Question 1

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 cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow. Net discounted cash flow takes into account the time value of money and applies a discount rate to future cash flows to reflect the uncertainty and risk associated with these cash flows.

Question 2

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 3

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

Accepted Answer

The net present value (NPV) method actually takes present value into account, making it a discounted cash flow (DCF) method. Other methods that ignore present value include the payback period method and the accounting rate of return method.

Question 4

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 5

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

This statement correctly defines the average rate of return method, also known as the accounting rate of return method.

Question 6

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

While managers may have more knowledge and understanding of the investment process, it is important to encourage and consider proposals from all employees who have potential investment ideas. This can foster creativity and innovation within the organization.

Question 7

The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $200,000 for the five years. The expected average rate of return on investment is 25%.

Accepted Answer

The expected average rate of return on investment is calculated by dividing the annual net income by the initial investment. In this case, the annual net income would be $200,000 / 5 = $40,000. The initial investment is $400,000. Therefore, the expected average rate of return is $40,000 / $400,000 = 0.1 or 10%, not 25%.

Question 8

The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $300,000 for the five years. The expected average rate of return is 37.5%.

Accepted Answer

The expected average rate of return is calculated as (Annual Net Income / Initial Investment) * 100. With a total net income of $300,000 over five years, the annual net income is $60,000. Therefore, the expected average rate of return is ($60,000 / $400,000) * 100 = 15%.

Question 9

The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $300,000 for the five years. The expected average rate of return is 30%.

Accepted Answer

The expected average rate of return can be calculated as follows:
Average rate of return = (Total net income / Initial investment) x 100%
= (300,000 / 400,000) x 100%
= 75%

Therefore, the expected average rate of return is 75%, which is higher than the required rate of return of 30%. Hence, the purchase of the fixed asset is profitable and the statement is true.

Question 10

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 value methods.

Accepted Answer

The methods for evaluating capital investment proposals indeed fall into two main categories: those that do not consider the time value of money (ignore present value) and those that do (present value methods), such as the Net Present Value (NPV) and Internal Rate of Return (IRR) methods.

Question 11

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 12

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

Capital investment decisions involve significant amounts of funds and have the potential to affect a company's operations for many years. Therefore, careful consideration and analysis are necessary before making such decisions.

Question 13

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 14

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

Accepted Answer

The statement accurately describes capital investment analysis.

Question 15

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

Accepted Answer

The average rate of return method is a capital investment analysis method that relies on accounting information such as net income and book value of assets. It does not consider the time value of money or present value.

Question 16

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

Accepted Answer

This is the correct definition of net cash flow.

Question 17

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

Accepted Answer

The calculation for average rate of return is the estimated annual income divided by the average investment, not the other way around.

Question 18

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 19

The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $200,000 for the five years. The expected average rate of return on investment is 50%.

Accepted Answer

The calculation for the expected average rate of return on investment is (total net income / initial investment) x 100%. 
In this case, the calculation would be ($200,000 / $400,000) x 100%, which equals 50%. Therefore, the statement regarding the expected average rate of return on investment is true. However, a rate of return of 50% is highly unrealistic and should raise suspicions about the accuracy of the information provided.

Question 20

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

Accepted Answer

The cash payback method only considers the time it takes for an investment to generate enough cash flows to recover its initial cost, without taking into account present value or time value of money.

Quiz 25: Capital Investment Analysis