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Exam 24: Capital Investment Analysis

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Question 1

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Implementing capital investment decisions with proper controls falls under which stage of the management process?

A) Planning
B) Performing
C) Evaluating
D) Communicating

E) All of the above
F) A) and D)

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Question 2

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The most commonly used methods in evaluation of capital investment proposals are net present value method,payback period method,and the accounting rate-of-return method.

A) True
B) False

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Question 3

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Availability of funds is not a criterion for deciding on capital investment proposals.

The proposals that either meet company strategic goals or produce the minimum rate of return set by management will receive serious review in the preliminary screen process.

The future value of a cash flow is always larger than the present value of that cash flow.

You are given the following present value factors at 8 percent,the Rogers Company's minimum desired rate of return: The Rogers Company is considering the replacement of a piece of equipment.The old machine has a carrying value of $800 and a remaining estimated life of five years,with no residual value at that time.Present residual value is $200.The new equipment will cost $1,200,including transportation and installation.It has an estimated life of five years,with no residual value at the end of that time.Annual cash operating costs are $400 for the old machine and $150 for the new machine.(Round your answers to two decimal places. ) a.Compute the present value of the operating cash outflows for the old machine. b.Compute the present value of the operating cash outflows for the new machine. c.Compute the present value of the cash operating savings if the new machine is purchased. d.What is the net present value of the replacement alternative?

Managers rely strictly on financial information when faced with decisions.

Management of Moore City Trust is in the process of evaluating the purchase of a new check sorting machine.The model under review will cost $44,000 and will require installation costs of $5,000.Similar machines have a ten-year life,and management has estimated that this sorter will have a residual value of $2,500 at the end of its life.Annual cost savings to be generated by the sorter will average $9,500 over the ten-year period.Management's minimum desired before-tax rate of return is 14 percent. Present value multipliers: a.Using before-tax information and the net present value method to evaluate this capital investment,determine whether the company should purchase the check sorting machine.Support your answer. b.If management had decided on a minimum desired before-tax rate of return of 16 percent,should the check sorting machine be purchased? Show all computations to support your answer.Round answers to nearest dollar.

Which of the following is true of the net present value method?

The payback period method of evaluating proposed capital investment does not take into account the time value of money.

Memphis Co.is considering purchasing a machine for $83,200 that will increase cash inflows by $40,000 in the first year,$30,000 the second year,and $25,000 the third year.The machine will have no residual value.The minimum rate of return is 10 percent.The present value factors,at 10 percent,for the three years are 0.909,0.826,and 0.751,respectively. -Using the above information for Memphis,the machine's net present value is

Capital investment analysis is a decision process for the purchase of capital facilities,such as buildings and equipment.

Lopez Co.is interested in purchasing equipment that would improve its operational efficiency.The cost of the equipment is $400,000 with an estimated residual value of $30,000 and a useful life of ten years.The equipment is expected to generate cash inflows of $60,000 a year.The company's minimum rate of return is 8 percent.The present value of $1 for ten years at 8 percent is 0.463,and the present value of an annuity of $1 at 8 percent and ten years is 6.710. -Using the above information for Lopez,the actual rate of return that the project earns is

The most beneficial projects are the ones with the highest net present value.

Qualitative factors are considered in the evaluation of capital investment proposals.

Decisions to install new equipment,replace old equipment,and purchase or construct a new building are examples of

The accounting rate of return is calculated by dividing the project's investment by its net income.

Fresno Manufacturing Company specializes in the production of precision tools.Management is in the process of selecting a new drill press.The press under consideration will cost $92,000 plus necessary installation charges of $5,000.Experience indicates that the press will last for five years and should have a residual value at the end of that period of $10,000.Expected annual cash revenues from the press should average $45,000,and related cash operating costs are estimated to be $20,000.Management has decided on a minimum desired before-tax rate of return of 10 percent. Present value multipliers: a.Using before-tax information and the net present value method to evaluate this capital investment,determine whether the company should purchase the drill press.Support your answer. b.If management has decided on a minimum desired before-tax rate of return of 12 percent,should the drill press be purchased? Show all computations to support your answer.

Upon completion of a capital investment project,what management functions related to it remain to be done?

Based on the payback period method,the alternative with the shortest payback period is the most desirable.