Test Bank Chapter 26 Capital Investment Analysis

Student: ___________________________________________________________________________ 1. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called capital investment analysis. True False 2. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called cost-volume-profit analysis. True False 3. Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is involved and operations could be affected for many years. True False 4. Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals. True False 5. The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) methods that ignore present value and (2) present values methods. True False 6. The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) average rate of return and (2) cash payback methods. True False 7. Average rate of return equals average investment divided by estimated average annual income. True False 8. Average rate of return equals estimated average annual income divided by average investment. True False 9. The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method. True False 10. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow. True False 11. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow. True False 12. The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method. True False 13. The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method. True False 14. Methods that ignore present value in capital investment analysis include the cash payback method. True False 15. Methods that ignore present value in capital investment analysis include the average rate of return method. True False 16. Methods that ignore present value in capital investment analysis include the internal rate of return method. True False 17. Methods that ignore present value in capital investment analysis include the net present value method. True False 18. The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows. True False 19. The cash payback method of capital investment analysis is one of the methods referred to as a present value method. True False 20. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 30%. True False 21. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 37.5%. True False 22. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 for the 5 years. The expected average rate of return on investment is 50%. True False 23. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 for the 5 years. The expected average rate of return on investment is 25.0%. True False 24. In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and then reduced to their present values. True False 25. The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period. True False 26. The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period. True False 27. If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years. True False 28. If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years. True False 29. For years one through five, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3 years. True False 30. For years one through five, a proposed expenditure of $500,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 5 years. True False 31. In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values. True False 32. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected. True False 33. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted. True False 34. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis. True False 35. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis. True False 36. A present value index can be used to rank competing capital investment proposals when the net present value method is used. True False 37. The internal rate of return method of analyzing capital investment proposals uses the present value concept to compute an internal rate of return expected from the proposals. True False 38. A series of equal cash flows at fixed intervals is termed an annuity. True False 39. A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality. True False 40. A qualitative characteristic that may impact upon capital investment analysis is manufacturing flexibility. True False 41. A qualitative characteristic that may impact upon capital investment analysis is employee morale. True False 42. A qualitative characteristic that may impact upon capital investment analysis is manufacturing productivity. True False 43. A qualitative characteristic that may impact upon capital investment analysis is manufacturing control. True False 44. The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis. True False 45. The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing. True False 46. The payback method can be used only when net cash inflows are the same for each period. True False 47. The accounting rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life. True False 48. The accounting rate of return is a measure of profitability computed by dividing the average annual cash flows from an asset by the average amount invested in the asset. True False 49. Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting decisions. True False 50. In calculating the net present value of an investment in equipment, the required investment and its terminal residual value should be subtracted from the present value of all future cash inflows. True False 51. In calculating the present value of an investment in equipment, the present value of the terminal residual value should be added to the cash inflows. True False 52. The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period. True False 53. A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual cash flows from the machine will be $3,500. The payback period for the new machine is 10.5 years. True False 54. A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual cash flows from the machine will be $3,500. The payback period for the new machine is 6 years. True False 55. A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from the investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4), and $6,000 (year 5). The average income from operations over the 5-year life is $20,400. The payback period is 3.5 years. True False 56. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 6 years. True False 57. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years. True False 58. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The payback period for the machine is 4 years. True False 59. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The payback period for the machine is 12 years. True False 60. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The accounting rate of return for the machine is 16.7%. True False 61. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The accounting rate of return for the machine is 50%. True False 62. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called: A. absorption cost analysis B. variable cost analysis C. capital investment analysis D. cost-volume-profit analysis 63. Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of A. sales mix analysis. B. variable cost analysis. C. capital investment analysis. D. variable cost analysis. 64. Which of the following is important when evaluating long-term investments? A. Investments must earn a reasonable rate of return B. The useful life of the asset C. Proposals should match long term goals. D. All of the above. 65. Which of the following are present value methods of analyzing capital investment proposals? A. Internal rate of return and average rate of return B. Average rate of return and net present value C. Net present value and internal rate of return D. Net present value and payback 66. Which of the following is a present value method of analyzing capital investment proposals? A. Average rate of return B. Cash payback method C. Accounting rate of return D. Net present value 67. By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money: A. has an international rate of exchange B. is the language of business C. is the measure of assets, liabilities, and stockholders' equity on financial statements D. has a time value 68. Which of the following are two methods of analyzing capital investment proposals that both ignore present value? A. Internal rate of return and average rate of return B. Net present value and average rate of return C. Internal rate of return and net present value D. Average rate of return and cash payback method 69. The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is: A. cash payback method B. net present value method C. internal rate of return method D. average rate of return method 70. The primary advantages of the average rate of return method are its ease of computation and the fact that: A. it is especially useful to managers whose primary concern is liquidity B. there is less possibility of loss from changes in economic conditions and obsolescence when the commitment is short-term C. it emphasizes the amount of income earned over the life of the proposal D. rankings of proposals are necessary 71. The expected average rate of return for a proposed investment of $600,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is: A. 40% B. 20% C. 60% D. 24% 72. The amount of the average investment for a proposed investment of $90,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the 4 years, is: A. $10,800 B. $21,600 C. $ 5,400 D. $45,000 73. The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield of $21,600, is: A. $10,800 B. $21,600 C. $ 5,400 D. $45,000 74. An anticipated purchase of equipment for $580,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: Year Net Income Net Cash Flow 1 $60,000 $110,000 2 50,000 100,000 3 50,000 100,000 4 40,000 90,000 5 40,000 90,000 6 40,000 90,000 7 40,000 90,000 8 40,000 90,000 What is the cash payback period? A. 5 years B. 4 years C. 6 years D. 3 years 75. Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value? A. Net present value B. Average rate of return C. Internal rate of return D. Cash payback 76. Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis? A. Price-level index B. Future value index C. Rate of investment index D. Present value index 77. An analysis of a proposal by the net present value method indicated that the present value of future cash inflows exceeded the amount to be invested. Which of the following statements best describes the results of this analysis? A. The proposal is desirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. B. The proposal is desirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis. C. The proposal is undesirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis. D. The proposal is undesirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. 78. Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return? A. Average rate of return B. Accounting rate of return C. Cash payback period D. Internal rate of return 79. Which of the following is a method of analyzing capital investment proposals that ignores present value? A. Internal rate of return B. Net present value C. Discounted cash flow D. Average rate of return 80. The methods of evaluating capital investment proposals can be separated into two general groups--present value methods and: A. past value methods B. straight-line methods C. reducing value methods D. methods that ignore present value 81. The rate of earnings is 10% and the cash to be received in three years is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest: Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 A. $13,316 B. $6,830 C. $7,510 D. $8,260 82. Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received four years hence, with earnings at the rate of 10% a year: Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 A. $13,660 B. $12,720 C. $15,840 D. $10,400 83. When several alternative investment proposals of the same amount are being considered, the one with the largest net present value is the most desirable. If the alternative proposals involve different amounts of investment, it is useful to prepare a relative ranking of the proposals by using a(n): A. average rate of return B. consumer price index C. present value index D. price-level index 84. Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows expected from capital investment proposals? A. Internal rate of return B. Cash payback C. Net present value D. Average rate of return 85. A series of equal cash flows at fixed intervals is termed a(n): A. present value index B. price-level index C. net cash flow D. annuity 86. The present value index is computed using which of the following formulas? A. Amount to be invested/Average rate of return B. Total present value of net cash flow/Amount to be invested C. Total present value of net cash flow/Average rate of return D. Amount to be invested/Total present value of net cash flow 87. Hazard Company is considering the acquisition of a machine that costs $525,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual cash flow of $150,000, and annual operating income of $87,500. What is the estimated cash payback period for the machine? A. 3 years B. 4.3 years C. 3.5 years D. 5 years 88. The expected average rate of return for a proposed investment of $8,000,000 in a fixed asset, using straight line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $12,000,000 is: A. 15% B. 12% C. 40% D. 7.5% 89. The present value factor for an annuity of $1 is determined using which of the following formulas? A. Amount to be invested/Annual average net income B. Annual net cash flow/Amount to be invested C. Annual average net income/Amount to be invested D. Amount to be invested/Equal annual net cash flows 90. The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 40,000 100,000 4 10,000 90,000 5 10,000 120,000 The cash payback period for this investment is: A. 5 years B. 4 years C. 2 years D. 3 years 91. The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 40,000 100,000 4 10,000 90,000 5 10,000 120,000 The average rate of return for this investment is: A. 18% B. 16% C. 58% D. 10% 92. The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 40,000 100,000 4 10,000 90,000 5 10,000 120,000 The net present value for this investment is: A. positive $36,400 B. positive $55,200 C. Negative $16,170 D. Negative $126,800 93. The management of California Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 20,000 100,000 4 10,000 90,000 5 10,000 90,000 The present value index for this investment is: A. .88 B. 1.45 C. 1.14 D. .70 94. The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $18,750 $93,750 2 18,750 93,750 3 18,750 93,750 4 18,750 93,750 5 18,750 93,750 The cash payback period for this investment is: A. 4 years B. 5 years C. 20 years D. 3 years 95. The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $18,750 $93,750 2 18,750 93,750 3 18,750 93,750 4 18,750 93,750 5 18,750 93,750 The average rate of return for this investment is: A. 5% B. 10% C. 25% D. 15% 96. The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $18,750 $93,750 2 18,750 93,750 3 18,750 93,750 4 18,750 93,750 5 18,750 93,750 The net present value for this investment is: A. Negative $118,145 B. Positive $118,145 C. Positive $19,875 D. Negative $19,875 97. The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $18,750 $93,750 2 18,750 93,750 3 18,750 93,750 4 18,750 93,750 5 18,750 93,750 The present value index for this investment is: A. 1.00 B. .95 C. 1.25 D. 1.05 98. Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows are expected to be $40,000 annually for seven years. The present value factors for an annuity of $1 for 7 years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is: A. 10% B. 6% C. 12% D. 8% 99. Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for four years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is: A. 9% B. 10% C. 12% D. 3% 100. Below is a table for the present value of $1 at Compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 Using the tables above, what would be the present value of $15,000 (rounded to the nearest dollar) to be received four years from today, assuming an earnings rate of 10%? A. $11,250 B. $10,245 C. $3,750 D. $47,550 101. Below is a table for the present value of $1 at Compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 Using the tables above, what would be the present value of $10,000 (rounded to the nearest dollar) to be received three years from today, assuming an earnings rate of 6%? A. $8,400 B. $8,900 C. $7,920 D. $11,905 102. Below is a table for the present value of $1 at Compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 Using the tables above, what is the present value of $4,000 (rounded to the nearest dollar) to be received at the end of each of the next four years, assuming an earnings rate of 12%? A. $2,544 B. $1,000 C. $12,148 D. $14,420 103. Below is a table for the present value of $1 at Compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 Using the tables above, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next 4 years, what would be the net present value (rounded to the nearest dollar) of the investment, (assuming an earnings rate of 10%)? A. $23,500 B. $16,050 C. $25,360 D. $1,860 104. Below is a table for the present value of $1 at Compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 Using the tables above, what would be the internal rate of return of an investment that required an investment of $189,550, and would generate an annual cash inflow of $50,000 for the next 5 years? A. 6% B. 10% C. 12% D. cannot be determined from the data given. 105. Below is a table for the present value of $1 at Compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 Using the tables above, what would be the internal rate of return of an investment of $294,840 that would generate an annual cash inflow of $70,000 for the next 5 years? A. 6% B. 10% C. 12% D. cannot be determined from the data given. 106. The expected average rate of return for a proposed investment of $500,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is: A. 18% B. 48% C. 24% D. 12% 107. Which of the following is not an advantage of the average rate of return method? A. It is easy to use. B. It takes into consideration the time value of money. C. It includes the amount of income earned over the entire life of the proposal. D. It emphasizes accounting income. 108. Which of the following is an advantage of the cash payback method? A. It is easy to use. B. It takes into consideration the time value of money. C. It includes the cash flow over the entire life of the proposal. D. It emphasizes accounting income. 109. An anticipated purchase of equipment for $600,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: Year Net Income Net Cash Flow 1 $60,000 $120,000 2 50,000 110,000 3 50,000 110,000 4 40,000 100,000 5 40,000 80,000 6 40,000 80,000 7 40,000 60,000 8 40,000 60,000 What is the cash payback period? A. 5 years B. 4 years C. 6 years D. 3 years 110. Using the following partial table of present value of $1 at compound interest, determine the present value of $30,000 to be received three years hence, with earnings at the rate of 12% a year: Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 A. $14,240 B. $16,800 C. $21,360 D. $15,840 111. The rate of earnings is 10% and the cash to be received in two year is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest: Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 A. $8,900 B. $9,090 C. $7,970 D. $8,260 112. Heather Company is considering the acquisition of a machine that costs $432,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual cash flow of $120,000, and annual operating income of $83,721. What is the estimated cash payback period for the machine? A. 3.6 years B. 4.3 years C. 5.2 years D. 6 years 113. The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $10,560,000 is: A. 24% B. 22% C. 45% D. 10% 114. The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 20,000 100,000 4 10,000 90,000 5 10,000 90,000 The cash payback period for this investment is: A. 5 years B. 4 years C. 2 years D. 3 years 115. The management of Indiana Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 60,000 120,000 3 30,000 100,000 4 10,000 90,000 5 10,000 90,000 The average rate of return for this investment is: A. 18% B. 21% C. 53% D. 10% 116. The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 20,000 100,000 4 10,000 90,000 5 10,000 90,000 The net present value for this investment is: A. positive $16,400 B. positive $25,200 C. Negative $99,600 D. Negative $126,800 117. The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $100,000 $180,000 2 40,000 120,000 3 20,000 100,000 4 10,000 90,000 5 10,000 90,000 The present value index for this investment is: A. 1.08 B. 1.45 C. 1.14 D. .70 118. The management of Charlton Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $20,000 $95,000 2 20,000 95,000 3 20,000 95,000 4 20,000 95,000 5 20,000 95,000 The cash payback period for this investment is: A. 4 years B. 5 years C. 19 years D. 3.3 years 119. The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $20,000 $95,000 2 20,000 95,000 3 20,000 95,000 4 20,000 95,000 5 20,000 