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Exam 16: Planning for Capital Investments

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Question 21

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Findell Corporation is considering two projects, A and B, and it has gathered the following estimates for the projects $\begin{array}{lcc}&\text {Project A}&\text {Project B}\\\text { Useful life } & 5 \text { Years } & 5 \text { Years } \\\text { Present value of cash inflows } & \$ 84,360 & \$ 55,100 \\\text { Present value of cash outflows } & \$ 77,000 & \$ 49.000\end{array}$ What is the present value index for Project A?

A) 1.096
B) 1.124
C) 0.889
D) 0.913

E) A) and D)
F) B) and D)

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Question 22

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Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years. Assuming the company is subject to a 40% tax rate during the period and a zero salvage value, what is the depreciable cost of the new asset?

A) $100,000
B) $250,000
C) $400,000
D) Can't be determined from the information provided

E) A) and B)
F) A) and C)

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Question 23

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

If the net present value for a capital investment is equal to zero, the internal rate of return for the investment is equal to the required rate of return.

Select the incorrect statement regarding postaudits of capital investment decisions.

Capital investment decisions involve all of the following, except:

Bristles Hair Salon is considering installing spray-tanning booths. The booths cost $220,000 and have an estimated five-year useful life. Ignore income taxes. The following pro forma income statement is provided: Required:Bristles would like to recoup its original investment in less than four years. Compute the payback period for the tanning booth investment. Would you recommend that the booths be purchased? Why or why not?Bristles' minimum acceptable unadjusted rate of return is 11%. Compute the unadjusted rate of return on the original investment. Would you recommend that the booths be purchased? Why or why not?

Pierce Company is considering the purchase of new equipment that will cost $150,000. The equipment will save the company $48,000 per year in cash operating costs. The equipment has an estimated useful life of five years and no expected salvage value. The company's cost of capital is 12%.(PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)Required:Assuming the company is subject to a 40% tax rate, compute the net present value.Compute the amount of the annual depreciation tax shield provided by the new equipment.Should the equipment be purchased? Why or why not?

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

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

The purposes of the postaudit for capital investments include all of the following except:

What is a postaudit of a capital investment decision, and how should the postaudit be conducted?

The rate of return that equates the present value of cash inflows and outflows is the:

Southport Company is considering the purchase of a piece of equipment that costs $100,000. The equipment would be depreciated on a straight-line basis to its expected salvage value of $10,000 over its 10-year useful life. Assuming a tax rate of 40%, what is the annual amount of the depreciation tax shield provided by this investment?

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

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

Which of the following statements about postaudits is correct?

Indicate whether each of the following statements is true or false. A capital investment is a purchase of a long-term operational asset. ______Investments in capital assets normally are recovered by selling the assets. ______The profitability of a business is greatly influenced by the quality of its capital investment decisions. ______A capital investment decision exchanges current cash inflows for future cash outflows. ______The time value of money concept is often used in making capital investment decisions. ______

Describe how the unadjusted rate of return for a capital investment is calculated. Should it be based on the net cost of the investment or the average investment?

The compensation a company receives for investing in capital assets is referred to as a return on investment.