Question 1

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 2

If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis.

Accepted Answer

If there is an excess of the present value of future cash inflows over the amount to be invested, it indicates that the rate of return on the proposal is greater than the discount rate used in the analysis, not less.

Question 3

If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis.

Accepted Answer

If the present value of future cash inflows exceeds the amount invested, it means that the project is generating returns greater than the rate used in the analysis, resulting in a positive net present value.

Question 4

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted.

Accepted Answer

If there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected as it would result in a negative net present value. A positive net present value is desirable in evaluating a proposal using the net present value method.

Question 5

For years one through five, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3 years.

Accepted Answer

The cash payback period is the amount of time it takes to recover the initial investment in cash flows. In this case, the initial investment is $250,000 and the cumulative net cash flows after three years are $250,000 ($90,000 + $85,000 + $75,000). Therefore, the cash payback period is 3 years, which meets the requirement for a good investment decision.

Question 6

A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality.

Accepted Answer

The impact of investment proposals on product quality is a qualitative characteristic that may influence capital investment analysis. This is because the quality of a company's products can affect customer satisfaction and sales, and thus have an impact on the success of the investment. As such, it is important for decision-makers to take into account the potential effects of a particular investment proposal on product quality when conducting their analysis.

Question 7

If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years.

Accepted Answer

The answer of If a proposed expenditure of $70,000 for...

Question 8

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 expected average rate of return is calculated as follows:
Average Rate of Return = (Total Net Income / Initial Investment) / Useful Life
= (300,000 / 400,000) / 5
= 15% per year
Therefore, the statement that the expected average rate of return is 37.5% is false.

Question 9

A qualitative characteristic that may impact upon capital investment analysis is manufacturing flexibility.

Accepted Answer

Manufacturing flexibility is a qualitative characteristic that can impact upon capital investment analysis. It refers to an organization's ability to quickly and efficiently adapt production processes to changes in demand or new product introductions. This can impact the cost-effectiveness of capital investments in manufacturing equipment and processes, as well as the overall competitiveness of the organization.

Question 10

In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and then reduced to their present values.

Accepted Answer

In net present value analysis, the expected future net cash flows are not averaged; each cash flow is individually discounted to its present value using a specific discount rate before they are summed to determine the net present value.

Question 11

A series of equal cash flows at fixed intervals is termed an annuity.

Accepted Answer

This is true. An annuity refers to a series of equal cash flows at fixed intervals, typically for a set period of time.

Question 12

In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values.

Accepted Answer

In net present value analysis, the expected future net cash flows are discounted to their present values using a predetermined discount rate, in order to determine the current value of the investment.

Question 13

For years one through five, a proposed expenditure of $500,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 5 years.

Accepted Answer

The answer of For years one through five, a proposed...

Question 14

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period.

Accepted Answer

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is actually called the payback period. The discount period refers to the length of time used to calculate the present value of future cash flows in a discounted cash flow analysis.

Question 15

The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period.

Accepted Answer

The definition of cash payback period is correct. It represents the period of time required for the initial investment to be returned in cash.

Question 16

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected.

Accepted Answer

The net present value method evaluates a proposal by comparing the present value of future cash inflows to the amount to be invested. If the present value of future cash inflows is less than the amount to be invested, the proposal is not expected to generate a positive return and should be rejected.

Question 17

A present value index can be used to rank competing capital investment proposals when the net present value method is used.

Accepted Answer

A present value index, also known as profitability index, is a ratio of the present value of cash inflows to the initial investment. It is used in capital budgeting to assess the relative profitability of different investment projects. By comparing the present value index of competing proposals, managers can make the most effective use of limited resources and choose the alternative that maximizes shareholder value. Therefore, the statement is true.

Question 18

The internal rate of return method of analyzing capital investment proposals uses the present value concept to compute an internal rate of return expected from the proposals.

Accepted Answer

The statement correctly describes the internal rate of return method, which involves calculating the rate of return that equates the present value of expected cash inflows with the present value of expected cash outflows from a capital investment proposal.

Question 19

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

Accepted Answer

The answer of If a proposed expenditure of $80,000 for...

Question 20

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 by dividing the total net income by the cost of the asset, multiplied by 100%. In this case, the calculation would be:

$200,000 / $400,000 x 100% = 50%

Therefore, the expected rate of return is correctly stated in the question. However, a 50% rate of return is not realistic or feasible, and suggests an error in the calculation or information provided. A more typical rate of return for a fixed asset investment would be in the range of 8-15%. Therefore, the answer is false.

Quiz 10: Capital Investment Analysis