1. What is a capital investment? How does it differ from an investment in stocks or...

  

Transcribed Image Text:

1. What is a capital investment? How does it differ from an investment in stocks or bonds? 2. What are three reasons that cash is worth more today than cash to be received in the future? 3. "A dollar today is worth more than a dollar in the future." "The present value of a future dollar is worth less than one dollar." Are is acceptable under the net present value method? these two statements synonymous? Explain. 13. What criteria determine whether a project 4. Define the term return on investment. How is the return normally expressed? Give an example of a capital investment return. 5. How does a company establish its minimum acceptable rate of return on investments? 6. If you wanted to have $500,000 one year from today and desired to earn a 10 per- cent return, what amount would you need to invest today? Which amount has more value, the amount today or the $500,000 a year from today? 14. Does the net present value method provide a measure of the rate of return on capital investments? 15. Which is the best capital investment evalu- ation technique for ranking investment opportunities? 7. Why are present value tables frequently used to convert future values to present values? 8. Define the term annuity. What is one exam- ple of an annuity receipt? 9. How can present value "what-if" analysis be enhanced by using software programs? Planning for Capita present value amounts to $40,000 while B's is only $30,000. Does this mean that A is the better investment opportunity? Explain. 16. Paul Henderson is a manager for Spark Company. He tells you that his company always maximizes profitability by accept- ing the investment opportunity with the highest internal rate of return. Explain to Mr. Henderson how his company may im- prove profitability by sometimes selecting investment opportunities with lower in- ternal rates of return. 10. Receiving $100,000 per year for five years is 17. What is the relationship between desired rate of return and internal rate of return? equivalent to investing what amount today at 14 percent? Provide a mathematical for- mula to solve this problem, assuming use of a present value annuity table to convert the future cash flows to their present value equivalents. Provide the expression for the 19. "I always go for the investment with the shortest payback period." Is this a sound strategy? Why or why not? Excel spreadsheet function that would per- 20. "The payback method cannot be used if form the present value conversion. 11. Maria Espinosa borrowed $15,000 from the the cash inflows occur in unequal patterns." Do you agree or disagree? Explain. bank and agreed to repay the loan at 8 per 21. What are the advantages and disadvan- cent annual interest over four y years, making tages associated with the unadjusted rate of return method for evaluating capital investments? payments of $4,529 per year. Because part of the bank's payment from Ms. Espinosa is a recovery of the original investment, what as- sumption must the bank make to earn its de- 22. How do capital investments affect profit- sired 8 percent compounded annual return? 12. Two investment opportunities have posi- 23. What is a postaudit? How is it useful in tive net present values. Investment A's net ability? capital budgeting? 18. What typical cash inflow and outflow items are associated with capital investments? 1. What is a capital investment? How does it differ from an investment in stocks or bonds? 2. What are three reasons that cash is worth more today than cash to be received in the future? 3. "A dollar today is worth more than a dollar in the future." "The present value of a future dollar is worth less than one dollar." Are is acceptable under the net present value method? these two statements synonymous? Explain. 13. What criteria determine whether a project 4. Define the term return on investment. How is the return normally expressed? Give an example of a capital investment return. 5. How does a company establish its minimum acceptable rate of return on investments? 6. If you wanted to have $500,000 one year from today and desired to earn a 10 per- cent return, what amount would you need to invest today? Which amount has more value, the amount today or the $500,000 a year from today? 14. Does the net present value method provide a measure of the rate of return on capital investments? 15. Which is the best capital investment evalu- ation technique for ranking investment opportunities? 7. Why are present value tables frequently used to convert future values to present values? 8. Define the term annuity. What is one exam- ple of an annuity receipt? 9. How can present value "what-if" analysis be enhanced by using software programs? Planning for Capita present value amounts to $40,000 while B's is only $30,000. Does this mean that A is the better investment opportunity? Explain. 16. Paul Henderson is a manager for Spark Company. He tells you that his company always maximizes profitability by accept- ing the investment opportunity with the highest internal rate of return. Explain to Mr. Henderson how his company may im- prove profitability by sometimes selecting investment opportunities with lower in- ternal rates of return. 10. Receiving $100,000 per year for five years is 17. What is the relationship between desired rate of return and internal rate of return? equivalent to investing what amount today at 14 percent? Provide a mathematical for- mula to solve this problem, assuming use of a present value annuity table to convert the future cash flows to their present value equivalents. Provide the expression for the 19. "I always go for the investment with the shortest payback period." Is this a sound strategy? Why or why not? Excel spreadsheet function that would per- 20. "The payback method cannot be used if form the present value conversion. 11. Maria Espinosa borrowed $15,000 from the the cash inflows occur in unequal patterns." Do you agree or disagree? Explain. bank and agreed to repay the loan at 8 per 21. What are the advantages and disadvan- cent annual interest over four y years, making tages associated with the unadjusted rate of return method for evaluating capital investments? payments of $4,529 per year. Because part of the bank's payment from Ms. Espinosa is a recovery of the original investment, what as- sumption must the bank make to earn its de- 22. How do capital investments affect profit- sired 8 percent compounded annual return? 12. Two investment opportunities have posi- 23. What is a postaudit? How is it useful in tive net present values. Investment A's net ability? capital budgeting? 18. What typical cash inflow and outflow items are associated with capital investments?

Answer rating: 100% (QA)

1 A capital investment refers to the allocation of funds or resources by a company or an individual to acquire longterm assets or invest in projects that are expected to generate income or provide a r... View the full answer