95,000 The cash payback period for this investment is: A. 4 years B. 5 years C. 20 years D. 3 years 120. The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $20,000 $95,000 2 20,000 95,000 3 20,000 95,000 4 20,000 95,000 5 20,000 95,000 The average rate of return for this investment is: A. 5% B. 10.5% C. 25% D. 15% 121. The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year Income from Operations Net Cash Flow 1 $20,000 $95,000 2 20,000 95,000 3 20,000 95,000 4 20,000 95,000 5 20,000 95,000 The net present value for this investment is: A. Positive $20,140 B. Negative $20,140 C. Positive $19,875 D. Negative $19,875 122. Below is a table for the present value of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 Using the tables above, what would be the present value of $15,000 (rounded to the nearest dollar) to be received at the end of each of the next two years, assuming an earnings rate of 6%? A. $27,495 B. $26,040 C. $30,000 D. $25,350 123. Below is a table for the present value of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 Using the tables above, what would be the present value of $8,000 (rounded to the nearest dollar) to be received one year from today, assuming an earnings rate of 12%? A. $7,544 B. $7,120 C. $7,272 D. $7,144 124. Below is a table for the present value of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 Using the tables above, what is the present value of $6,000 (rounded to the nearest dollar) to be received at the end of each of the next 4 years, assuming an earnings rate of 10%? A. $20,790 B. $19,020 C. $14,412 D. $25,272 125. Below is a table for the present value of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 Using the tables above, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a year for the next 4 years, what would be the present value (rounded to the nearest dollar) of the investment cash inflows, (assuming an earnings rate of 12%)? A. $20,352 B. $3,969 C. $22,190 D. $21,259 126. The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines and have asked the accountant to analyze them to determine the best average rate of return. Machine A Machine B Machine C Estimated Average Income $40,000 $50,000 $75,000 Average Investment $300,000 $250,000 $500,000 A. Machine B B. Machine C C. Machine B or C D. Machine A 127. The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines and have asked the accountant to analyze them to determine the best cash payback. Machine A Machine B Machine C Annual Cash Flow $40,000 $50,000 $75,000 Average Investment $300,000 $250,000 $500,000 A. Machine A B. Machine C C. Machine B D. All are equal. 128. Which of the following is true of the cash payback period? A. The longer the payback, the longer the estimated life of the asset. B. The longer the payback, the sooner the cash spent on the investment is recovered. C. The shorter the payback, the less likely the possibility of obsolescence. D. All of the above are correct. 129. The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines and have asked the accountant to analyze them to determine which of the proposals (if any) meet or exceed the company’s policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has a estimated useful life of 10 years. Machine A Machine B Machine C Present Value of Future Cash Flows computed using 10% rate of return $305,000 $295,000 $300,000 Amount of initial investment $300,000 $300,000 $300,000 A. A & C B. B & C C. B D. A only 130. The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return? Machine A Machine B Machine C Annual net cash flows $50,000 $40,000 $75,000 Average investment $250,000 $300,000 $500,000 A. Machine B B. Machine C C. Machine A and B D. Machine A 131. All of the following qualitative considerations may impact upon capital investment analysis except: A. manufacturing productivity B. manufacturing sunk cost C. manufacturing flexibility D. market opportunities 132. All of the following qualitative considerations may impact upon capital investment analysis except: A. time value of money B. employee morale C. the impact on product quality D. manufacturing flexibility 133. Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects? A. Deductions for individuals B. Depreciation deduction C. Minimum tax provision D. Charitable contributions 134. Assume in analyzing alternative proposals that Proposal F has a useful life of six years and Proposal J has a useful life of nine years. What is one widely used method that makes the proposals comparable? A. Ignore the fact that Proposal F has a useful life of six years and treat it as if it has a useful life of nine years. B. Adjust the life of Proposal J to a time period that is equal to that of Proposal F by estimating a residual value at the end of year six. C. Ignore the useful lives of six and nine years and find an average (7 1/2 years). D. Ignore the useful lives of six and nine years and compute the average rate of return. 135. Periods in time that experience increasing price levels are known as periods of: A. inflation B. recession C. depression D. deflation 136. Which of the following is not considered as a complicating factor in capital investment decisions? A. Income tax B. Lease versus capital investment C. Equal proposed lives D. Qualitative considerations 137. Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment? A. Further evaluate assets that are dissimilar in nature or have different useful lives. B. Using only quantitative measures to purchase an asset. C. Analyzing the lease vs purchase option. D. Considering income tax ramifications. 138. All of the following are factors that may complicate capital investment analysis except: A. possible leasing alternatives. B. changes in price levels. C. sunk costs. D. federal income tax ramifications. 139. The process by which management allocates available investment funds among competing investment proposals is called: A. investment capital B. investment rationing C. cost-volume-profit analysis D. capital rationing 140. In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation method(s) are often used? A. Cash payback method and average rate of return method B. Average rate of return method and net present value method C. Net present value method and cash payback method D. Internal rate of return and net present value methods 141. In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of: A. present value B. non-financial factors C. maximum cost D. net cash flow 142. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $143,000. Should the company invest in this project? A. yes, because net present value is $7,000 B. yes, because net present value is -$7,000 C. no, because net present value is $7,000 D. no, because net present value is -$7,000 143. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows generated by the project is $145,000. Should they invest in this project? A. yes, because the rate of return on the project exceeds the desired rate of return used to calculate the present value of the future cash flows. B. no, because the rate of return on the project is less than the desired rate of return used to calculate the present value of the future cash flows. C. no, because net present value is $5,000 D. yes, because the rate of return on the project is equal to the desired rate of return used to calculate the present value of the future cash flows. 144. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $170,000. The present value of the future cash flows is $185,000. The company’s desired rate of return used in the present value calculations was 10%. Which of the following statements is true? A. The project should not be accepted because the net present value is negative. B. The internal rate of return on the project is less than 10%. C. The internal rate of return on the project is more than 10%. D. The internal rate of return on the project is equal to 10%. 145. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company’s desired rate of return is $105,000. The IRR on the project is 12%. Which of the following statements is true? A. The project should not be accepted because the net present value is negative. B. The desired rate of return used to calculate the present value of the future cash flows is less than 12%. C. The desired rate of return used to calculate the present value of the future cash flows is more than 12%. D. The desired rate of return used to calculate the present value of the future cash flows is equal to 12%. 146. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company’s desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true? A. The project should not be accepted because the net present value is negative. B. The desired rate of return used to calculate the present value of the future cash flows is less than 12%. C. The desired rate of return used to calculate the present value of the future cash flows is more than 12%. D. The desired rate of return used to calculate the present value of the future cash flows is equal to 12%. 147. Determine the average rate of return for a project that is estimated to yield total income of $400,000 over four years, cost $720,000, and has a $70,000 residual value. Round answers in percentage to one decimal place. 148. Determine the average rate of return for a project that is estimated to yield total income of $250,000 over four years, cost $480,000, and has a $20,000 residual value. 149. An 8-year project is estimated to cost $400,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 5%, determine the estimated annual net income. 150. An 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the estimated annual net income. 151. A project has estimated annual net cash flows of $50,000. It is estimated to cost $180,000. Determine the cash payback period. 152. A project has estimated annual net cash flows of $90,000. It is estimated to cost $324,000. Determine the cash payback period. 153. A project has estimated annual cash flows of $95,000 for four years and is estimated to cost $260,000. Assume a minimum acceptable rate of return of 10%. Using the following tables determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. Below is a table for the present value of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 154. A project has estimated annual cash flows of $90,000 for three years and is estimated to cost $250,000. Assume a minimum acceptable rate of return of 10%. Using the following tables determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. Below is a table for the present value of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 155. A project is estimated to cost $273,840 and provide annual cash flows of $60,000 for seven years. Determine the internal rate of return for this project, using the following table. