Deck 15: Capital Investment Analysis

Question 1

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 20%.

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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 3

True

Question 4

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

Question 5

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 6

For years one through five,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 2.5 years.

Question 7

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

Question 8

If the average rate of return on an asset exceeds the minimum acceptable rate of return for investments,the asset should be purchased.

Question 9

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

Question 10

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

Question 11

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

Question 12

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 13

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.

Question 14

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

Question 15

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 2.5 years.

Question 16

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 17

The anticipated purchase of a fixed asset for $400,000,with a useful life of 5 years and
a $40,000 residual value,is expected to yield total net income of $500,000 for the 5 years.The expected average rate of return is 50%.

Question 18

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

Question 19

The anticipated purchase of a fixed asset for $400,000,with a useful life of 5 years and a $40,000 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 18.2%.

Question 20

If the minimum acceptable rate of return for investments exceeds the average rate of return on an asset,the asset should be purchased.

Question 21

When evaluating a proposal by use of the net present value method,if there is an excess of present value over the amount to be invested,the rate of return on the proposal is more than the rate used in the analysis.

Question 22

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 income of $150,000.The expected average rate of return,giving effect to depreciation on investment,is 15%.

Question 23

When evaluating a proposal by use of the net present value method,if 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 24

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

Question 25

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

Question 26

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

Question 27

When evaluating a proposal by use of the cash payback method,if net cash flows exceed the capital investment within the time deemed acceptable by management,the proposal should be accepted.

Question 28

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 29

When evaluating a proposal by use of the net present value method,if 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 30

Internal rate of return is often called the payback rate of return.

Question 31

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

Question 32

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

Question 33

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

Question 34

If a proposed expenditure of $400,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $160,000 and $60,000,respectively,the cash payback period is 2.5 years.

Question 35

For years one through five,a proposed expenditure of $400,000 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 $120,000,$105,000,$100,000,$75,000,and $75,000,respectively.The cash payback period is 4 years.

Question 36

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 37

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

Question 38

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

Question 39

Qualitative considerations are best evaluated using present value methods such as internal rate of return.

Question 40

Qualitative considerations in capital investment decisions are most appropriate for strategic investments or those that are designed to affect a company's long-term ability to
generate profits.

Question 41

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

Question 42

Capital rationing is the process by which management allocates funds among competing capital investment proposals.

Question 43

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

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

Question 44

An analysis of a proposal by the net present value method indicated that the present value exceeded the amount to be invested.Which of the following statements best describes the results of this analysis?

A)The proposal is desirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis.
B)The proposal is desirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis.
C)The proposal is undesirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis.
D)The proposal is undesirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis.

Question 45

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 46

In general,present value methods of analyzing capital investments are more desirable than methods ignoring present value because

A)the calculations in methods that ignore present value are more complex than those in methods using present value.
B)the present value methods consider that a dollar today is worth more than a dollar in the future due to the potential earning power of that dollar.
C)the calculations in methods that consider present value are less complex than those methods ignoring present value.
D)the present value methods consider that a dollar in the future is worth more than a dollar today due to the potential earning power of that dollar.

Question 47

The rate of earnings is 10% and the cash to be received in one year is $10,000.Determine the present value amount,using the following partial table of present value of $1 at compound interest:

A)$8,930
B)$9,000
C)$9,430
D)$9,090

Question 48

Using the following partial table of present value of $1 at compound interest,determine the present value of $20,000 to be received four years hence with earnings at the rate of 12% a year:

A)$13,660
B)$15,840
C)$12,720
D)$10,400

Question 49

By converting dollars to be received in the future into current dollars,the present value methods take into consideration that money

A)has an international rate of exchange.
B)is the language of business.
C)is the measure of assets,liabilities,and stockholders' equity on financial statements.
D)has a time value.

Question 50

Using the following partial table of present value of $1 at compound interest,compute the present value of $20,000 (rounded to nearest dollar)to be received one year from today,assuming an earnings rate of 15%.

A)$17,400.
B)$17,000.
C)$20,000.
D)$15,451.

Question 51

When evaluating two competing proposals with unequal lives,management should give greater consideration to the investment with the longer life because the asset will be useful to the company for a longer period of time.

Question 52

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)variable cost analysis.
D)capital investment analysis.

