Question

1. Wilson Company is considering replacing an existing piece of capital equipment. Relevant information includes: New equipment cost is $240,000; expected annual savings is $74,000; incremental working capital is $27,000. The incremental working capital will be recovered at the end of the project's life. In an NPV analysis, the incremental working capital will be considered as:

a.an opportunity cost that can be recovered.

b.a sunk cost that cannot be recovered.

c.a cash inflow at the project's inception.

d.a cash outflow at the project's inception.

2. Which of the following is an example of a capital investment decision by a company?

a.To renew raw material purchase agreement with suppliers

b.To invest in a new project

c.To repurchase issued shares from stock market

d.To extend discount to new customers

3. An investment is expected to produce annual cash flows $8,000
every year for 5 years. Assuming a discount rate of 8%, the present
value of this series of cash flows is _____. (Round your answer to
two decimal places.)

Period | 1 | 2 | 3 | 4 | 5 |

8% | 0.92593 | 0.85734 | 0.79383 | 0.73503 | 0.68058 |

a.$29,866.67

b.$32,857.53

c.$39,852.23

d.$31,941.68

Answer #1

1 |

The incremental working capital will be considered as a
cash outflow at the project's inception. |

Option D is correct |

2 |

To invest in a new project is an example of a
capital investment decision by a company. |

Option B is correct |

3 | |||

Year | Amount | PV factor | Present value |

1 | 8000 | 0.92593 | 7407.44 |

2 | 8000 | 0.85734 | 6858.72 |

3 | 8000 | 0.79383 | 6350.64 |

4 | 8000 | 0.73503 | 5880.24 |

5 | 8000 | 0.68058 | 5444.64 |

Total |
31941.68 |
||

Option D $31,941.68 is correct |

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