Deck 25: Capital Investment Analysis

Question 1

Capital investment analysis is a decision process for the purchase of capital facilities,such as buildings and equipment.

Answer 1

True

Question 2

Automating the existing production process does not come under the purview of capital investment analysis.

Answer 2

False

Question 3

Competition,availability and training of employees,anticipated future technological improvements are some of the examples of qualitative factors.

Answer 3

True

Question 4

The expected life,estimated cash flow and investment cost are the three methods used in the evaluation of capital investment proposals.

Question 5

Managers must be careful while making capital budgeting decisions so that the selected alternative will contribute the most to future profits.

Question 6

Net present value method,payback period method and accounting rate of return method are the three important decision variables used in the evaluation of proposals.

Question 7

The six steps of capital investment analysis can be used for both long-term as well as short-term planning purposes.

Question 8

Qualitative factors will not be considered in the evaluation of capital investment proposals.

Question 9

Cost of capital information is not at all necessary to establish the minimum rate of return on investments.

Question 10

Identifying the need for a new capital investment is the last step in the six step process of capital investment analysis.

Question 11

Capital facilities and projects are not expensive.

Question 12

The most commonly used methods in the evaluation of capital investment proposals are net present value method,payback period method and the accounting rate-of-return method.

Question 13

The objective of capital budgeting is to help only in the preparation of reports that will be submitted to the managers.

Question 14

The minimum rates of return or a minimum cash flow payback period are two standards established in capital investment analysis.

Question 15

Capital investment analysis is also known as capital budgeting.

Question 16

The proposals that will either meet company strategic goals or produce the minimum rate of return will receive serious review in the preliminary screening process.

Question 17

An organization with several branches and a highly developed system for capital investment analysis requires that all proposals should go through preliminary screening.

Question 18

Capital investment analysis ensures that the resources are used wisely.

Question 19

The net present value method and other methods of capital investment analysis can be used for taking short-term decisions.

Question 20

Capital investment analysis can be applied in case of expensive and long-term projects.

Question 21

The cost of capital is the simple average rate of return that a company must pay to its long-term creditors and the shareholders.

Question 22

The acceptable proposals are ranked in order of net present value,payback period or rate of return in capital investment decisions.

Question 23

Any proposal that fails to produce minimum rate but produces the hurdle rate will be accepted.

Question 24

The cost of debt,the cost of preferred stock,the cost of common stock and the cost of retained earnings are the components of cost of capital.

Question 25

The carrying value of the old asset in a machine replacement decision is irrelevant.

Question 26

The proposals with the highest rank are funded first in the capital investment decisions.

Question 27

Projected cash flows could vary each year of an asset's life.

Question 28

Cost of capital of a company will be determined in four steps.

Question 29

The future value of a cash flow is always larger than the present value of that cash flow.

Question 30

When deciding whether to keep or replace a fixed asset,the asset's carrying value could be relevant to the decision.

Question 31

Only large corporations benefit from capital investment analysis.

Question 32

Employees from every part of the organization participate in capital investment analysis.

Question 33

Ordinary annuity cash flows occur at the beginning of the interest period.

Question 34

Simple interest is the interest earned on a principal sum that is increased at the end of each period by the interest for that period.

Question 35

Present value is the amount that must be invested today at a given rate of compound interest to produce a given future value.

Question 36

Depending on the mixture of sources of capital,a company's cost of capital will vary.

Question 37

The minimum rate of return is fixed by the stockholders.

Question 38

The proposals that will produce poor returns will have a positive impact on the organization's profitability.

Question 39

The minimum rate of return is also known as the hurdle rate.

Question 40

Availability of funds is not the criteria for deciding on the capital investment proposals.

Question 41

Net present value analysis is based on a project's cash flows.

Question 42

The most beneficial projects are the ones with the lowest net present value.

Question 43

The purpose of establishing a desired rate of return on investment is to set a point below which the best alternative will be considered acceptable.

Question 44

When using the accounting rate-of-return method,the net income has to be averaged over the life of the investment.

Question 45

The accounting rate-of-return method is difficult to comprehend and apply.

Question 46

To use an annuity table,the cash flows for each interest period must be equal.

Question 47

A project with a net present value of zero should not be accepted.

Question 48

The payback period method of evaluating proposed capital investment does not take into account the time value of money.

Question 49

The accounting rate-of-return method does not consider the time value of money.

Question 50

The accounting rate-of-return method is widely used to measure the estimated performance of a capital investment,primarily because it is very accurate.

Question 51

The company's minimum rate of return is also referred to as its cost of capital.

Question 52

The discount rate used in net present value calculations is the company's minimum rate of return.

Question 53

The accounting rate of return is calculated by dividing the project's investment by its net income.

Question 54

The three techniques used to evaluate capital investment alternatives all use the project's expected net income.

Question 55

The payback period equals the cost of the capital investment divided by annual sales revenue.

Question 56

The accounting rate-of-return method implements the effects of the time value of money.

Question 57

The payback period is based on a project's net income.

