Question 1

The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis.

Accepted Answer

The process described is termed capital budgeting. Present value analysis is a technique used within capital budgeting to evaluate the desirability of investments or projects.

Question 2

Capital rationing is the process by which management allocates funds among competing capital investment proposals.

Accepted Answer

Capital rationing is indeed the process by which management prioritizes and allocates funds among various investment proposals that compete against one another for limited capital resources. It involves comparing the potential benefits and costs of each investment opportunity and selecting the ones that provide the greatest return on investment given the available budget.

Question 3

The primary advantages of the average rate of return method are its ease of computation and the fact that

Accepted Answer

The primary advantage of the average rate of return method is that it emphasizes the amount of income earned over the life of the proposal. This is a crucial consideration for managers who want to assess the profitability of a project. Moreover, the method's ease of computation is an added advantage that makes it a popular choice among managers. The other options, B, C, and D, are either irrelevant or incorrect.

Question 4

An analysis of a proposal by the net present value method indicated that the present value exceeded the amount to be invested.Which of the following statements best describes the results of this analysis?

Accepted Answer

The fact that the present value of the proposal exceeds the amount to be invested indicates that the proposal is desirable. The net present value method compares the present value of expected cash flows to the initial investment, and if the present value is greater, it means the proposal generates a positive return. Additionally, since the present value is greater than the investment amount, it implies that the rate of return expected from the proposal exceeds the minimum rate used in the analysis.

Question 5

Which of the following are present value methods of analyzing capital investment proposals?

Accepted Answer

Net present value (NPV) and internal rate of return (IRR) are both present value methods used to analyze capital investment proposals. NPV calculates the present value of expected cash inflows minus the present value of expected cash outflows, while IRR finds the discount rate at which the NPV of an investment equals zero. Both methods take into account the time value of money and provide a more accurate assessment of the profitability of the investment compared to methods like payback or average rate of return.

Question 6

In general,present value methods of analyzing capital investments are more desirable than methods ignoring present value because

Accepted Answer

Present value methods consider the time value of money principle, which states that a dollar today is worth more than a dollar in the future due to the potential earning power of that dollar. Therefore, it is more desirable to use present value methods for analyzing capital investments than methods that ignore present value. This is because present value methods provide a more accurate assessment of the cash flows associated with the investment and take into account the time value of money.

Question 7

The rate of earnings is 10% and the cash to be received in one year is $10,000.Determine the present value amount,using the following partial table of present value of $1 at compound interest:

Accepted Answer

The answer of The rate of earnings is 10% and...

Question 8

Using the following partial table of present value of $1 at compound interest,determine the present value of $20,000 to be received four years hence with earnings at the rate of 12% a year:

Accepted Answer

From the table, the present value factor for 4 years at 12% rate of interest is 0.635.
Therefore, Present value = $20,000 x 0.635 = $12,720. Therefore, the correct choice is C.

Question 9

By converting dollars to be received in the future into current dollars,the present value methods take into consideration that money

Accepted Answer

Present value methods take into account that money has a time value, meaning that a dollar received today is worth more than a dollar received in the future due to factors such as inflation and the potential to earn interest or returns if invested. Therefore, by converting future dollars into current dollars, present value methods account for this time value and enable more accurate financial analysis and decision-making.

Question 10

Using the following partial table of present value of $1 at compound interest,compute the present value of $20,000 (rounded to nearest dollar)to be received one year from today,assuming an earnings rate of 15%.

Accepted Answer

The answer of Using the following partial table of present...

Question 11

When evaluating two competing proposals with unequal lives,management should give greater consideration to the investment with the longer life because the asset will be useful to the company for a longer period of time.

Accepted Answer

When evaluating two competing proposals with unequal lives, management should consider the net present value (NPV) or equivalent annual cost (EAC) of each proposal rather than just the life span, to account for the time value of money and ensure a fair comparison.

Question 12

Decisions to install new equipment,replace old equipment,and purchase or construct a new building are examples of

Accepted Answer

Decisions related to investing in long-term capital assets typically require a capital investment analysis, which involves evaluating the expected costs and benefits over the life of the asset. Options A and B are not relevant to these types of decisions, and while option C may be relevant in certain circumstances, a capital investment analysis will typically be necessary to fully weigh the costs and benefits of investing in new equipment or buildings.

Question 13

Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

Accepted Answer

The present value index is used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis.

Question 14

The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing.

Accepted Answer

Capital rationing refers to the process of prioritizing and allocating already available investment funds among various competing capital investment proposals. Therefore, the statement is true.

Question 15

When several alternative investment proposals of the same amount are being considered,the one with the largest net present value is the most desirable.If the alternative proposals involve different amounts of investment,it is useful to prepare a relative ranking of the proposals by using a(n)

Accepted Answer

When alternative proposals involve different amounts of investment, a useful tool for ranking the proposals is the present value index. This index takes into account both the initial investment and the expected returns over time, providing a more accurate comparison of the proposals. Therefore, the best choice is C, present value index.

Question 16

Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return?

Accepted Answer

The internal rate of return (IRR) method uses the concept of present value to calculate the rate of return on a capital investment proposal. It measures the discount rate at which the net present value of the cash inflows from the investment is equal to the net present value of the cash outflows from the investment. The higher the IRR, the more attractive the investment proposal is.

Question 17

Leasing assets may be a favorable alternative to purchasing assets if the asset has a high risk of becoming obsolete.

Accepted Answer

Leasing assets allows for more flexibility in upgrading to newer technology or models, making it a favorable option for assets that may become quickly outdated. Additionally, leasing can provide tax benefits and lower upfront costs compared to purchasing.

Question 18

A capital expenditures budget summarizes the decisions made for the acquisition of fixed assets for several future years.

Accepted Answer

A capital expenditures budget is a plan that outlines the allocation of funds for the acquisition of fixed assets, such as land, buildings, machinery, and equipment, over a specified period of time, usually several years. It helps the management to evaluate investment opportunities, prioritize spending, and align the purchases with the overall strategic goals of the organization. Therefore, a capital expenditures budget summarizes the decisions that have been made or are planned for the future.

Question 19

An anticipated purchase of equipment for $1,200,000,with a useful life of 8 years and no residual value,is expected to yield the following annual net incomes and net cash flows:

What is the cash payback period?

Accepted Answer

The answer of An anticipated purchase of equipment for $1,200,000,with...

Question 20

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

Accepted Answer

The process described in the question is known as capital investment analysis. This involves making decisions about long-term investments in fixed assets, by evaluating the potential costs and benefits of each investment option. Absorption cost analysis and variable cost analysis are both methods of analyzing costs, but they are not specific to long-term investment decisions. Cost-volume-profit analysis is a method of analyzing the relationship between a company's costs, sales volume, and profitability, but it is not specific to long-term investments in fixed assets.

Quiz 15: Capital Investment Analysis