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

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

Accepted Answer

Leasing allows for flexibility in upgrading to newer and more advanced equipment without having to deal with the cost and hassle of selling the obsolete asset.

Question 3

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%. $$\begin{array} { |l | l | l | l | } 
\hline 20 \% & 15 \% & 10 \% & \text { Year } \
\hline 0.833 & 0.870 & 0.909 & 1 \
\hline 0.694 & 0.756 & 0.826 & 2 \
\hline 0.579 & 0.659 & 0.751 & 3 \
\hline 0.482 & 0.572 & 0.683 & 4 \
\hline 0.402 & 0.497 & 0.621 & 5 \
\hline 0.335 & 0.473 & 0.564 & 6 \
\hline 0.279 & 0.376 & 0.513 & 7 \
\hline & & & \
\hline
\end{array}$$

Accepted Answer

The present value of $1 to be received one year from today at 15% is 0.870. Therefore, the present value of $20,000 to be received one year from today at 15% is $20,000 x 0.870 = $17,400.

Question 4

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

Accepted Answer

Present value methods consider that a dollar today is worth more than a dollar in the future due to the potential earning power of that dollar. This means that these methods account for the time value of money, which is an important consideration in capital investments. Methods that ignore present value do not take this factor into account and may therefore provide less accurate results. Additionally, the complexity of the calculation is not a determining factor in the desirability of a method, as long as it produces accurate results.

Question 5

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 (PVI) is used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis. It is calculated by dividing the present value of net cash inflows by the initial investment. A PVI greater than 1 indicates that the project is expected to earn a return that exceeds the required rate of return and is therefore acceptable.

Question 6

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 consideration the time value of money, that is, the fact that money received in the future is worth less than the same amount received today. This is because money can earn interest or be invested to earn a return. Therefore, the methods discount the future cash flows to their present value, which reflects the value of the cash flows today.

Question 7

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

The present value index (PVI), also known as the profitability index, is a useful tool for ranking investment proposals that involve different amounts of investment. It is calculated by dividing the present value of the net cash inflows by the initial investment. The proposal with the highest PVI is considered the most desirable. The average rate of return and cash payback period are less useful for comparing proposals with different amounts of investment, as they do not take into account the time value of money. The price-level index is not relevant to the comparison of investment proposals.

Question 8

In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash payback and the average rate of return methods.

Accepted Answer

In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash payback and the average rate of return methods.

Question 9

The primary advantages of the average rate of return method of analyzing a capital investment proposal are its ease of computation and the fact that:

Accepted Answer

The answer of The primary advantages of the average rate...

Question 10

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 conditions where an organization possesses limited capital resources and must determine the best way to allocate the available funds among various proposed capital investment alternatives.

Question 11

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

Accepted Answer

This statement is true. A capital expenditures budget is a summary of the decisions made for acquiring fixed assets, often over a defined period of time, in order to support the future operations of a business or organization.

Question 12

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 exceeds the amount to be invested suggests that the proposal will generate positive net cash flows, meaning that the proposal is desirable. Additionally, since the present value exceeds the amount to be invested, the expected return from the proposal must also exceed the minimum rate used for the analysis, which supports choice A as the correct answer.

Question 13

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

Accepted Answer

Decisions to install new equipment, replace old equipment, and purchase or construct a new building are all long-term investments in the company's capital assets. Capital investment analysis is conducted to evaluate these types of investments and determine if they will generate sufficient returns to justify the costs.

Question 14

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: $$\begin{array} { | l | l | l | l | } 
\hline 12 \% & 10 \% & 6 \% & \text { Year } \
\hline 0.893 & 0.909 & 0.943 & 1 \
\hline 0.797 & 0.826 & 0.890 & 2 \
\hline 0.712 & 0.751 & 0.840 & 3 \
\hline 0.636 & 0.683 & 0.792 & 4 \
\hline & & &
\end{array}$$

Accepted Answer

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

Question 15

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: $$\begin{array}{l}
\text { Net Cash}& \text {Net Income Flow}&\text { Year}\
\$ 330,000 & \$ 180,000&1 \
320,000 & 170,000&2 \
780,000 & 130,000&3 \
770,000 & 120,000&4 \
200,000 & 50,000 &5\
200,000 & 50,000&6 \
200,000 & 50,000 &7\
200,000 & 50,000&8

\end{array}$$ What is the cash payback period?

Accepted Answer

The cash payback period is the time it takes for the net cash flows to recover the initial investment. The cumulative cash flows are $330,000 (Year 1), $650,000 (Year 2), $1,430,000 (Year 3). By the end of Year 3, the cumulative cash flow exceeds the initial investment of $1,200,000, so the payback period is 3 years.

Question 16

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

Accepted Answer

The method of evaluating capital investment proposals that uses the concept of present value to compute a rate of return is the internal rate of return (IRR). The IRR is essentially the discount rate that makes the net present value of an investment equal to zero, and it represents the rate of return that the project is expected to generate. The higher the IRR, the more desirable the project is as an investment.

Question 17

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 18

The rate of return 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: $$\begin{array} { | l | l | l | l | } 
\hline 12 \% & 10 \% & 6 \% & \text { Year } \
\hline 0.893 & 0.909 & 0.943 & 1 \
\hline 0.797 & 0.826 & 0.890 & 2 \
\hline 0.712 & 0.751 & 0.840 & 3 \
\hline 0.636 & 0.683 & 0.792 & 4 \
\hline & & &
\end{array}$$

Accepted Answer

The present value is calculated by multiplying the cash to be received by the present value factor for the given rate and time. Here, $10,000 * 0.909 = $9,090.

Question 19

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

Accepted Answer

The process of planning, evaluating, and controlling long-term investment decisions for fixed assets is known as capital investment analysis. Absorption cost analysis and variable cost analysis are both methods of analyzing the cost of production, and cost-volume-profit analysis is a tool for examining the relationship between sales, costs, and profits. None of these methods specifically refer to the process of evaluating long-term investments in fixed assets.

Question 20

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

Accepted Answer

Net present value and internal rate of return are both present value methods of analyzing capital investment proposals. Average rate of return is a non-present value method, while cash payback only considers the time it takes to recoup the initial investment and does not take into account the time-value of money.

Quiz 15: Capital Investment Analysis

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

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

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

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?

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

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) :

In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash payback and the average rate of return methods.

The primary advantages of the average rate of return method of analyzing a capital investment proposal are its ease of computation and the fact that:

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

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

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?

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

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

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.

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

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