Question 1

Alpha Inc.is evaluating the purchase of a machine costing $350,000.The expected useful life of the machine is 5 years at the end which it would have no residual value, and the depreciation is assumed to be on straight-line basis.The estimated total income from the machine is $500,000.The expected average rate of return for this machine is:

Accepted Answer

The answer of Alpha Inc.is evaluating the purchase of a...

Question 2

Average total assets divided by average stockholders' equity is the formula for financial leverage.​

Accepted Answer

This is the correct formula for financial leverage.

Question 3

Return on stockholders' equity is calculated as the ratio of average stockholders' equity to operating income.
​

Accepted Answer

Return on stockholders' equity is calculated as the ratio of net income to average stockholders' equity, not operating income.

Question 4

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

Accepted Answer

The process described is termed capital budgeting or capital allocation, not present value analysis. Present value analysis is a technique used within capital budgeting to evaluate the desirability of investments or projects.

Question 5

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.

Accepted Answer

When evaluating two competing proposals with unequal lives, management should consider the net present value (NPV) or equivalent annual cost (EAC) of each proposal rather than just the life span, to account for the time value of money and ensure a fair comparison.

Question 6

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

Accepted Answer

Leasing allows for flexibility in upgrading to newer technology or equipment when the lease term ends, without having to worry about selling or disposing of the obsolete asset.

Question 7

In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash payback and the average rate of return methods.

Accepted Answer

In capital rationing, proposals are initially screened using the cash payback and the average rate of return methods to establish minimum standards, which are then used to assess the overall feasibility of the proposals.

Question 8

The management of Retz Corporation is considering the purchase of a new machine costing $500,000.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: $$\begin{array} { c c c } 
\text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \
\hline 1 & \$ 100,000 & \$ 200,000 \
2 & 80,000 & 170,000 \
3 & 50,000 & 130,000 \
4 & 10,000 & 80,000 \
5 & 10,000 & 80,000
\end{array}$$ ? The average rate of return for this investment is:

Accepted Answer

The answer of The management of Retz Corporation is considering...

Question 9

The management of Retz Corporation is considering the purchase of a new machine costing $500,000.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:? $$\begin{array} { c c c } 
\text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \
\hline 1 & \$ 100,000 & \$ 200,000 \
2 & 80,000 & 170,000 \
3 & 50,000 & 130,000 \
4 & 10,000 & 80,000 \
5 & 10,000 & 80,000
\end{array}$$ ? The cash payback period for this investment is:

Accepted Answer

The cash payback period is calculated by adding the net cash flows year by year until the total investment of $500,000 is recovered. From the given data: Year 1 + Year 2 = $200,000 + $170,000 = $370,000. Adding Year 3's net cash flow of $130,000 gives a total of $500,000, which recovers the investment by the end of Year 3.

Question 10

Gamma Inc.is considering the purchase of a machine costing $450,000, having a useful life of five years.Depreciation would be recognized using the straight-line method, and the machine would have no residual value at the end of its useful life.The estimated total net income from the machine is $600,000.The average investment for the machine is:

Accepted Answer

The average investment for the machine can be calculated using the following formula: 
Average Investment = (Cost of Asset + Salvage Value) / 2
Since the machine has no residual value, Salvage Value = 0.
Therefore, Average Investment = ($450,000 + $0) / 2 = $225,000.
This is the amount that Gamma Inc. would need to invest annually in the machine to earn the estimated net income of $600,000. Choice C is the correct answer.

Question 11

The two methods that consider the time value of money concept to analyze capital investment proposals are:

Accepted Answer

The net present value method and the internal rate of return method both consider the time value of money concept by discounting future cash flows to their present value. The net present value method calculates the present value of all cash inflows and outflows and subtracts the initial investment to determine the net present value. The internal rate of return method calculates the rate of return that makes the net present value of all cash inflows and outflows equal to zero. These two methods are widely used in capital budgeting decisions.

Question 12

Which of the following concepts is being considered when a company making a capital investment decision converts all the dollar cash inflows and outflows over the life of a project to their present value?

Accepted Answer

Converting cash inflows and outflows to their present value is an application of the time value of money concept, which recognizes that the value of money changes over time due to inflation and the opportunity cost of potential investments.

