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Exam 10: Planning for Capital Investments

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Question 31

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Gordon Company is considering a three-year capital investment that will return $150,000 per year.The present value of this annuity at the company's required rate of return of 12% is $360,275. Required: Complete the table that has been started below to show the return on investment at 12% and the amount of investment recovered each year.Remember that the investment balance should be zero at the end of the three years.(Round to the nearest whole dollar.) $\begin{array}{cccccc} & \text {a}& \text {b}& \text {c}& \text {d}& \\& \text { Investment } & \text { Annual } & & & \text { Year-end } \\\text { Time } & \text { Balance During the } & \text { Cash } & \text { Return on } & \text { Recovered } & \text { Investment } \\\text { Period } & \text { Year } & \text { Inflow } & \text { Investment } & \text { Investment } & \text { Balance }\\1&\$360,275\\2\\3\end{array}$

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Question 32

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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? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

A) 5%
B) 6%
C) 8%
D) 10%

E) C) and D)
F) None of the above

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Question 33

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A capital investment project may provide cash inflows from:

Six years ago,Neighborhood Hardware paid a contractor $45,000 to expand the store.At that time,the company calculated a net present value of about $6,000 for the expansion.Now,the company believes that the investment increased annual cash inflows by $8,000 per year for each of the six years.The company has a desired rate of return of 10%.Ignoring income tax considerations,what was the net present value actually achieved for this capital investment? (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 dollar.)

Indicate whether each of the following statements is true or false. The net present value method provides a direct measure of the rate of return to be expected from a capital investment project.______ Managers who want to know the rate of return to expect from a capital investment project should calculate the net present value.______ The internal rate of return for a capital investment is the rate that would produce a net present value of zero.______ For a capital investment project to be acceptable,the internal rate of return should be higher than the hurdle rate.______ A capital investment project that has a positive net present value may have an internal rate of return that is lower than the hurdle or required rate of return.______

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

Seth Morrison is considering alternative proposals that involve different amounts of investments.To compare different sizes of investment proposals,it may be helpful for Seth to prepare a relative ranking of the proposals by using a(n) :

Why does a company use its cost of capital as the minimum required rate of return for its capital investment decisions?

Benson Corporation is considering an investment in equipment that would cost $50,000 and provide annual cash inflows of $14,000.The company's required rate of return is 12%; the internal rate of return for the investment is 10.5%.Should the company make this investment?

Chichester Company is considering investing in the following two mutually exclusive projects: $\quad$ $\quad$ $\quad$ $\quad$$\text { Annual Cash Inflows }$ $\begin{array}{|c|c|c|}\hline \text{ Year} & \text{ Project A } & \text{ Project B } \\\hline 1 & \$ 5,000 & \$ 3,500 \\\hline 2 & 4,000 & 3,500 \\\hline 3 & 3,000 & 3,500 \\\hline 4 & 2,000 & 3,500 \\\hline \text{ Total} & \$ 14,000 & \$ 14,000 \\\hline\end{array}$ (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 10%. 3)What is the maximum amount Chichester should be willing to pay for each project? 4)Suppose each project costs $10,000.Which project(s)should be accepted?

Ashley projects that she can get $100,000 cash per year for 5 years on a real estate investment project.If Ashley wants to earn a rate of return of 12%,what is the maximum that she should pay for the investment? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.Round your answer to the nearest dollar.)

All of the following are capital investment decisions except:

How would an organization benefit from conducting postaudits of its capital investment decisions?

Neighbors Company is considering the purchase of new equipment that will cost $130,000.The equipment will save the company $38,000 per year in cash operating costs.The equipment has an estimated useful life of five years and a zero expected salvage value.The company's cost of capital is 10%. (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.) Required: 1)Ignoring income taxes,compute the net present value and internal rate of return.Round net present value to the nearest dollar and round internal rate of return to the nearest whole percent. 2)Should the equipment be purchased? Why or why not?

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

Which of the following is not a major cash inflow from a capital investment?

Indicate whether each of the following statements is true or false. In analysis of a capital investment,a cost saving is treated as a cash inflow.______ The expected salvage value of an asset is a source of a cash outflow that should be considered in capital investment analyses.______ Many capital investments require an increase in the amount of a company's working capital.______ Incremental revenues are treated as cash outflows in capital investment analyses.______ An increase in working capital,which may occur near the beginning of a capital investment project,is treated as a cash outflow.______

Select the term from the list provided that best matches each of the following definitions or descriptions

Fenwick Company is considering a purchase of equipment that costs $60,000 and is expected to offer annual cash inflows of $16,645 for 5 years.Fenwick Company's required rate of return is 10%.The internal rate of return of this investment project is closest to: (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

A cash flow that only occurs in equal amounts each year is referred to as: