Accumulated conversion factor 567 annuity 567 capital

Accumulated conversion
factor 567
Annuity 567
Capital investments 564
Cost of capital 565
Incremental revenue 571
Internal rate of return 570
Minimum rate of
return 565
Net present value 569
Ordinary annuity 568
Payback method 578
Postaudit 581
Present value index 574
Present value table 566
Recovery of investment 580
Single-payment
(lump-sum) 566
Time value of money 564
Unadjusted rate of
return 579
Working capital 571
KEY TERMS

Planning for Capital Investments 585
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 these two statements synonymous? Explain.
4. Define the term return on investment. How is the return
normally expressed? Give an example of a capital invest-
ment 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 percent 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?
7. Why are present value tables frequently used to convert
future values to present values?
8. Define the term annuity. What is one example of an annuity
receipt?
9. How can present value “what-if” analysis be enhanced by
using software programs?
10. Receiving $100,000 per year for five years is equivalent
to investing what amount today at 14 percent? Provide a
mathematical formula 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 expres-
sion for the Excel spreadsheet function that would perform
the present value conversion.
11. Maria Espinosa borrowed $15,000 from the bank and agreed
to repay the loan at 8 percent annual interest over four years,
making payments of $4,529 per year. Because part of the
bank’s payment from Ms. Espinosa is a recovery of the
original investment, what assumption must the bank make
to earn its desired 8 percent compounded annual return?
12. Two investment opportunities have positive net present
values. Investment A’s net present value amounts to $40,000
while B’s is only $30,000. Does this mean that A is the
better investment opportunity? Explain.
13. What criteria determine whether a project is acceptable
under the net present value method?
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 evaluation technique
for ranking investment opportunities?
16. Paul Henderson is a manager for Spark Company. He
tells you that his company always maximizes profitability
by accepting the investment opportunity with the highest
internal rate of return. Explain to Mr. Henderson how his
company may improve profitability by sometimes select-
ing investment opportunities with lower internal rates of
return.
17.