Deck 10: Capital Investment Analysis

Question 1

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

Answer 1

False

Question 2

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 for the 5 years.The expected average rate of return is 30%.

Answer 2

True

Question 3

The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as 1 methods that ignore present value and 2 present values methods.

Answer 3

True

Question 4

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 for the 5 years.The expected average rate of return on investment is 50%.

Question 5

Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals.

Question 6

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

Question 7

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 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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 for the 5 years.The expected average rate of return on investment is 25.0%.

Question 14

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

Question 15

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called capital investment analysis.

Question 16

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 for the 5 years.The expected average rate of return is 37.5%.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.The average rate of return for the machine is 50%.

Question 22

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 23

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow 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 has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows 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 purchasing a machine for $21,000.The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500.The payback period for the new machine is 6 years.

Question 26

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period.

Question 27

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

Question 28

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 flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively.The cash payback period is 3 years.

Question 29

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 income from operations over the 5-year life is $20,400.The payback period is 3.5 years.

Question 30

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 31

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 income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.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 income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.The average rate of return for the machine is 16.7%.

Question 33

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

Question 34

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period.

Question 35

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

Question 36

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 37

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 38

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

Question 39

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

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 income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.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 a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted.

Question 43

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 44

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 45

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 46

A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality.

Question 47

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

Question 48

A qualitative characteristic that may impact upon capital investment analysis is manufacturing flexibility.

Question 49

A qualitative characteristic that may impact upon capital investment analysis is employee morale.

Question 50

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 51

A qualitative characteristic that may impact upon capital investment analysis is manufacturing productivity.

Question 52

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

Question 53

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 54

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 55

A qualitative characteristic that may impact upon capital investment analysis is market opportunities.

Question 56

In calculating 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 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

The average rate of return for this investment is

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

Question 62

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called

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

Question 63

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 payback

Question 64

The average rate of return for this investment is

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

Question 65

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

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

Question 66

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 67

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 net income of $360,000 for the 4 years, is

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

Question 68

Which method 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 69

The cash payback period for this investment is

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

Question 70

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 net income of $21,600 for the 4 years, is

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

Question 71

The cash payback period for this investment is

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

Question 72

Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of

A)sales mix analysis
B)variable cost analysis
C)capital investment analysis
D)variable cost analysis

Question 73

The methods of evaluating capital investment proposals can be separated into two general groups-present value methods and

A)past value methods
B)straight-line methods
C)reducing value methods
D)methods that ignore present value

Question 74

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 75

The amount of the estimated average 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 76

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 method

Question 77

The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is

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

Question 78

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 79

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 net incomes and net cash flows: What is the cash payback period?

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

Question 80

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 flow of $150,000, and annual operating income of $87,500.What is the estimated cash payback period for the machine?

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