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 6 4.917 4.355 4.111 7 5.582 4.868 4.564 8 6.210 5.335 4.968 9 6.802 5.759 5.328 10 7.360 6.145 5.650 156. A project is estimated to cost $248,400 and provide annual cash flows of $50,000 for eight years. Determine the internal rate of return for this project, using the following table. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 6 4.917 4.355 4.111 7 5.582 4.868 4.564 8 6.210 5.335 4.968 9 6.802 5.759 5.328 10 7.360 6.145 5.650 157. Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for seven years. Project B has a calculated net present value of $5,500 over a five year life. Project A could be sold at the end of five years for a price of $30,000. (a) Using the proper table below determine the net present value of Project A over a five-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value? Below is a table for the present value of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 158. Project A requires an original investment of $50,000. The project will yield cash flows of $15,000 per year for seven years. Project B has a calculated net present value of $13,500 over a four year life. Project A could be sold at the end of four years for a price of $25,000. (a) Using the proper table below determine the net present value of Project A over a four-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value? Below is a table for the present value of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 .890 .826 .797 3 .840 .751 .712 4 .792 .683 .636 5 .747 .621 .567 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 1 .943 .909 .893 2 1.833 1.736 1.690 3 2.673 2.487 2.402 4 3.465 3.170 3.037 5 4.212 3.791 3.605 159. What is the present value of $8,000 to be received at the end of six years, if the required rate of return is 15%? Below is a table for the present value of $1 at compound interest. Year 15% Year 15% 1 0.87 6 0.432 2 0.756 7 0.376 3 0.658 8 0.327 4 0.572 9 0.284 5 0.497 10 0.247 Below is a table for the present value of an annuity of $1 at compound interest. Year 15% Year 15% 1 0.87 6 3.785 2 1.626 7 4.16 3 2.283 8 4.487 4 2.855 9 4.772 5 3.353 10 5.019 160. Norton Company is considering a project that will require an initial investment of $750,000 and will return $200,000 each year for five years. Required: If taxes are ignored and the required rate of return is 9%, what is the project’s net present value? Based on this analysis, should Norton Company proceed with the project? Below is a table for the present value of $1 at compound interest. Year 9% Year 9% 1 0.917 6 0.596 2 0.842 7 0.547 3 0.772 8 0.502 4 0.708 9 0.460 5 0.650 10 0.422 Below is a table for the present value of an annuity of $1 at compound interest. Year 9% Year 9% 1 0.917 6 4.486 2 1.759 7 5.033 3 2.531 8 5.535 4 3.240 9 5.995 5 3.890 10 6.418 161. An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years. What is the investment’s internal rate of return? Below is a table for the present value of $1 at compound interest. Year 6% 10% 12% 15% 1 0.943 0.909 0.893 0.87 2 0.89 0.826 0.797 0.756 3 0.84 0.751 0.712 0.658 4 0.792 0.683 0.636 0.572 5 0.747 0.621 0.567 0.497 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 15% 1 0.943 0.909 0.893 0.87 2 1.833 1.736 1.69 1.626 3 2.673 2.487 2.402 2.283 4 3.465 3.17 3.037 2.855 5 4.212 3.791 3.605 3.353 162. Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year Net Income Net Cash Flow 1 $ 75,000 $285,000 2 100,000 290,000 3 109,000 190,000 4 36,000 125,000 $320,000 $890,000 The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is .893, .797, .712, and .636, respectively. Required: Determine the average rate of return on investment, including the effect of depreciation on the investment. 163. Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year Net Income Net Cash Flow 1 $ 75,000 $280,000 2 100,000 300,000 3 109,000 200,000 4 36,000 120,000 $320,000 $900,000 The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is .893, .797, .712, and .636, respectively. Required: Determine the net present value. 164. Match each of the following terms with the best definition given below. 1. Average income as a percentage of average investment Time value of money concept ____ 2. Initial cost divided by Annual net cash inflow of an investment Net present value method ____ 3. Recognizes that a dollar today is worth more than a dollar tomorrow. Capital investment analysis ____ 4. Capital budgeting Average rate of return ____ 5. The investment analysis method that is most often used by large U.S. companies. Cash payback period ____ 165. Match the term with the correct definition. 