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Exam 16: Planning for Capital Investments

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Question 71

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Which of the following is not a major cash inflow from a capital investment?

A) Incremental revenue
B) Increase in working capital
C) Cost savings
D) Salvage value

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

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Question 72

Multiple Choice

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Which of the following statements is correct?

A) A postaudit should be conducted at the time a capital investment is purchased.
B) The postaudit of a capital investment project should be made using the same analytical technique that was used in deciding to make the investment.
C) The purpose of postaudits is to improve a company's cost-volume-profit analysis.
D) The postaudit process uses expected cash flows and the company's cost of capital.

E) A) and D)
F) B) and D)

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Question 73

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

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?

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? (Do not round your PV factors. Round your answer to the nearest dollar.)

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

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. 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

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?

Indicate whether each of the following statements is true or false: 1. A postaudit should be conducted at the time a capital investment is purchased. 2. The postaudit of a capital investment project should be made using the same analytical technique that was used in deciding to make the investment. 3. The purpose of postaudits is to improve a company's capital investment decision process. 4. The postaudit process uses expected cash flows and the company's cost of capital. 5. Making good estimates of future cash flows is important in making capital investment decisions.

Which of the following would be considered a cash inflow in determining the value of a capital investment?

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

Which of the following statements concerning payback analysis is true?

Which of the following statements is incorrect?

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

In 2008, Chandler Company purchased equipment with an expected useful life of 5 years. The initial cost of the equipment was $85,000. Chandler's cost of capital is 12%. At the time it purchased the equipment, Chandler projected the following cash inflows from use of the equipment: $\begin{array} { | l | l | } \hline \text { Year } & \text { Projected cash inflow } \\\hline 1 & \$ 20,000 \\\hline 2 & \$ 30,000 \\\hline 3 & \$ 35,000 \\\hline 4 & \$ 25,000 \\\hline 5 & \$ 15,000 \\\hline\end{array}$ In 2013, the equipment had reached the end of its useful life. Chandler determined that it had actually generated the following cash flows: $\begin{array} { | l | l | } \hline \text { Year } & \text { Actual cash inflow } \\\hline 1 & \$ 10,000 \\\hline 2 & \$ 20,000 \\\hline 3 & \$ 30,000 \\\hline 4 & \$ 30,000 \\\hline 5 & \$ 30,000 \\\hline\end{array}$ Required: 1) What was the net present value that Chandler calculated for the equipment when the company purchased the asset? 2) Calculate the net present value that the equipment achieved, based on the actual cash inflows. 3) Comment on the pattern of actual cash inflows, compared to the cash flows that had been projected. 4) Was the equipment in fact an acceptable investment, based on the cash flows actually achieved?

In 2008, Burton Company purchased equipment with an expected useful life of 5 years. The initial cost of the equipment was $160,000. Burton's cost of capital is 12%; when it purchased the equipment, Burton computed a net present value of $15,824 for the investment. In 2013, the equipment reached the end of its useful life. Burton determined that, over the 5-year life, the equipment had generated annual cash inflows of $46,000. Required: Conduct a post-audit to determine whether the equipment achieved the net present value the company had expected. Based on the results actually achieved, was the asset in fact an acceptable investment?

Pierce Company is considering the purchase of new equipment that will cost $150,000. The equipment will save the company $48,000 per year in cash operating costs. The equipment has an estimated useful life of five years and no expected salvage value. The company's cost of capital is 12%. Required: 1) Assuming the company is subject to a 40% tax rate, compute the net present value. 2) Compute the amount of the annual depreciation tax shield provided by the new equipment. 3) Should the equipment be purchased? Why or why not?

Which statement characterizes the time value of money concept?

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

Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years. Assuming a desired rate of return of 12%, is the project acceptable?