Question 1

Assume in analyzing alternative proposals that Proposal F has a useful life of six years and Proposal J has a useful life of nine years.What is one widely used method that makes the proposals comparable?

Accepted Answer

The best choice is to adjust the life of Proposal J to a time period that is equal to that of Proposal F and add its estimated residual value to the cash inflow at the end of year six. This method is called equivalent annual annuity (EAA) and it adjusts the cash inflows of both proposals to an equal annual amount over a common period of time (in this case, six years). This allows for a more accurate comparison of the two proposals in terms of their overall profitability. Adding the residual value at the end of year six for Proposal J accounts for any additional cash inflows or salvage value that may be received after the six-year period.

Question 2

Which of the following is a qualitative consideration that influences capital investments analysis?

Accepted Answer

Manufacturing flexibility is a qualitative consideration because it refers to the potential for a capital investment to improve a company's ability to respond to changing market conditions, rather than a quantifiable financial metric such as the time value of money or internal rate of return.

Question 3

Mars Corp.is choosing between two different capital investment proposals.Machine A has a useful life of 4 years,and Machine B has a useful life of 6 years.Each proposal requires an initial investment of $200,000,and the company desires a rate of return of 10%.Although Machine B has a useful life of 6 years,it could be sold at the end of 4 years for $35,000.

Accepted Answer

To compare the present values of the two proposals, we need to calculate the net present value (NPV) of each.

For Machine A, the NPV after 4 years can be calculated as follows:

Initial investment: -$200,000 
Annual cash inflow: $68,732 (calculated using the annuity formula with a 10% discount rate) 
NPV after 4 years: -$200,000 + $233,318 = $33,318

For Machine B, we need to consider the salvage value at the end of year 4:

Initial investment: -$200,000 
Annual cash inflow: $48,172 (calculated using the annuity formula with a 10% discount rate) 
Salvage value at year 4: $35,000 
NPV after 4 years: -$200,000 + $187,012 + $21,385 (NPV of salvage value at year 4) = $8,397

Therefore, Machine A has a higher net present value after 4 years and should be chosen by Mars Corp.

Question 4

Which of the following is a factor that complicates capital investment analysis?

Accepted Answer

The answer of Which of the following is a factor...

Question 5

The process by which management allocates available investment funds among competing investment proposals is called:

Accepted Answer

The answer of The process by which management allocates available...

Question 6

In capital rationing,alternative proposals that survive initial screening and further analysis using present value methods are normally evaluated in terms of:

Accepted Answer

The answer of In capital rationing,alternative proposals that survive initial...

Question 7

Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

Accepted Answer

The depreciation deduction allows for the cost of the capital investment to be spread out over its useful life, reducing the taxable income and thus the income tax expense. Interest deduction may be applicable for financing the capital investment projects, but it does not directly reduce the tax burden from the investment. Minimum tax provision and charitable contributions are not directly related to capital investment projects.

Question 8

One issue to consider when investing in assets in foreign countries is:

Accepted Answer

The answer of One issue to consider when investing in...

Question 9

Both proposal M,and N cost $800,000,have a 6-year life,and have expected total cash flows of $1,200,000.Proposal M is expected to provide equal annual net cash flows of $200,000,while the net cash flows for Proposal N are as follows:

Accepted Answer

The answer of Both proposal M,and N cost $800,000,have a...

Question 10

June Co.is evaluating a project requiring a capital expenditure of $620,000.The project has an estimated life of four years and no salvage value.The estimated net income and net cash flow from the project are as follows:

Accepted Answer

The answer of June Co.is evaluating a project requiring a...

Question 11

Using the following partial table of present value of $1 at compound interest,determine the present value of $20,000 to be received three years hence,with earnings at the rate of 10% a year.

Accepted Answer

The present value factor for 3 years at 10% is approximately 0.7513. Multiplying $20,000 by 0.7513 gives the present value of $15,020.

Question 12

If the rate of earnings is 12% and the cash to be received in two years is $20,000,determine the present value amount,using the following partial table of present value of $1 at compound interest.

Accepted Answer

Using the formula for present value of a single amount at compound interest: 
PV = FV/(1+i)^n 
where PV is the present value, FV is the future value, i is the interest rate, and n is the number of periods. 
Plugging in the given values, we get: 
PV = 20,000/(1+0.12)^2 
PV = 15,939.88 
Rounding to the nearest dollar, the present value amount is $15,940, which is choice B.

Question 13

A $350,000 capital investment proposal has an estimated life of four years and no residual value.The estimated net cash flows are as follows:

Accepted Answer

The answer of A $350,000 capital investment proposal has an...

Question 14

Heedy Inc.is considering a capital investment proposal that costs $460,000 and has an estimated life of four years,and no residual value.The estimated net cash flows are as follows:

Accepted Answer

The answer of Heedy Inc.is considering a capital investment proposal...

Question 15

In capital rationing,an initial screening of alternative proposals is usually performed by establishing minimum standards.Which of the following evaluation methods are normally used?

Accepted Answer

The cash payback method and average rate of return method are commonly used for initial screening in capital rationing because they are simpler and quicker to calculate compared to more complex methods like net present value or internal rate of return, allowing for an efficient preliminary assessment of projects.

Question 16

The net present value has been computed for Proposals A and B.Relevant data are as follows:

Accepted Answer

The answer of The net present value has been computed...

Question 17

Periods experiencing increase in price levels are known as periods of:

Accepted Answer

Periods experiencing an increase in price levels are known as inflation.

Question 18

All of the following qualitative considerations may impact upon capital investments analysis except:

Accepted Answer

Manufacturing sunk cost is a financial concept and not a qualitative consideration. The other options are all qualitative considerations that can impact capital investments analysis. Manufacturing productivity refers to how efficient the manufacturing process is, which can affect the return on investment. Manufacturing flexibility refers to the ability to adapt to changing market conditions or customer demands, which can impact the longevity of the investment. Manufacturing control refers to the level of control the company has over the manufacturing process, which can affect the quality of the final product and the ability to make changes in the future.

Question 19

A 5-year project is estimated to cost $700,000 and have no residual value.If the straight-line depreciation method is used and estimated total income is $231,000,determine the average rate of return giving effect to depreciation on the investment.

Accepted Answer

The answer of A 5-year project is estimated to cost...

Question 20

Sommers Company is evaluating a project requiring a capital expenditure of $300,000.The project has an estimated life of 5 years and no salvage value.The estimated net income and net cash flow from the project are as follows:

Accepted Answer

The answer of Sommers Company is evaluating a project requiring...

Quiz 15: Capital Investment Analysis