net cash inflows of $16,000 per year.Omicron's cost of capital is 12%. Required: Estimate the internal rate of return for this capital investment.Is this an acceptable investment? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)

Redmond Company is considering investing in one of the following two projects: $\quad$$\quad$$\quad$$\quad$$\text { Annual Cash Inflows }$ $\begin{array}{|c|c|c|c|c|}\hline \text { Year }&\text { Project A } &\text { Project B } \\\hline 1 & \$ 2,000 &\$ 4,000 \\\hline 2 & 3,000 & & 2,000 \\\hline 3 & 3,000 & & 2,000 \\\hline 4 & 1,000 & & 1,000 \\\hline \text {Total} & \$ 9,000 & \$ 9,000 \\\hline\end{array}$ (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.) Required: 1)Which project is more desirable strictly in terms of cash inflows? Why? 2)Compute the present value of each project's cash inflows assuming the company's required rate of return is 12%. 3)What is the maximum amount Redmond should be willing to pay for each project? 4)Suppose each project costs $7,000.Which project(s)should be accepted? Note that only one project can be accepted.

George Company has the opportunity to purchase an asset that costs $40,000.The asset is expected to increase net income by $10,000 per year.Depreciation expense will be $5,000 per year.Based on this information the payback period is:

Which of the following is not a criterion that is used to determine whether a project is acceptable under the net present value method?

Findell Corporation is considering two projects,A and B,and it has gathered the following estimates for the projects $\begin{array} { l c c } & \text { Project A } & \text { Project B } \\\text { Useful life } & 5 \text { years } & 5 \text { years } \\\text { Present value of cash inflows } & \$ 84,360 & \$ 55,100 \\\text { Present value of cash outflows } & \$ 77,000 & \$ 49,000\end{array}$ What is the present value index for Project A?

The length of time required to recover the initial investment in a capital asset is known as the:

Assuming equal time intervals between the payments and a constant rate of return,which of the following cash flow patterns represents an annuity? $\begin{array}{lllllllll}\text { Year } 1& \text { Year } 2& \text { Year } 3 & \text { Year }4& \text { Year } 5 & \text { Year } 6\end{array}$ A. $\begin{array}{lllllllll}\$ 1,000 & \$ 1,000 & \$ 1,000 & \$ 1,000 & \$ 1,000 & \$ 1,000\end{array}$ B. $\begin{array}{llllllll}\$ 500 & &&\$ 0 &&& \$ 500 & &\$ 500&& \$ 500 && \$0\end{array}$ C. $\begin{array}{llllllll}\$ 100 &&& \$ 200 && \$ 300 && \$ 400 && \$500&&\$600\end{array}$

Which of the following are not present value methods of analyzing capital investment proposals?