FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 10: Planning for Capital Investments

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 71

Essay

Review LaterAdd Note

Review Later

Alcorn Company is considering purchasing equipment that costs $400,000.The equipment has an estimated useful life of 8 years and no salvage value.Alcorn believes that the annual cash inflows from using the equipment will be $80,000. (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.) Required: 1)Calculate the net present value of the equipment assuming that Alcorn's cost of capital is 12%.Is the equipment an acceptable investment? 2)Calculate the net present value of the equipment assuming that Alcorn's cost of capital is 10%.Is the equipment an acceptable investment? 3)What general conclusion can you reach from your results to parts 1)and 2)?

Correct Answer

verified

1)Net present value = ($80,000 × 4.96764...

View Answer

Show Answer

Question 72

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following is not a factor in explaining why the present value of a future dollar is less than one dollar?

A) Inflation
B) Interest
C) Risk of failure to receive expected cash inflows
D) Historic cost

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

Correct Answer

verified

Show Answer

Question 73

True/False

Review LaterAdd Note

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

The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the tax rate.

The review of a capital budgeting decision to determine whether a project was accepted that should have been rejected is referred to as:

Morrisey Company has two investment opportunities.Both investments cost $5,500 and will provide the same total future cash inflows.The cash receipt schedule for each investment is given below: $\begin{array} { | l | c | c | } \hline & \text { Investment I } & \text { Investment II } \\\hline \text { Period 1 } & \$ 1,000 & \$ 1,000 \\\hline \text { Period 2 } & 1,000 & 2,000 \\\hline \text { Period 3 } & 2,000 & 3,000 \\\hline \text { Period 4 } & \underline { 4,000 } & \underline { 2,000 } \\\hline \text { Total } & \underline { \$ 8,000 } & \underline { \$ 8,000 } \\\hline\end{array}$ What is the net present value of Investment II assuming an 8% minimum rate of return? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.Do not round your intermediate calculations.Round your answer to the nearest whole dollar.)

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

Cash inflows from a capital investment may include the salvage value of capital assets and increases in revenues.

Matt needs to compute the present value of $5,000 to be received four years from now.He should multiply $5,000 by the appropriate present value interest factor obtained from the present value of $1 table.

Theresa is considering starting a small business.She plans to purchase equipment costing $145,000.Rent on the building used by the business will be $26,000 per year while other operating costs will total $30,000 per year.A market research specialist estimates that Theresa's annual sales from the business will amount to $80,000.Theresa plans to operate the business for 6 years.Disregarding the effects of taxes,what will be the amount of annual net cash flow generated by the business?

The difference between an ordinary annuity and an annuity due is:

Why is the time value of money often taken into account in analyzing a capital investment?

Depreciation on a capital investment (such as equipment)has the effect of decreasing the amount of income taxes that the company owning the asset must pay.

Capital investment decisions involve investments in current assets.

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

The rate of return that equates the present value of cash inflows and outflows is the:

Which method for evaluating capital investment proposals reduces the present value of cash outflows from the present value of cash inflows?

The cost of capital is sometimes referred to as the hurdle or discount rate.

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? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.Do not round PV factors and intermediate calculations.Round your final answer to the nearest dollar.)

Burgess Corporation is considering purchasing equipment that costs $235,000.The equipment has an estimated useful life of 5 years and no salvage value.Burgess believes that the annual cash inflows from using the equipment will be $65,000. (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.) Required: 1)Calculate the net present value of the equipment assuming that Burgess's cost of capital is 12%.Is the equipment an acceptable investment? 2)Calculate the net present value of the equipment assuming that Burgess's cost of capital is 10%.Is the equipment an acceptable investment? 3)Based on your results to parts 1)and 2),estimate the internal rate of return for the investment in the equipment.