Question 1

Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a useful life of 9 years.What is one widely used method to make the net present values of the proposals comparable?

Accepted Answer

The best choice is to adjust the life of Proposal J to a time period that is equal to that of Proposal F by estimating a residual value at the end of year 6. This method is known as the equivalent annual annuity method and is widely used to make the net present values of proposals with different useful lives comparable. By estimating the residual value of Proposal J at the end of year 6, the proposal can be converted into an equivalent annual annuity that has the same useful life as Proposal F. This allows for a fair comparison between the two proposals based on their net present values. Option A is not a valid method because it ignores the difference in useful lives between the two proposals. Option C is not a valid method because finding an average of the two useful lives does not take into account the time value of money. Option D is not a valid method because computing the average rate of return does not take into account the difference in the amount and timing of cash flows between the two proposals.

Question 2

Using the tables above, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a year for the next 4 years, what would be the present value of the investment cash inflows, assuming an earnings rate of 12%?

Accepted Answer

The answer of Using the tables above, if an investment...

Question 3

The management of Dakota Corporation is considering the purchase of a new machine costing $420,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively.In addition to the foregoing information, use the following data in determining the acceptability of this investment:  The present value index for this investment is

Accepted Answer

The answer of The management of Dakota Corporation is considering...

Question 4

A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $210,000.The present value of the future cash flows is $225,000.The company's desired rate of return used in the present value calculations was 12%.Which of the following statements is true?

Accepted Answer

The present value of the cash flows is greater than the investment amount, indicating a positive net present value. Since the desired rate of return used in the calculations was 12%, an internal rate of return greater than 12% would also indicate a positive net present value. Therefore, the internal rate of return on the project must be more than the desired rate of return of 12%. The project should be accepted.

Question 5

Brunette Company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $180,000.The present value of the future cash flows generated by the project is $163,000.Should they invest in this project?

Accepted Answer

The present value of the future cash flows ($163,000) is less than the amount of the investment ($180,000), indicating that the project is not financially viable. Additionally, the rate of return on the project is lower than the desired rate of return used to calculate the present value of the future cash flows, further indicating that the project should not be pursued. Therefore, the company should not invest in this project.

Question 6

A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $100,000.The present value of the future cash flows at the company's desired rate of return is $100,000.The IRR on the project is 12%.Which of the following statements is true?

Accepted Answer

Since the present value of the future cash flows equals the amount to be invested, the net present value is zero. The IRR of 12% is equal to the desired rate of return used to calculate the present value of the future cash flows, indicating that the project is expected to earn exactly the required rate of return. Therefore, the project should be accepted.

Question 7

T-Bone Company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $150,000.The present value of the future cash flows is $141,000.Should the company invest in this project?

Accepted Answer

The net present value (NPV) is calculated by subtracting the present value of the investment ($141,000) from the amount of the investment ($150,000). In this case, NPV = $150,000 - $141,000 = $9,000. A positive NPV would indicate that the investment would generate more cash flows than the initial investment, while a negative NPV would indicate that the investment would not generate enough cash flows to cover the initial investment. Since the NPV in this case is positive, it means that the investment will generate more cash flows than the initial investment. Therefore, the correct answer is D, as the company should not invest in this project.

Question 8

Using the tables above, what would be the present value of $8,000 to be received 1 year from today, assuming an earnings rate of 12%?

Accepted Answer

The answer of Using the tables above, what would be...

Question 9

Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment?

Accepted Answer

Using only quantitative measures to evaluate asset purchases may not provide a complete picture of the investment and may overlook important qualitative factors such as market trends, competitive landscape, and potential risks. It is important to consider both quantitative and qualitative factors when making investment decisions.

Question 10

Using the tables above, what is the present value of $6,000 to be received at the end of each of the next 4 years, assuming an earnings rate of 10%?

Accepted Answer

The present value factor for 10% earnings rate and 4 years is 0.683; therefore, the present value of $6,000 to be received at the end of each of the next 4 years is calculated as follows: 
PV = $6,000 x 0.683 x 4 = $16,392 
Therefore, the closest choice is B, which is $19,020, and is the nearest to the calculated present value.

Question 11

A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $100,000.The present value of the future cash flows at the company's desired rate of return is $105,000.The IRR on the project is 12%.Which of the following statements is true?

Accepted Answer

The answer of A company is contemplating investing in a...

Question 12

The management of Idaho Corporation is considering the purchase of a new machine costing $430,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively.In addition to the foregoing information, use the following data in determining the acceptability of this investment:  The net present value for this investment is

Accepted Answer

The answer of The management of Idaho Corporation is considering...

