SmartBook Chapter 10: Planning for Capital Investments

Using the present value of an annuity table above, calculate the present value of a $8,000, 3 year annuity, assuming a desired rate of return of 5%.

$21,786

Using the present value of a single sum table above, calculate the present value of $40,000 to be received in 3 years, assuming a desired rate of return of 5%.

$34,554

Using the present value of a single sum table above, calculate the present value of $40,000 to be received in 2 years, assuming a desired rate of return of 6%.

$35,600

Using the present value of an annuity table above, calculate the present value of a $2,000, 3 year annuity, assuming a desired rate of return of 6%.

$5346

Using algebra, calculate the necessary investment to earn $78,000 in one year with a desired rate of return of 3%. Round to the nearest whole dollar.

$75,728

Using algebra, calculate the necessary investment to earn $100,000 in one year with a desired rate of return of 8%. Round to the nearest whole dollar.

$92,593

Calculate the payback period for a $500 investment with the following expected cash flows: Year 1: $300 Year 2: $200 Year 3: $100 Year 4: $400

2 years

Assume an investment that cost $100,000 will save $20,000 a year. The payback period is _____ years.

5

Durango Co.is considering purchasing a piece of equipment for $27,232. Based on the table above, what is the approximate internal rate of return if the equipment provides cash inflows of $10,000 per year for the next three years?

5%

Durango Co. is considering purchasing a piece of equipment for $18,334. Based on the table above, what is the approximate internal rate of return if the equipment provides cash inflows of $10,000 per year for the next two years?

6%

A company reported net income of $60,000 which includes a depreciation expense of $10,000. If the company's tax rate is 21%, the depreciation tax shield is $_____.

Blank 1: 2,100, $2,100, 2100, or $2100

Companies that earn lower returns than their cost of _____ eventually go bankrupt. (Enter only one word per blank.)

Blank 1: capital

Purchasing a manufacturing plant is an example of a(n) _____ investment. (Enter only one word per blank.)

Blank 1: capital

The most common source of cash inflows from using additional capital assets is called _____ revenue.

Blank 1: incremental

To determine whether to accept or reject an investment project, the desired rate of return may be compared to the _____ _____ of return.

Blank 1: internal Blank 2: rate

One-time receipts of cash are frequently called single-payment, or _____ - _____, cash flows.

Blank 1: lump Blank 2: sum

A series of equal payments that occur at the end of year is called a(n) _____ annuity.

Blank 1: ordinary

A simple way to calculate the time it will take to recover the initial cash outflow that ignores the time value of money is the _____ method.

Blank 1: payback

A one-time cash inflow obtained when a company terminates an investment is called the investment's _____ value.

Blank 1: salvage or residual

The net present value decision rule says if the net present value is equal or greater than _____, accept the investment opportunity.

Blank 1: zero or 0

Because cash flows are generally received throughout the year, using an ordinary annuity assumption for capital investment decisions is not appropriate.

False

True or false: If two investment opportunities have different useful lives, they can still be evaluated using payback.

False

True or false: The timing of cash flows does not affect the present value.

False

Which of the following terms refer to a company's cost of capital?

Hurdle rate Cutoff rate Desired rate of return Required rate of return Discount rate

A company is considering two projects (A and B). Both have a cost of $10,000 and will return a total of $16,000 over the next four years. Which of the following statements is true?

If Project A returns $4,000 per year and Project B returns $7,000 in year 1 and $3,000 per year in years 2 - 4, Project B is the best option.

Which of the following does not refer to a company's cost of capital?

Investment rate

Durango Co. is considering purchasing a rental unit for $200,000. The present value of projected cash inflows from the rental unit is $195,000. Should Durango Co. purchase the rental unit?

No

If the company can only invest in one opportunity, the best choice is ____​_.

Opportunity 2 because the present value index is 1.968

Investment PV of cash inflows PV of cash outflows Opportunity 1 $49,000 $112,323 Opportunity 2 $14,232 $13,232 Which of the following statements is correct?

Opportunity 2 is the best option because the present value index is 1.07557.

Which of the following is NOT a primary category of cash outflows for capital investments?

Salvage value of investment

A company is considering two investments that both have a payback period of 3 years. Which of the following statements is correct?

The investment with the longest life will generally be preferable.

Decreases in cash outflows have the same beneficial effect as increases in cash inflows.

True

Durango Co. is considering purchasing a rental unit for $200,000. The present value of projected cash inflows from the rental unit is $225,000. Should Durango Co. purchase the rental unit?

Yes

All of the following are capital investments decisions except _____.

acquiring common stock

All of the following are capital investments decisions except ____​_.

acquiring common stock

When calculating annual cash flows, depreciation expense is ____​_ net income.

added back to

A series of equal cash payments that occur at the beginning of every year is called a(n) _____.

annuity

Saying an investment is "earning the desired rate of return," assumes the cash inflows generated by the investment ____​_ reinvested at the desired rate of return.

are

An annuity is a series of cash payments that _____.

are equal amounts have a constant rate of return have equal time intervals between payments

The concept of relevance applies to _____.

both short- and long-term decisions

Purchases of long-term operational assets are called _____ investments.

capital

The minimum rate of return on investments is represented by a company's cost of _____.

capital

An investment's salvage value is a _____.

cash inflow

Decreases in cash outflows are known as _____.

cost savings

The internal rate of return is the rate at which the present value of cash inflows is _____ the cash outflows.

equal to

A positive net present value suggests that the investment will earn a rate of return that is ____​_ the desired rate of return.

higher than

The internal rate of return decision rule states that a project should be accepted _____.

if the internal rate of return is greater than or equal to the desired rate of return

The net present value decision rule says to accept the investment opportunity _____.

if the net present value is greater than or equal to zero

Additional cash inflow from operating activities generated by using additional capital assets is called _____ revenue.

incremental

Factors that explain why the present value of a future dollar is less than one dollar include _____.

inflation risk interest

The rate at which the present value of cash inflows equals the cash outflows is the _____.

internal rate of return

The compensation companies receive for making capital investment decisions is called the return on _____.

investment

The compensation companies receive for purchasing capital assets is called return on ____​_.

investment (ROI)

The desired rate of return uses compounding interest because ____​_.

it assumes all cash inflows are reinvested

The time value of money concept states that the present value of a dollar received in the future is worth _____ a dollar.

less than

Capital investments are purchases of ____​_.

long-term operational assets

A negative net present value suggests that the investment will earn a rate of return that is _____ the desired rate of return.

lower than

Subtracting the cost of the investment from the present value of the future cash inflows determines the ____​_ of the investment.

net present value

Depreciation expense is _____.

only relevant to capital investment decisions if taxes are considered

A series of equal payments that occur at the end of year is called a(n) _____.

ordinary annuity

Because it simplifies the time value of money computations, companies frequently use a(n) ____​_ assumption when considering cash flows from capital investments.

ordinary annuity

When considering an asset replacement decision, the _____.

original cost and book value of the asset being replaced are both irrelevant

A simple way to calculate the time it will take to recover the initial cash outflow that ignores the time value of money is the _____.

payback method

Net present value (NPV) is defined as the _____.

present value of future cash inflows less the cost of the investment

Cash outflows related to an initial capital investment include _____.

purchase price training costs installation costs

A one time future receipt of cash is called a(n) _____.

single-payment cash flow

Which of the following is not a factor in explaining why the present value of a future dollar is less than one dollar?

sunk costs

The concept that recognizes the present value of a dollar received in the future is less than a dollar is the _____ concept.

time value of money