Question 1

Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:  
The company's minimum desired rate of return for net present value analysis is 15%. The present value of $1 at compound interest of 15% for 1, 2, 3, and 4 years is 0.870, 0.756, 0.658, and 0.572, respectively. 
Determine 
(a) the average rate of return on investment, using straight-line depreciation, and 
(b) the net present value.

Accepted Answer

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Question 2

In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of:

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Question 3

Determine the average rate of return for a project that is estimated to yield total income of $250,000 over 4 years, cost $480,000, and has a $20,000 residual value.

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Question 4

What is capital investment analysis?  Why are capital investment analysis decisions often difficult and risky?

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Question 5

Proposals M and N each cost $550,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows:  
Determine the cash payback period for each proposal.

Accepted Answer

The answer of Proposals M and N each cost $550,000,...

Question 6

Proposals A and B each cost $600,000 and have 5-year lives.   Proposal A is expected to provide equal annual net cash flows of $159,000, while the net cash flows for Proposal B are as follows:  
Determine the cash payback period for each proposal. Round answers to two decimal places.

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Question 7

Jimmy Co. is considering a 12-year project that is estimated to cost $1,050,000 and has no residual value. Jimmy Co. seeks to earn an average rate of return of 18% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Jimmy Co.

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Question 8

Proposals L and K each cost $600,000, have 6-year lives, and have expected total cash flows of $720,000. Proposal L is expected to provide equal annual net cash flows of $170,000, while the net cash flows for Proposal K are as follows:  
Determine the cash payback period for each proposal. Round your answers to two decimal places.

Accepted Answer

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Question 9

Identify four capital investment evaluation methods discussed in the chapter and discuss the strengths and weaknesses of each method.

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Question 10

A project has estimated annual net cash flows of $80,000. It is estimated to cost $600,000. Determine the cash payback period.

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Question 11

Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Tipper Company.

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Question 12

Determine the average rate of return for a project that is estimated to yield total income of $600,000 over 4 years, cost $840,000, and has an $80,000 residual value. Round percentage answers to one decimal place.

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Question 13

The process by which management allocates available investment funds among competing investment proposals is called

Accepted Answer

Capital rationing is the process by which management allocates available investment funds among competing investment proposals. It involves setting limits on the amount of funds that can be invested in certain projects or areas of the business, in order to conserve resources and focus on the most promising opportunities. Investment rationing (choice B) is similar, but typically refers to situations where external factors are limiting the amount of investment available (e.g. government regulations, market conditions). Cost-volume-profit analysis (choice C) is a method of analyzing the relationship between a company's costs, volume of production/sales, and profits. Investment capital (choice A) simply refers to the funds available for investment.

Question 14

In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation methods are often used?

Accepted Answer

The cash payback method and average rate of return method are often used for initial screening in capital rationing because they are simpler and quicker to calculate compared to more complex methods like net present value or internal rate of return, making them suitable for initial evaluations.

Question 15

BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:  
The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively. 
Determine: 
(a) the average rate of return on investment, including the effect of depreciation on the investment, and 
(b) the net present value.

Accepted Answer

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Question 16

A project has estimated annual net cash flows of $60,000. It is estimated to cost $240,000. Determine the cash payback period.

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Question 17

A 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the estimated annual net income.

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Question 18

Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:  
The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively. 
Determine the average rate of return on investment, including the effect of depreciation on the investment.

Accepted Answer

The answer of Dickerson Co. is evaluating a project requiring...

Question 19

All of the following are factors that may complicate capital investment analysis except

Accepted Answer

Sunk costs are past costs that have already been incurred and cannot be recovered. They do not affect the future cash flows of a capital investment project and therefore do not complicate capital investment analysis. However, possible leasing alternatives, changes in price levels, and federal income tax ramifications can all affect the future cash flows and complicate the analysis.

Question 20

An 8-year project is estimated to cost $400,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 5%, determine the estimated annual net income.

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Quiz 11: Capital Investment Analysis