Deck 26: Capital Investment Analysis

Question 1

Methods that ignore present value in capital investment analysis include the average rate of return method.

Answer 1

True

Question 2

Average rate of return equals average investment divided by estimated average annual income.

Answer 2

False

Question 3

Methods that ignore present value in capital investment analysis include the cash payback method.

Answer 3

True

Question 4

The expected period of time between the date of an investment and the recovery in cash of the amount invested is called the cash payback period.

Question 5

Methods that ignore present value in capital investment analysis include the internal rate of return method.

Question 6

Average rate of return equals average annual income divided by average investment.

Question 7

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow.

Question 8

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow.

Question 9

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 over the 5 years. The expected average rate of return is 37.5%.

Question 10

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 over the 5 years. The expected average rate of return is 50%.

Question 11

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 over the 5 years. The expected average rate of return is 30%.

Question 12

The methods of evaluating capital investment proposals can be grouped into two general categories referred to as (1) the average rate of return and (2) the cash payback methods.

Question 13

The methods of evaluating capital investment proposals can be grouped into two general categories referred to as (1) methods that do not use present values and (2) methods that use present values.

Question 14

The process by which management plans, evaluates, and controls investments in fixed assets is called capital investment analysis.

Question 15

The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

Question 16

The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method.

Question 17

The expected period of time between the date of an investment and the recovery in cash of the amount invested is called the discount period.

Question 18

Care must be taken when making capital investment decisions, since a long-term commitment of funds is involved and operations could be affected for many years.

Question 19

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 over the 5 years. The expected average rate of return is 25%.

Question 20

The cash payback method of capital investment analysis is one of the methods referred to as a present value method.

Question 21

The cash payback method can be used only when net cash inflows are the same for each period.

Question 22

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The average rate of return for the machine is 50%.

Question 23

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash inflow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

Question 24

For Years 1-5, a proposed expenditure of $500,000 for a fixed asset with a 5-year life is expected to generate operating income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash inflows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 5 years.

Question 25

A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 6 years.

Question 26

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual net cash inflows from the investment are $36,000 (Year 1), $30,000 (Year 2), $18,000 (Year 3), $12,000 (Year 4), and $6,000 (Year 5). The average operating income generated from the investment over its 5-year life is $20,400. The cash payback period is 3.5 years.

Question 27

If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash inflow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years.

Question 28

The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method.

Question 29

A company is considering purchasing a machine for $21,000. The machine will generate operating income of $2,000; annual net cash inflows from the machine will be $3,500. The cash payback period for the new machine is 10.5 years.

Question 30

For Years 1-5, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash inflows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3 years.

Question 31

A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years.

Question 32

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The payback period for the machine is 12 years.

Question 33

The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method.

Question 34

The average rate of return method of analyzing capital investment decisions measures the average rate of return from using the asset over its entire life.

Question 35

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The average rate of return for the machine is 16.7%.

Question 36

The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an asset by the average amount invested in the asset.

Question 37

The time expected to pass before the net cash inflows from an investment would return its initial cost is called the amortization period.

Question 38

A company is considering purchasing a machine for $21,000. The machine will generate operating income of $2,000; annual net cash inflows from the machine will be $3,500. The cash payback period for the new machine is 6 years.

Question 39

In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and then reduced to their present values.

Question 40

A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total operating income generated over the life of the machine is estimated to be $12,000. The machine will generate net cash inflows of $6,000 per year. The payback period for the machine is 4 years.

Question 41

In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values.

Question 42

If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis.

Question 43

In computing the present value of an investment in equipment, the present value of the residual value should be added to the cash inflows

Question 44

A qualitative characteristic that may influence capital investment analysis is the investment proposal's impact on manufacturing productivity.

Question 45

The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis.

Question 46

The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing.

Question 47

A qualitative characteristic that may influence capital investment analysis is the investment proposal's impact on manufacturing flexibility.

Question 48

In computing the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows.

Question 49

A qualitative characteristic that may influence capital investment analysis is the investment proposal's impact on market opportunities.

Question 50

With expected value analysis, incorporating the probabilities of various outcomes allows uncertainty to be completely eliminated.

Question 51

A present value index can be used to rank competing capital investment proposals when the net present value method is used.

