Question 1

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 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 $300,000 for the 5 years.The expected average rate of return is 30%.

Accepted Answer

The expected average rate of return is calculated by dividing the total net income ($300,000) by the initial investment ($400,000) and multiplying by 100%. This gives an expected average rate of return of 75%. Since this is higher than the stated expected rate of return of 30%, the project is expected to be profitable and the statement is true.

Question 3

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 values methods.

Accepted Answer

True

Question 4

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 cannot be 50% as it would mean the total net income is $800,000, which is twice the cost of the asset. Therefore, the statement is false. The correct average rate of return can be calculated using the formula: (total net income / initial cost) / useful life = ($200,000 / $400,000) / 5 = 10%.

Question 5

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 processes involved in submitting capital investment proposals, they may not necessarily be the only ones encouraged to submit such proposals. Other employees or stakeholders with relevant experience and insights may also be encouraged to submit proposals. Additionally, matching investments with long-term goals may involve input and collaboration from multiple departments and individuals within an organization.

Question 6

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

Accepted Answer

This is the correct formula for calculating average rate of return.

Question 7

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 is correct. The average rate of return method calculates the average annual income as a percentage of the average investment.

Question 8

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

Accepted Answer

The cash payback method only looks at the amount of time it takes for the initial investment to be recovered, it does not consider the time value of money or the potential future cash flows beyond the payback period.

Question 9

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

Accepted Answer

The net present value (NPV) method does take into account present value in capital investment analysis by discounting future cash flows to their present value.

Question 10

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 11

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, as it does not consider the time value of money. It only looks at the length of time it takes 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 by discounting future cash flows to their present value.

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 a long-term commitment of funds and can have implications for operations for many years, making it important to consider them carefully.

Question 13

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 14

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

Accepted Answer

The formula for average rate of return is (total gains - total costs)/total investment, not average investment divided by estimated average annual income.

Question 15

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 correctly defines capital investment analysis.

Question 16

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

The answer of The anticipated purchase of a fixed asset...

Question 17

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

Accepted Answer

Net discounted cash flow refers to the excess of cash inflows over outflows, but the word "discounted" indicates that the cash flows have been adjusted for the time value of money.

Question 18

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 19

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

Accepted Answer

The average rate of return method only considers the average profit earned over the life of the investment and does not take into account the time value of money or present value.

Question 20

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).

Quiz 10: Capital Investment Analysis

The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

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%.

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 values methods.

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%.

Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals.

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

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.

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

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

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

The cash payback method of capital investment analysis is one of the methods referred to as a present value method.

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.

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%.

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

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

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%.

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

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

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

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.