1 - 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 +$5,000D - 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.
2 - All of the following are factors that may complicate capital investment analysis except
A - the leasing alternative
B - changes in price levels
C - sunk cost
D - the federal income tax
3 - 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 fromOperations |
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