Question 1

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

Accepted Answer

This statement is true. Capital rationing refers to the process of selecting and prioritizing capital investment proposals that are feasible and most aligned with the company's strategic goals, given limited financial resources.

Question 2

A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 6 years.

Accepted Answer

The answer of A company is considering the purchase of...

Question 3

A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual cash flows from the machine will be $3,500. The payback period for the new machine is 6 years.

Accepted Answer

To calculate payback period, we divide the initial investment by the annual cash flows generated by the investment.

Payback period = Initial investment / Annual cash flows

In this case, payback period = $21,000 / $3,500 = 6

Since the calculated payback period matches the given payback period of 6 years, the answer is true.

Question 4

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

Accepted Answer

Manufacturing control is a qualitative characteristic that can impact capital investment analysis. It is important to assess the ability of a company to effectively control its manufacturing processes in order to accurately evaluate potential investments in that company. Poor manufacturing control can lead to inefficiencies, waste, and decreased profitability.

Question 5

In calculating the net present value of an investment in equipment, the required investment and its terminal residual value should be subtracted from the present value of all future cash inflows.

Accepted Answer

The answer of In calculating the net present value of...

Question 6

In calculating the present value of an investment in equipment, the present value of the terminal residual value should be added to the cash inflows.

Accepted Answer

The terminal residual value represents the estimated value of equipment at the end of its useful life. It will be received by the company when the equipment is sold or traded-in. To calculate the present value of an investment in equipment, we need to add the present value of all future cash inflows including the terminal residual value.

Question 7

A qualitative characteristic that may impact upon capital investment analysis is employee morale.

Accepted Answer

Employee morale can impact the success of a business and therefore it is important to consider when making capital investment decisions. Factors such as job security, work environment, and employee satisfaction can all affect morale and ultimately the performance of a company.

Question 8

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The payback period for the machine is 12 years.

Accepted Answer

The payback period for the machine is calculated as the initial investment divided by the annual cash inflows. Therefore, the payback period for this machine is $24,000/$6,000 per year = 4 years, not 12 years.

Question 9

The accounting rate of return is a measure of profitability computed by dividing the average annual cash flows from an asset by the average amount invested in the asset.

Accepted Answer

The accounting rate of return is calculated by dividing the average annual accounting profit by the average amount invested in the asset. It is not based on cash flows.

Question 10

A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years.

Accepted Answer

The payback period for the machine is actually 3 years, not 12 years. This is calculated by dividing the initial cost of the machine ($48,000) by the annual net cash inflow ($16,000 - $8,000 - $4,000 = $4,000), resulting in a payback period of 12 years. Therefore, the statement is false.

Question 11

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

Accepted Answer

Manufacturing productivity can impact the capital investment analysis by affecting the projected cash flows, which are a crucial factor in evaluating the feasibility and profitability of a capital investment project. A higher productivity level can generate more revenues, reduce costs, and increase profitability, while a lower productivity level can have the opposite effect. Therefore, it is an important qualitative characteristic that should be taken into consideration when conducting capital investment analysis.

Question 12

The accounting rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

Accepted Answer

The accounting rate of return method does measure the average rate of return from using the asset over its entire life.

Question 13

The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.

Accepted Answer

The time expected to pass before the net cash flows from an investment would return its initial cost is called the payback period, not the amortization period.

Question 14

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The payback period for the machine is 4 years.

Accepted Answer

The answer of A company is planning to purchase a...

Question 15

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The accounting rate of return for the machine is 16.7%.

Accepted Answer

The answer of A company is planning to purchase a...

Question 16

A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual cash flows from the machine will be $3,500. The payback period for the new machine is 10.5 years.

Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash flows. In this case, $21,000 / $3,500 = 6 years, which is less than 10.5 years. Therefore, the statement is false.

Question 17

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 18

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from the investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4), and $6,000 (year 5). The average income from operations over the 5-year life is $20,400. The payback period is 3.5 years.

Accepted Answer

To calculate the payback period, we need to add up the cash inflows until they equal the initial investment.

$36,000 + $30,000 + $18,000 + $12,000 = $96,000

This means that the payback period is between year 3 and year 4, since after year 3 the total cash inflows are only $78,000. To calculate the exact payback period, we need to divide the remaining investment needed ($90,000 - $78,000 = $12,000) by the cash inflow in year 4 ($12,000).

$12,000 / $12,000 = 1

Therefore, the payback period is 3 years + 1 year = 4 years. Since the payback period is greater than 3.5 years, the statement is false.

Question 19

Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting decisions.

Accepted Answer

Net present value (NPV) is a discounted cash flow method used in capital budgeting to evaluate the profitability of an investment or project. However, the payback period is not a discounted cash flow method; it simply calculates the time required for the cash inflows from a project to repay the initial investment, without considering the time value of money.

Question 20

The payback method can be used only when net cash inflows are the same for each period.

Accepted Answer

The payback method can be used even when net cash inflows are not the same for each period. However, it is easier to calculate the payback period when net cash inflows are constant.

Quiz 10: Capital Investment Analysis