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 the 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 discounts future cash flows to their present value.

Question 2

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 as (Total net income / Initial investment) x 100%. Using the given information, we can calculate the expected average rate of return as (200,000 / 400,000) x 100% = 50%. Therefore, the given statement is true.

Question 3

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

False

Question 4

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 definition of net cash flow.

Question 5

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

Accepted Answer

The formula for average rate of return is (total earnings / total investment) * 100, not average investment divided by estimated average annual income.

Question 6

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. Capital investment decisions involve a significant amount of funds and have long-term implications for the company's future operations. It is crucial to evaluate all possible risks and benefits before making a final decision.

Question 7

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 non-discounted cash flow method that ignores present value in capital investment analysis.

Question 8

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 9

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

Accepted Answer

The net present value method takes into account the present value of cash flows in capital investment analysis. Therefore, it is not a method that ignores present value.

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 
(2) present value methods.

Accepted Answer

The methods of evaluating capital investment proposals are typically divided into those that consider the time value of money (present value methods) and those that do not (non-present value methods).

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 30%.

Accepted Answer

The expected average rate of return can be calculated using the formula: (total net income / initial investment) x 100. 
In this case, the expected rate of return would be (300,000 / 400,000) x 100 = 75%. Therefore, the statement that the expected average rate of return is 30% is false.

Question 12

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

Accepted Answer

The cash payback method only takes into account the time it takes to recover the initial investment, without considering the time value of money or the profitability of the investment over its lifetime.

Question 13

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 14

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

Accepted Answer

This statement accurately describes the definition of capital investment analysis.

Question 15

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 expertise in proposing and executing capital investments, they should not be the only ones encouraged to submit proposals. Other employees may have valuable insights and ideas that could benefit the company's long-term goals.

Question 16

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 17

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 
(2) cash payback methods.

Accepted Answer

The two general categories for evaluating capital investment proposals are typically referred to as non-discounted cash flow methods (like payback period) and discounted cash flow methods (like net present value and internal rate of return). Average rate of return is a specific method, not a category.

Question 18

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 19

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 a present value method of capital investment analysis. It only considers the time it takes to recover the initial investment in cash flows. 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.

Question 20

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 given statement accurately describes the average rate of return method.

Quiz 11: Capital Investment Analysis