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Exam 16: Planning for Capital Investments

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Question 61

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The cost of capital is called all of the following except:

A) cutoff rate.
B) discount rate.
C) hurdle rate.
D) All of these are terms for the cost of capital.

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

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Question 62

Multiple Choice

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

A) net cash flow.
B) lump sum.
C) annuity.
D) return on investment.

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

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Question 63

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The cost of capital represents the maximum acceptable rate of return that a capital investment should earn.

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. 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 B.

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

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 (based on average investment) would be approximately:

What amount of cash must be invested today in order to have $60,000 at the end of one year assuming the rate of return is 9%?

The length of time required to recover the initial investment in a capital asset is known as the:

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

The review of a capital budgeting decision to determine whether a project was accepted that should have been rejected is referred to as:

A capital investment project may provide cash inflows from:

Saget Company is considering the purchase of equipment that would cost $35,000 and offer annual cash inflows of $10,500 over its useful life of 5 years. Assuming a required rate of return of 8%, what is the net present value of this investment opportunity?

Langdon Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $10,000 per year for 3 years. Assuming that Langdon's required rate of return is 8%, what is the present value of these cash inflows? Use Appendix Table 2. (Do not round your intermediate calculations. Round your final answer to the nearest dollar.)

If a company has to pay a given amount of income taxes over the life of a capital investment, managers of the company should seek to pay the taxes as early as possible in the investment's life.

The rate of return that equates the present value of cash inflows and outflows is the:

Depreciation on a capital investment (such as equipment) has the effect of decreasing the amount of income taxes that the company owning the asset must pay.