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Exam 10: Planning for Capital Investments

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Question 61

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Mendez Company is considering a capital project that costs $16,000.The project will deliver the following cash flows: $\begin{array}{|l|l|l|l|l|}\hline \underline {\text { Year 1 }} & \underline {\text { Year 2 }} & \underline {\text { Year 3 }} & \underline {\text { Year 4 }} & \underline {\text { Year 5 }} \\\hline \$ 8,000 &\$ 6 ,000&\$ 5,000&\$ 6 ,000&\$5 ,000\\\hline\end{array}$ Using the incremental approach,the payback period for the investment is:

A) 5 years.
B) 2 years.
C) 2.4 years.
D) 1.66 years.

E) A) and B)
F) None of the above

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Question 62

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Select the incorrect statement regarding postaudits of capital investment decisions.

A) A postaudit should be conducted at the end of the project.
B) The postaudit helps management determine whether a project that had been accepted should have been rejected.
C) A postaudit is only necessary for a capital investment selected using a technique that does not consider the time value of money.
D) The goal of a postaudit is to provide feedback that can be used to improve the accuracy of future capital investment decisions.

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

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Question 63

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The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow.Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

Findell Corporation is considering two projects,A and B,and it has gathered the following estimates for the projects: $\begin{array}{|l|l|l|}\hline & \text { Project A } & \text { Project B } \\\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \\\hline \text { Present value of cash inflows } & \$ 84,360 & \$ 55,100 \\\hline \text { Present value of cash outflows } & \$ 77,000 & \$ 49,000 \\\hline & & \\\hline\end{array}$ What is the net present value of cash flows for project B?

Which of the following is not a criteria that is used to determine whether a project is acceptable under the net present value method?

The present value index indicates the:

Nguyen Company has an opportunity to purchase an asset that will cost the company $36,000.The asset is expected to add $12,000 per year to the company's net income.Assuming the asset has a five-year useful life and zero salvage value,the unadjusted rate of return based on the average investment will be:

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

Sources of cash inflows from capital investments include incremental expenses and installation costs.

Because of the expense of applying multiple techniques,managers should use a single capital budgeting technique to analyze potential capital investments.

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

Paul Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $12,000 per year for 3 years.Assuming that the required rate of return is 10%,what is the present value of these cash inflows? (Do not round PV factors and intermediate calculations.Round your final answer to the nearest dollar. )

Which of the following statements is incorrect?

An investment that costs $40,000 will produce annual cash flows of $12,000 for a period of 4 years.Given a desired rate of return of 10%,what will the investment generate? (Do not round your intermediate calculations.Round your answer to nearest whole dollar. )

If a company has to pay a given amount of income taxes over the life of a capital investment,managers of the company should seek to pay the taxes as early as possible in the investment's life.

An annuity is a series of equal payments over equal time intervals that earn a constant rate of return.

Columbus Company is considering a project that requires an initial investment of $400,000.Its incremental cash flows are expected to be $150,000 per year for five years.The project would be depreciated on a straight-line basis over 5 years with no expected salvage value.The company has a stated policy that all projects must return their required investment dollars within the first 75% of the project's life.The company is subject to a 40% income tax rate,and its cost of capital is 10%. Required: 1)Compute the project's after-tax net cash flows (NCF)by completing the following table: $\begin{array}{|c|c|c|c|c|c|}\hline & \text { Cash } & & \text { Taxable } & \text { Cash Outflow } & \text { After-tax } \\\hline \text { Year } & \text { Inflows } & \text { Depreciation } & \text { Income } & \text { for Taxes } & \text { NCF } \\\hline 1.5 & & & & & \\\hline\end{array}$ 2)Compute the project's net present value by completing the following table.(Round the present value amounts to the nearest whole number. ) $\begin{array}{|c|c|c|c|}\hline & \text { After-tax } & \text { Present Value } & \text { Total } \\\hline \text { Year } & \text { NCF } & \text { Factor } & \text { Present Value } \\\hline 0 & & & \\\hline 1.5 & & & \\\hline\end{array}$ 3)Compute the project's payback period. 4)Should the project be accepted? Why or why not?

Levin Company is considering two new machines that should produce considerable cost savings in its assembly operations.The cost of each machine is $14,000 and neither is expected to have a salvage value at the end of a 4-year useful life.Levin's required rate of return is 12% and the company prefers that a project return its initial outlay within the first half of the project's life.The annual after-tax cash savings for each machine are provided in the following table: $\quad \quad \quad \quad \quad \quad\text { Annual After-tax Cash Savings }$ $\begin{array}{|l|r|r|}\hline \text { Year: } & \quad\quad\text { Machine A } & \quad \quad\text { Machine B } \\\hline1& \$ 5,000 & \$ 8,000 \\\hline 2&5,000 & 6,000 \\\hline3&5,000 & 4,000 \\\hline4& \underline { 5,000} & \underline { 2,000} \\\hline 5& \underline { \$ 20,000} & \underline { \$ 20,000} \\\hline\end{array}$ Required: 1)Compute the payback period for each machine using the incremental approach and comment on the results. 2)Compute the unadjusted rate of return based on average investment for each machine.The machines will be depreciated on a straight-line basis. 3)Compute the net present value for each machine. 4)Which machine would you recommend? Explain your reasoning. 5)Use the present value table to compute the approximate internal rate of return for Machine.

Cash outflows from a capital investment project include:

Which of the following statements concerning payback analysis is