1. The length of time it will take to recover through cash inflows the dollars of a capital outlay. accounting rate of return ____ 2. A formal means of analyzing long-range investment decisions. net present value ____ 3. The rate of return that makes the net present value of a project equal to zero. annuity ____ 4. A stream of equal cash flow amounts. capital investment analysis ____ 5. The decision model that computes the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to their present value, using a minimum desired rate of return. internal rate of return ____ 6. A measure of profitability computed by dividing the average operating income that an asset generates by the average amount of the investment in the asset. payback period ____ 166. Jimmy Co. is considering a 12-year project that is estimated to cost $1,050,000 and has no residual value. Jimmy Co. seeks to earn an average rate of return of 18% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for this project to be acceptable to Jimmy Co. 167. Proposals L and K each cost $500,000, have 6-year lives, and have expected total cash flows of $720,000. Proposal L is expected to provide equal annual net cash flows of $140,000, while the net cash flows for Proposal K are as follows: Year 1 $250,000 Year 2 200,000 Year 3 100,000 Year 4 90,000 Year 5 60,000 Year 6 20,000 $720,000 Determine the cash payback period for each proposal. Round your answers to two decimal places. 168. Proposals M and N each cost $600,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows: Year 1 $250,000 Year 2 $200,000 Year 3 $150,000 Year 4 $ 75,000 Year 5 $ 50,000 Year 6 $ 25,000 Determine the cash payback period for each proposal. 169. A $550,000 capital investment proposal has an estimated life of four years and no residual value. The estimated net cash flows are as follows: Year Net Cash Flow 1 $300,000 2 280,000 3 208,000 4 180,000 The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is .893, .797, .712, and .636, respectively. Determine the net present value. 170. Sunrise Inc. is considering a capital investment proposal that costs $227,500 and has an estimated life of four years and no residual value. The estimated net cash flows are as follows: Year Net Cash Flow 1 $97,500 2 $80,000 3 $60,000 4 $40,000 The minimum desired rate of return for net present value analysis is 10%. The present value of $1 at compound interest rates of 10% for 1, 2, 3, and 4 years is .909, .826, .751, and .683, respectively. Determine the net present value. 171. The net present value has been computed for Proposals P and Q. Relevant data are as follows: Proposal P Proposal Q Amount to be invested $245,000 $460,000 Total present value of net cash flow 296,500 425,000 Determine the present value index for each proposal. Round your answers to two decimal places. 172. Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year Net Income Net Cash Flow 1 $ 90,000 $210,000 2 80,000 200,000 3 40,000 160,000 4 30,000 150,000 $240,000 $720,000 The company's minimum desired rate of return for net present value analysis is 15%. The present value of $1 at compound interest of 15% for 1, 2, 3, and 4 years is .870, .756, .658, and .572, respectively. Determine (a) the average rate of return on investment, using straight line depreciation, and (b) the net present value. 173. BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year Net Income Net Cash Flow 1 $ 75,000 $285,000 2 102,000 290,000 3 109,500 190,000 4 36,000 125,000 $322,500 $890,000 The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is .893, .797, .712, and .636, respectively. Determine: (a) the average rate of return on investment, including the effect of depreciation on the investment, and (b) the net present value. 174. The internal rate of return method is used to analyze a $946,250 capital investment proposal with annual net cash flows of $250,000 for each of the six years of its useful life. (a) Determine a present value factor for an annuity of $1 which can be used in determining the internal rate of return. (b) Based on the factor determined in (a) and the portion of the present value of an annuity of $1 table presented below, determine the internal rate of return for the proposal. Year 10% 15% 20% 1 0.909 0.870 0.833 2 1.736 1.626 1.528 3 2.487 2.283 2.106 4 3.170 2.855 2.589 5 3.791 3.353 2.991 6 4.355 3.785 3.326 7 4.868 4.160 3.605 175. Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for this project to be acceptable to Tipper Co. 176. Proposals A and B each cost $500,000 and have 5-year lives. Proposal A is expected to provide equal annual net cash flows of $109,000, while the net cash flows for Proposal B are as follows: Year 1 $150,000 Year 2 140,000 Year 3 110,000 Year 4 50,000 Year 5 50,000 $500,000 Determine the cash payback period for each proposal. Round answers to two decimal places. 177. A $400,000 capital investment proposal has an estimated life of four years and no residual value. The estimated net cash flows are as follows: Year Net Cash Flow 1 $200,000 2 150,000 3 90,000 4 80,000 The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is .893, .797, .712, and .636, respectively. Determine the net present value. 178. Mundall Company is considering a project that will require an initial investment of $600,000 and is expected to generate the following cash flows: Year 1 $100,000 Year 2 $250,000 Year 3 $250,000 Year 4 $200,000 Year 5 $100,000 A. What is the project’s payback period? B. If the required rate of return is 20% and taxes are ignored, what is the project’s net present value? The present value of $1 at compound interest of 20% for 1, 2, 3, 4 and 5 years is .8333, .6944, .5