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?