Deck 13: Tools for Evaluating Investment Decisions

Question 1

------------------------------- refers to the addition of durable assets to an agribusiness, which usually require large financial outlays and will last over a long period of time.

Answer 1

Capital investment

Question 2

------------------------------- is a method of calculating interest earned periodically, when that interest is added to the principal and becomes a part of the principal base on which future interest is earned.

Answer 2

Compounding

Question 3

-----------------------------is a method of converting a future value to a present value by adjusting the future value by its discount rate.

Answer 3

Discounting

Question 4

The length of time it will take an investment to generate sufficient additional cash flows to pay for it is called the ------------------------------- period.

Question 5

The -------------------------------is the interest rate used in capital budgeting, which is the firm's required rate of return on its equity capital.

Question 6

The procedure for evaluating the effects of an agribusiness manager's investment choices on the profitability, risk and liquidity of a business is called

A) Profitability budgeting
B) Capital budgeting
C) Liquidity budgeting
D) None of the above

Question 7

Investment decisions possible for an agribusiness firm include

A) Ordering product in sufficient quantities to obtain a volume discount
B) Replacing inventory in a more timely manner
C) Pricing the product to cover total costs
D) None of the above

Question 8

One thousand dollars invested today at 5 percent per year, compounded annually, for five years will be worth

A) $1,050
B) $1,250
C) $1,276
D) None of the above

Question 9

One dollar received in two years would be worth ____________ dollars today, with interest compounded annually.

A) 1 x (1 + i)^-2
B) 1 x (1 + i)²
C) 1 x [(1 + i)(1 + i)]
D) None of the above

Question 10

Assume the payback period for investment A is five years and the payback period for investment B is four years. Investment A has $1,000 more total net profit over its life than does investment alternative B over its life. Which of the two investments would you choose, if you use the payback method of capital budgeting?

A) A
B) B
C) A and B
D) Neither

Question 11

An investment of $1,000 with annual benefits of $150 per year for the first five years of its life and $100 per year the next five years of its life has a payback period of

A) 6.7 years
B) 7.5 years
C) 10 years
D) None of the above

Question 12

An initial investment of $2,000 with average net cash flow after depreciation of $200 per year with an average depreciation of $100 per year has a simple rate of return of

A) 10 percent
B) 20 percent
C) 30 percent
D) None of the above

Question 13

The future value of $1,000 invested each of the next five years with interest compounded annually at an interest rate of 5 percent per year is

A) $5,250.00
B) $6,250.00
C) $5,525.60
D) None of the above

Question 14

The discount rate (i) used in capital budgeting consists of three components and one of those components is a risk-free interest rate.

Question 15

The chief limitation of the simple rate of return is it ignores cash flows generated after the payback period.

Question 16

When using the net present value method, if the net present value is positive, you accept the investment.

Question 17

The initial investment amount used for the net present value method includes only the cost of the investment and does not include costs necessary to make the investment operational.

Question 18

When comparing the net present value and internal rate of return methods, the net present value method solves for the discount rate and the IRR requires a specified discount rate.

Question 19

If the required rate of return exceeds the internal rate of return, you accept the investment.

Question 20

An example of a capital investment opportunity would be the purchase of a machine that will increase production efficiency and reduce production costs.

Question 21

One of the disadvantages of the payback period method is that it does not incorporate the returns after the payback period.

Question 22

Annuities are a stream of incomes and/or costs that are equal amounts for each of the number of periods evaluated.

Question 23

For the net present value method, accounting profits are used for the returns rather than net cash flows.