Question 13

Which of the following is not considered a complicating factor in capital investment decisions?

Accepted Answer

Equal proposal lives is a simplifying assumption that assumes all proposed investments have the same useful life. It is not considered a complicating factor in capital investment decisions. Factors such as income tax, lease versus purchasing options, and qualitative factors (such as the impact on company culture or community relations) are all complicating factors that must be considered when making investment decisions.

Question 14

Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

Accepted Answer

The depreciation deduction allows businesses to spread the cost of capital investments over several years, reducing the amount of taxable income in each year. This can help to lower the overall income tax expense resulting from capital investment projects. The other options listed do not directly relate to capital investments and would not have the same effect on reducing income tax expense.

Question 15

The production department is proposing the purchase of an automatic insertion machine.It has identified 3 machines, each with an estimated life of 10 years.Which machine offers the best internal rate of return?

Accepted Answer

The answer of The production department is proposing the purchase...

Question 16

The production department is proposing the purchase of an automatic insertion machine.It has identified 3 machines and have asked the accountant to analyze them to determine which of the proposals if any meet or exceed the company's policy of a minimum desired rate of return of 10% using the net present value method.Each of the assets has an estimated useful life of 10 years.The accountant has identified the following data:  Which of the investments are acceptable?

Accepted Answer

Using the net present value method with a minimum desired rate of return of 10%, the results are as follows:

Machine A: NPV = $8,370
Machine B: NPV = -$6,116
Machine C: NPV = $10,599

Based on these calculations, Machines A and C have positive NPVs, which means they meet or exceed the company's policy of a minimum desired rate of return of 10%. Machine B has a negative NPV, indicating that it does not meet the required rate of return. Therefore, the best choice is A) Machines A & C.

Question 17

All of the following qualitative considerations may impact upon capital investment analysis except

Accepted Answer

Manufacturing sunk cost is a financial term that is already reflected in the capital investment analysis and is not a qualitative consideration. The other options listed, such as manufacturing productivity, flexibility, and market opportunities, are qualitative factors that can impact the analysis.

Question 18

Periods in time that experience increasing price levels are known as periods of

Accepted Answer

Inflation is the period of time where the general price level of goods and services in an economy is increasing, resulting in a decrease in the purchasing power of currency.

Question 19

Using the tables above, what would be the present value of $15,000 to be received at the end of each of the next 2 years, assuming an earnings rate of 6%?

Accepted Answer

The answer of Using the tables above, what would be...

Question 20

All of the following qualitative considerations may impact upon capital investment analysis except

Accepted Answer

Time value of money is a quantitative consideration that is typically taken into account in capital investment analysis, whereas employee morale, impact on product quality, and manufacturing flexibility are qualitative considerations.

Quiz 10: Capital Investment Analysis

Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a useful life of 9 years.What is one widely used method to make the net present values of the proposals comparable?

Using the tables above, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a year for the next 4 years, what would be the present value of the investment cash inflows, assuming an earnings rate of 12%?

A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $210,000.The present value of the future cash flows is $225,000.The company's desired rate of return used in the present value calculations was 12%.Which of the following statements is true?

Brunette Company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $180,000.The present value of the future cash flows generated by the project is $163,000.Should they invest in this project?

A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $100,000.The present value of the future cash flows at the company's desired rate of return is $100,000.The IRR on the project is 12%.Which of the following statements is true?

T-Bone Company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $150,000.The present value of the future cash flows is $141,000.Should the company invest in this project?

Using the tables above, what would be the present value of $8,000 to be received 1 year from today, assuming an earnings rate of 12%?

Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment?

Using the tables above, what is the present value of $6,000 to be received at the end of each of the next 4 years, assuming an earnings rate of 10%?

A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $100,000.The present value of the future cash flows at the company's desired rate of return is $105,000.The IRR on the project is 12%.Which of the following statements is true?

Which of the following is not considered a complicating factor in capital investment decisions?

Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

The production department is proposing the purchase of an automatic insertion machine.It has identified 3 machines, each with an estimated life of 10 years.Which machine offers the best internal rate of return?

All of the following qualitative considerations may impact upon capital investment analysis except

Periods in time that experience increasing price levels are known as periods of

Using the tables above, what would be the present value of $15,000 to be received at the end of each of the next 2 years, assuming an earnings rate of 6%?

All of the following qualitative considerations may impact upon capital investment analysis except