Deck 24: Capital Investment Analysis

Question 1

Capital investment analysis involves the evaluation of alternative proposals for large capital investments,including considerations for financing the projects.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

If revenues (cash inflows)are the same among alternatives,cost savings are used as the basis for evaluation.

Question 5

For the purposes of capital investment analysis,income tax effects are excluded from computations.

Question 6

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

Question 7

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

Question 8

Only quantitative data are used in the capital investment decision-making process.

Question 9

Managers rely strictly on financial information when faced with decisions.

Question 10

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

Question 11

The minimum rate of return on a capital investment is set by the management of a company.

Question 12

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

Question 13

Capital investment analysis is also known as capital budgeting.

Question 14

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

Question 15

Cost-benefit is an accounting convention or rule of thumb that supports long-run decision making.

Question 16

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

Question 17

The salvage value of an asset is a future cash inflow.

Question 18

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

Question 19

Availability of funds is not a criterion for deciding on capital investment proposals.

Question 20

Qualitative factors are considered in the evaluation of capital investment proposals.

Question 21

The accounting rate-of-return method is a precise but difficult way to measure the performance of a capital investment.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

The payback period equals the cost of the capital investment divided by net income.

Question 30

The accounting rate-of-return method is widely used to measure the estimated performance of a capital investment,primarily because it uses time value of money concepts.

Question 31

The salvage value of an old asset in a machine replacement decision is irrelevant.

Question 32

The payback period is based on a net present value of cash flows.

Question 33

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

Question 34

The company's minimum rate of return is also referred to as its profit margin.

Question 35

The accounting rate-of-return is calculated by dividing the cost of investment by annual net cash inflows.

Question 36

Based on the payback period method,the alternative with the shortest payback period is the most desirable.

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

If alternatives for an equipment replacement decision affect revenues the same and do not involve cash receipts,its benefits could still be measured by analyzing its

A)cost savings.
B)net cash inflows.
C)net cash outflows.
D)none of these options.

Question 42

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

Question 43

Capital investment analysis involves all of the following except

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

Question 44

As part of the performing stage of management,capital investment proposals are evaluated.

Question 45

Projected disposal or residual values of replacement equipment are relevant to capital investment analysis because

A)they represent future cash inflows.
B)they usually differ among alternatives.
C)they reduce income taxes.
D)they represent future cash inflows and usually differ among alternatives.

Question 46

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)analyzing sunk costs.

Question 47

Which of the following is not an appropriate method used in evaluating proposed capital investments?

A)Net present value
B)Payback period
C)Carrying value of equipment
D)Accounting rate of return

Question 48

Depreciation expense is relevant to capital investment analysis because

A)it affects cash inflows.
B)it is a period expense.
C)it affects cash outflows for income taxes.
D)none of these options.

Question 49

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

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

Question 50

While making capital investment decisions,companies set a minimum rate of return to

A)set the maximum expected returns.
B)guard their profitability.
C)cover their fixed costs.
D)comply with the government regulations.

Question 51

The undepreciated portion of the original cost of a fixed asset is the

A)carrying value.
B)depreciation expense.
C)residual value.
D)accumulated depreciation.

Question 52

Many management decisions are unique and hence incompatible with strict rules,steps,or timetables.

Question 53

Managers use both quantitative and qualitative information to analyze the effects of capital investment decisions on their organization's resources and profits.

Question 54

As part of the planning stage of management,capital investment needs are identified.

Question 55

As part of the communication stage of management,post completion audits are performed to determine if capital investment goals were achieved.

Question 56

The minimum rate of return on an investment is also known as a

A)hurdle rate.
B)payback rate.
C)net present value.
D)profit margin.

Question 57

Jymo Company has a tax rate of 25 percent and is considering a capital project that will make the following annual contribution to operating income: Using the income adjustment procedure,net cash inflows are

A)$(93,750).
B)$12,500.
C)$93,750.
D)$100,000.

Question 58

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)revenues earned by the equipment.

Question 59

Which of the following is true of cost-benefit analysis?

A)It supports only short-run decision making.
B)It considers quantitative costs and benefits,not qualitative.
C)It conveys that the benefits from a project should exceed its costs.
D)It supports only long-run decision making.

Question 60

As part of the performing stage of management,capital investment decisions are implemented with proper controls.

Question 61

Sabrina Company has a tax rate of 30 percent and is considering a capital project that will make the following annual contribution to operating income: Using the income adjustment procedure,net cash inflows are

A)$38,500.
B)$43,500.
C)$83,500.
D)$100,000.

Question 62

Perry Company has a tax rate of 30 percent and is considering a capital project that will make the following annual contribution to operating income before income taxes: The impact of income taxes on net cash flows will be

A)$(7,500).
B)$(22,500).
C)$(45,000).
D)$(75,000).

Question 63

A project is accepted under the net present value method when

A)the net present value is zero or negative.
B)the total amount of cash inflows exceeds the purchase price of the asset.
C)the purchase price of the asset is less than the present value of net cash inflows.
D)the present value of net cash inflows exceeds a predetermined minimum amount.

Question 64

Rodriguez Inc.is considering a project that costs $200,000.The company expects the annual cash revenues to be $75,000 and annual expenses (including depreciation)to be $30,000.The project has a ten-year useful life and a residual value of $25,000.Assume Rodriguez Inc.uses the straight-line method of depreciation. Using the above information for Rodriguez,the project's payback period (rounded to two decimal places)is

A)2.31 years.
B)3.20 years.
C)2.14 years.
D)2.50 years.

