Question 1

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 consider present value in capital investment analysis.

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

The cash payback method ignores present value and only considers the time it takes for a project's cash inflows to recover its initial investment.

Question 4

The expected period of time between the date of an investment and the recovery in cash of the amount invested is called the cash payback period.

Accepted Answer

The cash payback period is indeed the duration of time it takes for an investment to generate an amount of cash equal to the initial investment cost, effectively "paying back" the investor.

Question 5

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 6

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

Accepted Answer

The average rate of return is calculated by dividing the average annual income by the average investment amount, often expressed as a percentage to indicate the profitability of an investment over a certain period.

Question 7

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

Accepted Answer

Net cash flow is defined as the difference between cash inflows (revenues) and cash outflows (expenses), so the statement is true.

Question 8

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 simply referred to as net cash flow. Net discounted cash flow takes into account the time value of money by discounting future cash flows to their present value.

Question 9

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 over the 5 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 5 years, the annual net income is $60,000. Therefore, the expected average rate of return is ($60,000 / $400,000) * 100 = 15%.

Question 10

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 over the 5 years. The expected average rate of return is 50%.

Accepted Answer

The expected average rate of return is calculated as the average annual net income divided by the initial investment cost. Here, the average annual net income would be $200,000 / 5 = $40,000. The expected average rate of return is then $40,000 / $400,000 = 0.1 or 10%, not 50%.

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 over the 5 years. The expected average rate of return is 30%.

Accepted Answer

The expected average rate of return is calculated as (Total net income / Initial investment) * 100%. In this case, the expected average rate of return is (300,000 / 400,000) * 100% = 75%, which is greater than the required rate of return of 30%.

Question 12

The methods of evaluating capital investment proposals can be grouped into two general categories referred to as (1) the average rate of return and (2) the 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 payback period and accounting rate of return, and (2) discounting methods such as the net present value (NPV) and internal rate of return (IRR).

Question 13

The methods of evaluating capital investment proposals can be grouped into two general categories referred to as (1) methods that do not use present values and (2) methods that use present values.

Accepted Answer

The methods for evaluating capital investment proposals indeed fall into two broad categories: those that do not consider the time value of money (such as the payback period and accounting rate of return methods) and those that do (such as net present value and internal rate of return methods).

Question 14

The process by which management plans, evaluates, and controls investments in fixed assets is called capital investment analysis.

Accepted Answer

Capital investment analysis is the process used by management to plan, evaluate, and control investments in fixed assets, ensuring that the investments will generate adequate returns and align with the company's strategic goals.

Question 15

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 compared to the initial investment, without considering the present value of future cash flows.

Question 16

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 describes the average rate of return method, which calculates the percentage return on average investment based on average annual income.

Question 17

The expected period of time between the date of an investment and the recovery in cash of the amount invested is called the discount period.

Accepted Answer

The expected period of time between the date of an investment and the recovery in cash of the amount invested is called the payback period, not the discount period.

Question 18

Care must be taken when making capital investment decisions, since a long-term commitment of funds is involved and operations could be affected for many years.

Accepted Answer

Capital investment decisions involve large sums of money, are difficult to reverse, and have long-term impacts on a company's financial health and operational capabilities.

Question 19

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 over the 5 years. The expected average rate of return is 25%.

Accepted Answer

The expected average rate of return is calculated as the average annual net income divided by the initial investment cost. Here, the average annual net income would be $200,000 / 5 = $40,000. The initial investment is $400,000. Thus, the expected average rate of return is $40,000 / $400,000 = 0.1 or 10%, not 25%.

Question 20

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 is not considered a present value method. It simply looks at how long it will take to recover the initial investment through cash inflows. Present value methods, such as net present value and internal rate of return, take into account the time value of money and discount future cash flows to their present value.

Quiz 26: Capital Investment Analysis