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Exam 10: Planning for Capital Investments

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Question 41

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Connor has $300,000 to invest in a 5-year annuity.Assuming the time value of money is 10%,what amount will Connor receive in cash each year? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.Do not round your PV factors.Round your answer to the nearest dollar.)

A) $79,139
B) $60,000
C) $96,631
D) None of these answers are correct.

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

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Question 42

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What is the reinvestment assumption,and how does the assumption affect capital investment analyses?

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The reinvestment assumption is that cash...

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Question 43

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Generally,a company should use the MACRS method to calculate depreciation on its income tax return,due to the effects of the time value of money.

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

When the effect of income taxes is considered in a capital budgeting analysis,the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

Select the incorrect statement concerning the present value index (PVI) .

Select the term from the list provided that best matches each of the following definitions or descriptions.Put the number of the term in the answer column.

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?

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?

Butch's Barbecue thinks that offering delivery will increase their sales.Butch's is considering whether to purchase a used delivery truck costing $12,000.Additional net income from the delivery service will be $1,400 per year.The truck will last approximately 5 years.What is the unadjusted rate of return based on the average investment?

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

What amount of cash would result at the end of one year,if $15,000 is invested today and the rate of return is 8%? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

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: $\begin{array}{lrr} \text { Spray booth revenue } &&\$95,000\\ \text { Less expenses:} &\\ \text { Supplies } &\$15,000\\\text { Insurance }&5,000\\ \text { Depreciation} &44,000\\ \text { Maintenance } &\underline{6,000}&\underline{70,000}\\ \text { Net income } &&\underline{\$25,000}\\\end{array}$ Required: 1)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? 2)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?

Which of the following statements concerning payback analysis is true?

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.

Montana Company is evaluating two different capital investments,Project X and Y.Either X or Y would cost $210,000,and the company cannot afford to do both.The company expects that Project X would provide net cash inflows of $62,000 per year for 5 years.For Project Y,the net cash inflows are expected to be as follows: $\begin{array}{|c|c|}\hline \text { Year } & \text { Cash inflows from Project } Y \\\hline 1 & \$44,000 \\\hline 2 & 48,000 \\\hline 3 & 60,000 \\\hline 4 & 76,000 \\\hline 5 & 80,000 \\\hline \text { Total } &\$ 308,000 \\\hline\end{array}$ Montana's cost of capital is 12%.(PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.) Required: 1)Calculate the present value index for Project X and for Project Y.Round your answer to three decimal places. 2)Indicate whether each of the projects is an acceptable investment. 3)Based on present value index,which of the two projects should Montana implement?

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

The unadjusted rate of return is found by dividing the average incremental increase in annual operating income by the cost of the investment.

Indicate whether each of the following statements is true or false. If two capital investments both have positive net present values,both offer an actual rate of return that is higher than the required rate of return.______ Company M has two potential capital investments,each of which has a positive net present value.M can only accept one of the investments.In this situation,it should always accept the project that has the higher net present value.______ Net present value is calculated by dividing the present value of cash inflows by the present value of cash outflows associated with a capital investment.______ The present value index can be used to compare different capital investment projects.______ The higher the present value index,the lower the rate of return per dollar invested in the project.______

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