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Exam 10: Planning for Capital Investments

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Question 1

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Ashley projects that she can get $100,000 cash per year for 5 years on a real estate investment project. If Ashley wants to earn a rate of return of 12%, what is the maximum that she should pay for the investment? (Round your answer to the nearest dollar.)

A) $56,743
B) $446,429
C) $360,478
D) $560,000

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

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Question 2

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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) If the net present value is negative; the expected rate of return for the project is greater than the 10% minimum or required rate of return.
B) If the net present value is negative; the expected rate of return for the project is less than the 10% minimum or required rate of return.
C) If the net present value is negative; the expected rate of return for the project is equal to the 10% minimum or required rate of return.
D) None of the other answers are correct.

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

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Question 3

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Indicate whether each of the following statements is true or false: A postaudit should be conducted at the time a capital investment is purchased.The postaudit of a capital investment project should be made using the same analytical technique that was used in deciding to make the investment.The purpose of postaudits is to improve a company's capital investment decision process.The postaudit process uses expected cash flows and the company's cost of capital.Making good estimates of future cash flows is important in making capital investment decisions.

Which of the following statements describes the cost of capital?

An investment that costs $5,000 will produce annual cash flows of $2,000 for a period of 4 years. Given a desired rate of return of 8%, what is the present value index? (Do not round your intermediate calculations. Round your answer to three decimal points.)

The future value of $1 table should be used to discount lump sum cash flows expected to occur in the future.

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

Harvey wants to determine the net present value for a proposed capital investment. He has determined the desired rate of return, the expected investment time period, a series of cash inflows of equal amount, the salvage value of the investment, and the required cash outflows. Which of the following tables would most likely be used to calculate the net present value of the investment?

A series of equal cash flows at fixed intervals is termed a(n) :

A dollar to be received in the future is subject to the effects of risk and inflation.

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.)

All of the following are capital investment decisions except:

Which statement characterizes the time value of money concept?

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

Cash outflows generated by capital investments include all of the following except:

Which of the following are not present value methods of analyzing capital investment proposals?

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

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

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

Finnegan Company plans to invest in a new operating plant that is expected to cost $500,000. The projected incremental income from the investment is as follows: The unadjusted rate of return on the initial investment would be approximately: $\begin{array} { | l | c | } \hline & \text { Net Income } \\\hline \text { Year } & \text { After Tax } \\\hline 1 & \$ 30,000 \\\hline 2 & \$ 45,000 \\\hline 3 & \$ 50,000 \\\hline 4 & \$ 55,000 \\\hline 5 & \$ 40,000 \\\hline 6 & \$ 20,000 \\\hline\end{array}$