Question 53

Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

A)Price-level index
B)Present value factor
C)Annuity
D)Present value index

Question 54

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

Question 55

When several alternative investment proposals of the same amount are being considered,the one with the largest net present value is the most desirable.If the alternative proposals involve different amounts of investment,it is useful to prepare a relative ranking of the proposals by using a(n)

A)average rate of return.
B)consumer price index.
C)present value index.
D)price-level index.

Question 56

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)Internal rate of return
C)Cash payback period
D)Accounting rate of return

Question 57

Leasing assets may be a favorable alternative to purchasing assets if the asset has a high risk of becoming obsolete.

Question 58

A capital expenditures budget summarizes the decisions made for the acquisition of fixed assets for several future years.

Question 59

An anticipated purchase of equipment for $1,200,000,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 60

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 61

A series of equal cash flows at fixed intervals is termed a(n)

A)present value index.
B)price-level index.
C)net cash flow.
D)annuity.

Question 62

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 63

The payback period is determined using which of the following formulas?

A)Amount to be invested/Annual average net income
B)Annual net cash flow/Amount to be invested
C)Annual average net income/Amount to be invested
D)Amount to be invested/Equal annual net cash flows

Question 64

The present value index is computed using which of the following formulas?

A)Amount to be invested/Average rate of return
B)Total present value of net cash flow/Amount to be invested
C)Total present value of net cash flow/Average rate of return
D)Amount to be invested/Total present value of net cash flow

Question 65

The present value index for this investment is

A)1.00.
B).95.
C)1.25.
D)1.05.

Question 66

The rate of earnings is 6%,and the cash to be received in one year is $10,000.Determine the present value amount,using the following partial table of present value of $1 at compound interest.

A)$9,430
B)$9,000
C)$9,090
D)$8,930

Question 67

Using the following partial table of present value of $1 at compound interest,determine the present value of $20,000 to be received four years hence,with earnings at the rate of 10%
A year.

A)$13,660
B)$12,720
C)$15,840
D)$10,400

Question 68

The expected average rate of return for a proposed investment of $3,000,000 in a fixed asset giving effect to depreciation (straight-line method)with a useful life of 20 years,no residual value,and an expected total income of $6,000,000 is

A)25%.
B)18%.
C)40%.
D)20%.

Question 69

The net present value for this investment is

A)positive $24,960.
B)negative $27,600.
C)positive $27,600.
D)negative $24,960.

Question 70

Crane Company is considering the acquisition of a machine that costs $60,000.The machine is expected to have a useful life of 5 years,a negligible residual value,an annual cash flow of $15,000,and annual operating income of $15,000.What is the estimated cash payback period for the machine?

A)1.7 years
B)3 years
C)4 years
D)5 years

Question 71

The management of Hence Corporation is considering the purchase of a new machine costing $200,000.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 in this situation:

The cash payback period for this investment is

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

Question 72

The average rate of return for this investment is

A)18%.
B)16%.
C)58%.
D)20%.

Question 73

Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows expected from capital investment proposals?

A)Internal rate of return
B)Cash payback
C)Net present value
D)Average rate of return

Question 74

The amount of the average investment for a proposed investment of $70,000 in a fixed asset,with a useful life of four years,straight-line depreciation,no residual value,and an expected total net income of $21,600 for the 4 years,is

A)$10,800.
B)$21,600.
C)$35,000.
D)$30,000.

Question 75

The amount of the estimated average income for a proposed investment of $60,000 in a fixed asset,giving effect to depreciation (straight-line method),with a useful life of four years,no residual value,and an expected total income yield of $22,300,is

A)$10,800.
B)$5,575.
C)$5,400.
D)$15,000.

Question 76

The present value index for this investment is

A).88.
B)1.45.
C)1.14.
D).70.

Question 77

The management of London Corporation is considering the purchase of a new machine costing $750,000.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 this information,use the following data in determining the acceptability in this situation:

The cash payback period for this investment is

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

Question 78

The net present value for this investment is

A)positive $39,750.
B)positive $118,145.
C)negative $118,145.
D)negative $39,750.

Question 79

The average rate of return for this investment is

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

Question 80

The expected average rate of return for a proposed investment of $540,000 in a fixed asset,with a useful life of four years,straight-line depreciation,no residual value,and an expected total net income of $216,000 for the 4 years,is

A)18%.
B)15%.
C)27%.
D)20%.