Question 13

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:

Accepted Answer

The average income is calculated by subtracting the total depreciation from the total income yield and then dividing by the number of years. Depreciation per year is $60,000 / 4 = $15,000. Total depreciation over four years is $60,000. Total income yield is $22,300. Average income = ($22,300 - $60,000) / 4 = $5,575.

Question 14

The expected average rate of return for a proposed investment of $900,000 in a fixed asset, with a useful life of five years, recognition is given to the effect of straight-line depreciation on the investment, no residual value, and an expected total net income of $360,000 for the 5 years, is:

Accepted Answer

The answer of The expected average rate of return for...

Question 15

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 factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively.In addition to this information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } 
\text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \
\hline 1 & \$ 37,500 & \$ 187,500 \
2 & 37,500 & 187,500 \
3 & 37,500 & 187,500 \
4 & 37,500 & 187,500 \
5 & 37,500 & 187,500
\end{array}$$ ? The cash payback period for this investment is:

Accepted Answer

The answer of The management of London Corporation is considering...

Question 16

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

Accepted Answer

This is a true statement. Capital rationing refers to the process of limiting the amount of funds available for investment in order to prioritize and allocate those funds among competing investment proposals.

Question 17

Purchase of a new machine to replace an old machine is an example of:

Accepted Answer

The purchase of a new machine involves a significant capital investment and requires a thorough analysis of the costs and benefits associated with the new machine. This is known as capital investment analysis. Breakeven, cost-volume-profit, and just-in-time inventory analyses are not specifically related to the purchase of a new machine.

Question 18

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 factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively.In addition to this information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } 
\text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \
\hline 1 & \$ 37,500 & \$ 187,500 \
2 & 37,500 & 187,500 \
3 & 37,500 & 187,500 \
4 & 37,500 & 187,500 \
5 & 37,500 & 187,500
\end{array}$$ ? The average rate of return for this investment is:

Accepted Answer

The answer of The management of London Corporation is considering...

Question 19

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

Accepted Answer

The process described in the question refers to capital investment analysis, which involves evaluating the potential long-term benefits and costs of investments in fixed assets. Option A and B are related to cost analysis methods, while option D is focused on short-term decisions related to sales and costs.

Question 20

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

Accepted Answer

A capital expenditures budget outlines the planned purchases of fixed assets, such as equipment or property, and summarizes the decisions made regarding those purchases.

Quiz 15: Capital Investment Analysis

Average total assets divided by average stockholders' equity is the formula for financial leverage.

Return on stockholders' equity is calculated as the ratio of average stockholders' equity to operating income.

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

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.

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

In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash payback and the average rate of return methods.

The two methods that consider the time value of money concept to analyze capital investment proposals are:

Which of the following concepts is being considered when a company making a capital investment decision converts all the dollar cash inflows and outflows over the life of a project to their present value?

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:

The expected average rate of return for a proposed investment of $900,000 in a fixed asset, with a useful life of five years, recognition is given to the effect of straight-line depreciation on the investment, no residual value, and an expected total net income of $360,000 for the 5 years, is:

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

Purchase of a new machine to replace an old machine is an example of:

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

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

Quiz 15: Capital Investment Analysis

Average total assets divided by average stockholders' equity is the formula for financial leverage.​

Return on stockholders' equity is calculated as the ratio of average stockholders' equity to operating income. ​

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

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.

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

In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash payback and the average rate of return methods.

The two methods that consider the time value of money concept to analyze capital investment proposals are:

Which of the following concepts is being considered when a company making a capital investment decision converts all the dollar cash inflows and outflows over the life of a project to their present value?

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:

The expected average rate of return for a proposed investment of $900,000 in a fixed asset, with a useful life of five years, recognition is given to the effect of straight-line depreciation on the investment, no residual value, and an expected total net income of $360,000 for the 5 years, is:

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

Purchase of a new machine to replace an old machine is an example of:

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

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

Average total assets divided by average stockholders' equity is the formula for financial leverage.

Return on stockholders' equity is calculated as the ratio of average stockholders' equity to operating income.