Question 65

When using the net present value method to compare keeping an old building or disposing it and acquiring a new building,the current cash residual value of the old building should be

A)deducted from the price paid for the new building.
B)viewed as a cash outflow.
C)added to the price of the new building.
D)irrelevant to the decision.

Question 66

Boston Corp.is evaluating three projects.Each project will return a total of $600,000 to the company in cash flows over a three-year period.The cash flows for the three projects are as follows: Using the payback period method,which project represents the best investment for Boston?

A)Project A
B)Project B
C)Project C
D)All projects are equally good investments.

Question 67

Lopez Co.is interested in purchasing equipment that would improve its operational efficiency.The cost of the equipment is $400,000 with an estimated residual value of $30,000 and a useful life of ten years.The equipment is expected to generate cash inflows of $60,000 a year.The company's minimum rate of return is 8 percent.The present value of $1 for ten years at 8 percent is 0.463,and the present value of an annuity of $1 at 8 percent and ten years is 6.710. Using the above information for Lopez,the net present value of the project is

A)$402,600.
B)$13,890.
C)$200,000.
D)$16,490.

Question 68

Rodriguez Inc.is considering a project that costs $200,000.The company expects the annual cash revenues to be $75,000 and annual expenses (including depreciation)to be $30,000.The project has a ten-year useful life and a residual value of $25,000.Assume Rodriguez Inc.uses the straight-line method of depreciation. Using the above information for Rodriguez,the accounting rate of return for the project is
(Round your answer to a whole percent)

A)51 percent.
B)22 percent.
C)67 percent.
D)40 percent.

Question 69

Memphis Co.is considering purchasing a machine for $83,200 that will increase cash inflows by $40,000 in the first year,$30,000 the second year,and $25,000 the third year.The machine will have no residual value.The minimum rate of return is 10 percent.The present value factors,at 10 percent,for the three years are 0.909,0.826,and 0.751,respectively. Using the above information for Memphis,the machine's actual rate of return is

A)negative.
B)greater than 10 percent.
C)less than 10 percent.
D)10 percent.

Question 70

Which of the following evaluation methods ignores the time value of money?

A)The accounting rate-of-return and discounted cash flow methods
B)The net present value and discounted cash flow methods
C)The payback period and net present value methods
D)The accounting rate-of-return and payback period methods

Question 71

Implementing capital investment decisions with proper controls falls under which stage of the management process?

A)Planning
B)Performing
C)Evaluating
D)Communicating

Question 72

Which of the following is measured by the payback period method?

A)The period for which an investment is expected to be useful
B)The expected cash inflows and outflows of an investment
C)The estimated length of time to recover the cost of an investment
D)The economic life of an investment

Question 73

Assume revenues are received in cash and expenses,except for depreciation,are paid in cash.Based on this assumption,which of the following statements is true?

A)Net cash flows for a period are equal to net income minus depreciation expense.
B)Net cash flows for a period are equal to net income.
C)Net cash flows for a period are equal to net income plus depreciation expense.
D)Net cash flows for a period are equal to net income plus income tax expense.

Question 74

Annual net cash flows are defined as

A)annual cash inflows minus annual cash outflows.
B)annual cash inflows minus annual cash outflows minus depreciation expense.
C)annual revenues plus cash expenses.
D)annual cash inflows minus depreciation expense.

Question 75

Which of the following is true of the net present value method?

A)It measures a project's time-adjusted rate of return.
B)It discounts cash flows at the minimum desired rate of return.
C)It ignores cash flows beyond the payback period.
D)It applies only to mutually exclusive investment proposals.

Question 76

Which of the following methods uses the time value of money for capital investment analysis?

A)Average investment
B)Net present value method
C)Payback method
D)Accounting rate-of-return method

Question 77

Medina Company has a tax rate of 30 percent and is considering a capital project that will make the following annual contribution to operating income: Using the receipts and disbursements method,net cash inflows are

A)$(83,500).
B)$43,500.
C)$83,500.
D)$100,000.

Question 78

Memphis Co.is considering purchasing a machine for $83,200 that will increase cash inflows by $40,000 in the first year,$30,000 the second year,and $25,000 the third year.The machine will have no residual value.The minimum rate of return is 10 percent.The present value factors,at 10 percent,for the three years are 0.909,0.826,and 0.751,respectively. Using the above information for Memphis,the machine's net present value is

A)$21,800.
B)$(3,285).
C)$79,915.
D)$(4,286).

Question 79

Lopez Co.is interested in purchasing equipment that would improve its operational efficiency.The cost of the equipment is $400,000 with an estimated residual value of $30,000 and a useful life of ten years.The equipment is expected to generate cash inflows of $60,000 a year.The company's minimum rate of return is 8 percent.The present value of $1 for ten years at 8 percent is 0.463,and the present value of an annuity of $1 at 8 percent and ten years is 6.710. Using the above information for Lopez,the actual rate of return that the project earns is

A)negative.
B)greater than 8 percent.
C)less than 8 percent.
D)equal to 8 percent.

Question 80

Discounting calculates the __________ value of an amount to be received.

A)future
B)compounded
C)present
D)book