Question 58

Supporting poor-return proposals that fall below the minimum rate of return eventually lowers the entire company's profitability.

Question 59

An advantage of the net present value method is that it considers the time value of money.

Question 60

When two or more capital investment proposals are being evaluated using the accounting rate-of-return method,the proposal that yields the highest ratio of net income to average cost of investment is selected.

Question 61

The alternative with the highest payback period is the most desirable.

Question 62

The minimum rate of return is also known as

A) hurdle rate
B) payback period
C) net present value
D) cost of debt

Question 63

A minimum rate of return will be set by the organizations to guard

A) the minimum costs
B) the profitability
C) fixed costs
D) variable costs

Question 64

The components of cost of capital include all of the following except

A) the cost of debt
B) the cost of preferred stock
C) the cost of common stock and retained earnings
D) the minimum rate of return

Question 65

Smile Industries capital structure consists of $1,000,000 of debt at 6 percent interest and 1,500,000 of stockholders equity at 2 percent.
The proportion of Equity in the total capital structure is

A) 40%
B) 60%
C) 100%
D) 15%

Question 66

Depreciation expense influences cash flows because it directly affects

A) the amount of income taxes paid by the company.
B) cash received from revenues during the current period.
C) the carrying value of the asset.
D) accumulated depreciation.

Question 67

The financing structure of Taylor communications is as follows:
$\begin{array}{lcc}\text {Source of Capital}&\text {Proportion of capital}&\text {Cost of Capital}\\\hline \text { Debt financing, } \$ 300,000 & 30 \% & 6 \% \\\text { Preferred stock, } \$ 100,000 & 10 \% & 8 \% \\\text { Common stock, } \$ 400,000 & 40 \% & 12 \% \\\text { Retained earnings, } \$ 200,000 & 20 \% & 12 \%\end{array}$

The weighted cost of debt is

A) 2.4%
B) 4.8%
C) .8%
D) 1.8%

Question 68

To analyze a capital investment using the accounting rate-of-return method,one can use an estimated amount for the annual net income.

Question 69

Qualitative factors that are considered by decision makers include all of the following except

A) impact on other company operations
B) revenue from fees
C) anticipated future technological improvements
D) competition.

Question 70

Capital investment analysis involves all of the following except

A) preparing reports for management.
B) analyzing the sales mix.
C) selecting the best alternative.
D) dividing available capital investment funds.

Question 71

Which of the following could not be the appropriate method used in evaluating proposed capital investments

A) Net present value method
B) Payback period method
C) The carrying value of the department's equipment
D) Accounting rate of return method

Question 72

Various parts of the organization that are involved in capital investment analysis include all of the following except

A) financial analysts
B) marketing specialists
C) creditors
D) managers

Question 73

The financing structure of Taylor communications is as follows: $\begin{array}{lcc}\text {Source of Capital}&\text {Proportion of capital}&\text {Cost of Capital}\\\hline \text { Debt financing, } \$ 300,000 & 30 \% & 6 \% \\\text { Preferred stock, } \$ 100,000 & 10 \% & 8 \% \\\text { Common stock, } \$ 400,000 & 40 \% & 12 \% \\\text { Retained earnings, } \$ 200,000 & 20 \% & 12 \%\end{array}$


The weighted cost of preferred stock is

A) .8%
B) 4.8%
C) 2.4%
D) 9.8%

Question 74

Smile Industries capital structure consists of $1,000,000 of debt at 6 percent interest and 1,500,000 of stockholders equity at 2 percent.
The proportion of Debt in the total capital structure is

A) 10%
B) 15%
C) 40%
D) 100%

Question 75

Smile Industries capital structure consists of $1,000,000 of debt at 6 percent interest and 1,500,000 of stockholders equity at 2 percent.
The overall cost of capital is

A) 2.4%
B) 4.8%
C) .8%
D) 9.8%

Question 76

The financing structure of Taylor communications is as follows:
$$\begin{array} { l c c c } \text { Source of Capital } & \text { Proportion of capital } & & \text { Cost of Capital } \\\text { Debt financing, } \$ 300,000 & 30 \% & & 6 \% \\\text { Preferred stock, } \$ 100,000 & 10 \% & & 8 \% \\\text { Common stock, } \$ 400,000 & 40 \% & & 12 \% \\\text { Retained earnings, } \$ 200,000 & 20 \% & & 12 \%\end{array}$$
The cost of equity capital is the return required by

A) stockholders
B) preferred shareholders
C) creditors
D) financial institutions

Question 77

The average cost of capital of Smile Industries is

A) 2.4%
B) 1.2%
C) .6%
D) 3.6%

Question 78

If an equipment replacement decision would not affect revenue,its benefits could still be measured by analyzing its

A) cost savings.
B) net cash flows.
C) effect on net income.
D) net cash outflows.

Question 79

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

A) capital investment decisions.
B) incremental analysis.
C) sales mix analysis.
D) direct costing decisions.

Question 80

The key steps followed by the managers in capital investment analysis include all of the following except

A) identification of capital investment needs
B) preliminary screening
C) formal requests for capital investments
D) sunk costs.