Question 1

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

Accepted Answer

The internal rate of return (IRR) method does consider the present value of future cash flows to determine the rate at which the net present value of those cash flows is zero. It is a time value of money approach.

Question 2

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.

Accepted Answer

This statement is true as capital investment decisions involve significant financial resources and have long-term consequences for a company's operations. Therefore, caution and thorough analysis are necessary in making these decisions.

Question 3

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

Accepted Answer

The cash payback method only looks at the time it takes to recover the initial investment without considering the time value of money. It does not take into account the present value of future cash flows.

Question 4

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.

Accepted Answer

The answer of The methods of evaluating capital investment proposals...

Question 5

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%.

Accepted Answer

The expected average rate of return on investment is calculated by dividing the total net income by the initial investment, which gives a result of 50% in this case. However, a 50% rate of return is not realistically achievable and raises doubts about the accuracy of the given information.

Question 6

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

Accepted Answer

Capital investment analysis is the process of planning, evaluating, and controlling long-term investment decisions involving fixed assets.

Question 7

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

Accepted Answer

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow. Net discounted cash flow refers to the present value of future cash flows after discounting for the time value of money.

Question 8

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

Accepted Answer

The net present value method does take into account the present value of cash flows in capital investment analysis.

Question 9

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

Accepted Answer

The formula for average rate of return is (estimated total income / total investment) * 100. It is not simply the division of average investment by estimated average annual income.

Question 10

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

Accepted Answer

The average rate of return method focuses on the average annual profit of an investment, not taking into account the present value of future cash flows.

Question 11

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%.

Accepted Answer

The answer of The anticipated purchase of a fixed asset...

Question 12

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.

Accepted Answer

The statement is correct. The average rate of return method (ARR) is a capital budgeting technique that calculates the expected profitability of an investment by dividing the estimated average annual income by the average investment. It helps in comparing different investment proposals and selecting the one with the highest return on average.

Question 13

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

Accepted Answer

The cash payback method focuses on the time it takes for a project to generate cash flows sufficient to recover the initial investment, without taking the present value of future cash flows into account.

Question 14

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%.

Accepted Answer

The answer of The anticipated purchase of a fixed asset...

Question 15

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

Accepted Answer

This is the correct formula for calculating the average rate of return.

Question 16

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

Accepted Answer

The average rate of return method does not incorporate present value in capital investment analysis. It simply calculates the average annual profit as a percentage of the initial investment, without considering the time value of money.

Question 17

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%.

Accepted Answer

The expected average rate of return can be calculated as (Total net income / Initial investment) x 100. Substituting the given values, we get (300,000 / 400,000) x 100 = 75%. Therefore, the statement that the expected average rate of return is 30% is false.

Question 18

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

Accepted Answer

This statement accurately defines net cash flow.

Question 19

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.

Accepted Answer

The methods of evaluating capital investment proposals are generally grouped into two categories: (1) non-discounting methods such as the average rate of return and cash payback period, and (2) discounting methods such as the net present value (NPV) and internal rate of return (IRR).

Question 20

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

Accepted Answer

This statement is incorrect. While managers may have a better understanding of the processes and long-term goals of the company, it is not limited to them. Anyone within the company can submit a capital investment proposal if they have an idea that aligns with the company's goals and can show potential for a positive return on investment.

Quiz 25: Capital Investment Analysis