Question 52

A qualitative characteristic that may influence capital investment analysis is the investment proposal's impact on product quality.

Question 53

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected.

Question 54

A qualitative characteristic that may influence capital investment analysis is the investment proposal's impact on employee morale.

Question 55

The internal rate of return method of analyzing capital investment proposals uses present value concepts to compute a rate of return expected from the proposals.

Question 56

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted.

Question 57

Net present value and the payback period are examples of discounted cash flow methods used in capital investment decisions.

Question 58

A series of equal cash flows at fixed intervals is termed an annuity.

Question 59

Sensitivity analysis assigns likelihoods (probabilities) to various inputs, thus incorporating uncertainty directly into the output (answer).

Question 60

If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis.

Question 61

The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. 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: ​
The cash payback period for this investment is

A)5 years
B)4 years
C)2 years
D)3 years

Question 62

The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total income of $360,000 for the 4 years is

A)45%
B)22.5%
C)11.3%
D)5.5%

Question 63

The primary advantages of the average rate of return method are its ease of computation and the fact that

A)it is especially useful to managers whose primary concern is liquidity
B)there is less possibility of loss from changes in economic conditions and obsolescence when the commitment is short term
C)it emphasizes the amount of income earned over the life of the proposal
D)rankings of proposals are necessary

Question 64

The expected average rate of return for a proposed investment of $6,000,000 in a fixed asset, using straight-line depreciation, a useful life of 20 years, no residual value, and an expected total income of $12,000,000 over the 20 years, is

A)20%
B)10%
C)40%
D)5%

Question 65

Which of the following are present value methods of analyzing capital investment proposals?

A)internal rate of return and average rate of return
B)average rate of return and net present value
C)net present value and internal rate of return
D)net present value and cash payback

Question 66

Which of the following are two methods of analyzing capital investment proposals that both ignore present value?

A)internal rate of return and average rate of return
B)net present value and average rate of return
C)internal rate of return and net present value
D)average rate of return and cash payback

Question 67

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: ​
The expected average rate of return for a proposed investment of $650,000 in a fixed asset, with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is

A)13.9%
B)36.9%
C)18.5%
D)9.25%

Question 68

With sensitivity analysis, at least one input must be a known (not estimated) value.

Question 69

The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. 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: ​
The average rate of return for this investment is

A)18%
B)16%
C)58%
D)10%

Question 70

Which of the following methods of evaluating capital investment proposals uses the concept of present value to compute a rate of return?

A)average rate of return
B)accounting rate of return
C)cash payback period
D)internal rate of return

Question 71

Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash inflow of $150,000, and annual operating income of $87,500. The estimated cash payback period for the machine is

A)3.5 years
B)4 years
C)4.5 years
D)5 years

Question 72

Which of the following is a method of analyzing capital investment proposals that ignores present value?

A)internal rate of return
B)net present value
C)discounted cash flow
D)average rate of return

Question 73

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: ​
The average rate of return for this investment is

A)5%
B)10%
C)25%
D)15%

Question 74

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: ​
The cash payback period for this investment is

A)4 years
B)5 years
C)20 years
D)3 years

Question 75

The process by which management plans, evaluates, and controls investments in fixed assets is called _____ analysis.

A)absorption cost
B)variable cost
C)capital investment
D)cost-volume-profit

Question 76

Which of the following is a present value method of analyzing capital investment proposals?

A)average rate of return
B)cash payback method
C)accounting rate of return
D)net present value

Question 77

The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total income of $21,600 for the 4 years is

A)$30,000
B)$21,600
C)$5,400
D)$60,000

Question 78

The _____ method of analyzing capital investment proposals divides the estimated average annual income by the average investment.

A)cash payback
B)net present value
C)internal rate of return
D)average rate of return

Question 79

The amount of the estimated average annual income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of 4 years, no residual value, and an expected total income yield of $25,300, is

A)$12,650
B)$25,300
C)$6,325
D)$45,000

Question 80

An anticipated purchase of equipment for $490,000 with a useful life of 8 years and no residual value is expected to yield the following annual incomes and net cash flows: The cash payback period for the equipment is

A)5 years
B)4 years
C)6 years
D)3 years