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Exam 12: Capital Investment Decisions and the Time Value of Money

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Question 21

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Regarding capital rationing decisions for capital assets, which of the following is true?

A) Companies should always choose the investment with the shortest payback period.
B) Companies should always choose the investment with the highest NPV.
C) Companies should always choose the investment with the highest ARR.
D) None of the above are true.

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

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Question 22

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After a company invests in capital assets, it will perform a ________ in order to compare the actual to the projected net cash inflows.

A) cash flow analysis
B) pre and post analysis
C) post-audit
D) post-cash flow

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

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Question 23

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Which method of capital budgeting is best used for longer term capital investments?

The accounting rate of return method of analyzing capital budgeting decisions measures the average annual rate of return from using the asset over its entire life.

Your grandfather has promised to give you $500 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year. Using a discount rate of 7%, which of the following is correct for determining the present value of the gift?

"Management's minimum desired rate of return on an investment" is best described by which of the following terms?

The interest rate that makes the net present value of the investment equal to zero is the internal rate of return.

In calculating the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows.

One dollar to be received in the future is worth more than one dollar today.

Pro-Am Audio is a company that is contracted to DJ private events. Due to a recent increase in bookings, Pro-Am is considering the purchase of another mobile DJ unit. Pro-Am uses the payback method to evaluate its investments. The mobile DJ unit will cost $18,000, has a useful life of 14 years, and will generate $6000 in net cash inflows per year. The residual value of the unit is $800. What is the payback period for the mobile DJ unit?

All four of the methods for analyzing capital investments use accrual basis accounting.

Capital budgeting predictions must consider factors such as changing consumer preferences, competition, and government regulations.

How does depreciation affect the calculation of a project's payback period?

You win the lottery and must decide how to take the payout. Use a 10% discount rate. What is the present value of $14,000 a year received at the end of each of the next five years? Present Value of $1 Present Value of Annuity of $1

Shaker Investments, a private investment holding company, is searching for a new investment opportunity. Shaker Investments has identified two potential investment opportunities: an upstart fast food chain and a growing organic grocery chain. Information for each investment follows: Present Value of $1 Present Value of Annuity of $1 Required: a. Calculate the net present value of the Fast Food Chain. b. Calculate the net present value of the Organic Grocery Chain. c. Using the net present value method, which investment should Shaker select if it can select only one investment?

Sparky the Electrician specializes in rewiring historic houses. Sparky recently purchased a new wire-pulling device that will decrease the time to complete each job and increase total revenues. The device will cost $2608 and will increase net cash flows by $1630 per year. The new device has a useful life of 7 years and a residual value of $230. What is the payback period for the new wire-pulling device?

The payback and accounting rate of return models are conceptually better than the discounted cash flow models because they are based on cash flows, and they consider both profitability and the time value of money.

The following are all methods of analyzing capital investments except

The net present value method assumes that the cash inflows from a project are immediately reinvested at the

Osprey Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available: How long is the payback period for Investment B?