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Exam 10: Planning for Capital Investments

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Question 71

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A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable investment.

A) True
B) False

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Question 72

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A dollar to be received in the future is subject to the effects of risk and inflation.

A) True
B) False

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Question 73

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Which of the following does not represent an advantage of the unadjusted rate of return over the payback method for evaluating capital projects?

Select the incorrect statement concerning the present value index (PVI) .

A postaudit should be performed at the end of a capital investment project to determine whether the expected results were actually achieved.

Capital investment decisions involve all of the following,except:

For a capital investment project to be acceptable,it must generate a rate of return:

Jiminez Company has two investment opportunities.Both investments cost $5,000 and will provide the following net cash flows: $\begin{array}{|l|r|r|}\hline \text { Year } & \text { Investment } \mathrm{A} & \text { Investment } \mathrm{B} \\\hline 1 & \$ 3,000 & \$ 3,000 \\\hline 2 & 3,000 & 4,000 \\\hline 3 & 3,000 & 2,000 \\\hline 4 & 3,000 & 1,000 \\\hline\end{array}$ What is the total present value of Investment A's cash flows assuming an 8% minimum rate of return? (Do not round your intermediate calculations.Round your answer to the nearest whole dollar. )

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

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?

Which of the following is the approximate internal rate of return for an investment that costs $33,550 and provides a $5,000 annuity for 10 years?

Cash inflows generated by capital investments include all of the following except:

Chico Company is considering the purchase of a new high-speed machine for its factory.The machine will cost $160,000 and will save the company $45,000 per year in cash operating costs.The machine has an estimated useful life of five years and no expected salvage value.The company's cost of capital is 12%. Required: 1)Compute the net present value of this investment. 2)What is the maximum amount that Chico should be willing to pay for the machine? 3)What are the minimum annual cash savings that will make the machine acceptable on a net present value basis if the purchase price is $160,000?

In Year 1,Chandler Company purchased equipment with an expected useful life of 5 years.The initial cost of the equipment was $85,000.Chandler's cost of capital is 12%.At the time it purchased the equipment,Chandler projected the following cash inflows from use of the equipment: $\begin{array}{|l|l|}\hline \text { Year } & \text { Projected cash inflow } \\\hline 1 & \$ 20,000 \\\hline 2 & \$ 30,000 \\\hline 3 & \$ 35,000 \\\hline 4 & \$ 25,000 \\\hline 5 & \$ 15,000 \\\hline\end{array}$ At the end of Year 5,the equipment had reached the end of its useful life.Chandler determined that it had actually generated the following cash flows: $\begin{array}{|l|l|}\hline \text { Year } & \text { Actual cash inflow } \\\hline 1 & \$ 10,000 \\\hline 2 & \$ 20,000 \\\hline 3 & \$ 30,000 \\\hline 4 & \$ 30,000 \\\hline 5 & \$ 30,000 \\\hline\end{array}$ Required: 1)What was the net present value that Chandler calculated for the equipment when the company purchased the asset? 2)Calculate the net present value that the equipment achieved,based on the actual cash inflows. 3)Comment on the pattern of actual cash inflows,compared to the cash flows that had been projected. 4)Was the equipment in fact an acceptable investment,based on the cash flows actually achieved?

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

Cash outflows can be categorized into all of the following groups except:

Indicate whether each of the following statements is

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? (Do not round your intermediate calculations.Round your answer to three decimal points. )

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

Connor has $300,000 to invest in a 5-year annuity.Assuming the time value of money is 10%,what amount will Connor receive in cash each year? (Do not round your PV factors.Round your answer to the nearest dollar. )