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Exam 10: Planning for Capital Investments

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Question 81

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Which of the following statements is incorrect?

A) The further into the future a cash receipt is expected to occur, the lower is its present value.
B) The return on investment measures the compensation a company expects to receive from investing in capital assets.
C) Most companies use their cost of capital to estimate the minimum return on investment required from capital investments.
D) When a company invests in capital assets, it sacrifices future dollars for the opportunity to receive present dollars.

E) A) and D)
F) A) and C)

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Question 82

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

A) $7,360
B) $6,100
C) $1,260
D) None of these answers are correct.

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

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Question 83

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Describe what is meant by the time value of money.

Select the incorrect statement regarding postaudits of capital investment decisions.

Mary needs to have $20,000 one year from today.The formula to compute the amount of money that must be invested today is future value ÷ (1 − interest rate).

Joan Osborne is evaluating a potential capital investment.She has calculated the net present value using a minimum rate of return of 10%.Using this rate,the net present value is negative.What does this tell her about the rate of return expected for the project?

A project's net present value can be found by subtracting the cost of the project from the total present value of the future cash flows generated by the project.

Generally,the unadjusted rate of return should be calculated based on the average investment rather than the amount of the original investment in a depreciable asset such as equipment.

A postaudit should be performed at the end of a capital investment project to determine whether the expected results were actually achieved.

The process by which management evaluates long-term investment decisions involving long-term operational assets is called:

When calculating the present value of an ordinary annuity,it is assumed that:

Which of the following statements about postaudits is correct?

Capital investments differ from stock and bond investments in that stock and bond investments can be sold in organized markets.

Investment projects A and B offer equal cash inflows over their lives,but the cash inflows for project A occur sooner than those for project B.The two projects are otherwise identical (the cost is the same,for example).Based on this information,the internal rate of return for A is lower than for B.

Jiminez Company has two investment opportunities.Both investments cost $5,000 and will provide the following net cash flows: $\begin{array} { l r r } \text { Year } & \text { Irvestrnent A } & \text { Irvestrnent B } \\1 & \mathbf {\$ 3 , 0 0 0 } & \mathbf {\$ 3 , 0 0 0 } \\2 & \mathbf { 3 , 0 0 0 } & 4,000 \\3 & \mathbf { 3 , 0 0 0 } & 2,000 \\4 & \mathbf { 3 } , 000 & 1,000\end{array}$ What is the total present value of Investment A's cash flows 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.)

Weston Company is considering a capital project that delivers a $50,000 annual net cash flow before tax.The investment will result in annual depreciation expense of $10,000 over the project's four-year useful life.Assuming a tax rate of 40%,what amount of annual after-tax net cash flow will be provided by this project?