Question 1

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow. Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

Accepted Answer

Current expenses are not a factor in causing the present value of cash inflows to diminish over time. The other options - earning potential, risk of uncollectibility, and inflation - all contribute to the decrease in present value over time.

Question 2

Which method of evaluating capital investment decisions 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 compute a rate of return by finding the discount rate that makes the net present value of all cash flows from a particular project equal to zero.

Question 3

Joan Osborne is evaluating a potential capital investment. She has calculated the net present value using a minimum rate of return of 10%. Using this rate, the net present value is negative. What does this tell her about the rate of return expected for the project?

Accepted Answer

A negative net present value (NPV) using a minimum rate of return of 10% means that the expected rate of return for the project is less than 10%. This is because the NPV calculation takes into account the present value of future cash flows, discounted at the minimum rate of return. If the calculation results in a negative number, it indicates that the project is not expected to generate sufficient cash flows to exceed the minimum required rate of return. Therefore, Joan Osborne should not invest in this project.

Question 4

Which of the following are not present value methods of analyzing capital investment proposals?

Accepted Answer

Payback and unadjusted rate of return are not present value methods of analyzing capital investment proposals. Internal rate of return, net present value, and adjusted rate of return are all present value methods that take into account the time value of money.

Question 5

Seth Morrison is considering alternative proposals that involve different amounts of investments. To compare different size investment proposals, it may be helpful for Sarah to prepare a relative ranking of the proposals by using a(n):

Accepted Answer

A present value index calculates the present value of the cash inflows divided by the initial investment, providing a relative ranking of different investment proposals based on their profitability per dollar invested. This allows for an easy comparison of proposals of different sizes. Net present value and internal rate of return may also be useful in evaluating investment proposals, but they do not provide a direct relative ranking like a present value index.

Question 6

Which of the following is not a criteria that is used to determine whether a project is acceptable under the net present value method?

Accepted Answer

The net present value method determines whether a project is acceptable by calculating the present value of all cash inflows and outflows associated with the project and subtracting them to find the net present value. If the net present value is greater than zero, the project is acceptable because it will generate a positive return for the company. If the net present value is less than zero, the project is not acceptable because it will result in a negative return. If the net present value is equal to zero, the project is borderline and may not be accepted depending on other factors such as strategic fit or risk. The required rate of return is used as a discount rate in calculating the net present value but is not a criterion used to determine whether the project is acceptable.

Question 7

Which of the following statements is incorrect?

Accepted Answer

The statement in D is incorrect because it describes the process in reverse. When a company invests in capital assets, it sacrifices present dollars for the opportunity to receive future dollars, not the other way around.

Question 8

Which of the following statements about postaudits is correct?

Accepted Answer

The postaudit of a capital investment project should be made using the same analytical technique that was used in deciding to make the investment. This allows for a fair assessment of the investment's performance and helps to identify any issues with the initial analysis. A postaudit is typically conducted after the completion of a capital investment project to evaluate whether the projected cash flows and other benefits were realized, and if not, to identify the reasons for the shortfall. Improving cost-volume-profit analysis is not the main purpose of postaudits, and while expected cash flows and the cost of capital may be used in the postaudit process, they are not the only factors considered.

Question 9

The present value index indicates the:

Accepted Answer

The answer of The present value index indicates the:
...

Question 10

Which method for evaluating capital investment proposals reduces the present value of cash outflows from the present value of cash inflows?

Accepted Answer

The net present value method involves subtracting the present value of cash outflows from the present value of cash inflows to determine the value of a capital investment proposal. A positive value signifies that the project is profitable, while a negative value indicates that the project would result in a net loss. The payback method focuses on evaluating the amount of time required to recover the initial investment, while the internal rate of return measures the profitability of a project as a percentage rate of return. The unadjusted rate of return is a simple measure of profitability that calculates the average annual income from a project as a percentage of the initial investment. However, none of these methods specifically subtracts the present value of cash outflows from the present value of cash inflows like the net present value method does.

Question 11

A series of equal cash flows at fixed intervals is termed a(n):

Accepted Answer

An annuity is a series of equal cash flows at fixed intervals, while a lump sum is a single payment. Net cash flow refers to the difference between the inflows and outflows of cash in a business, and return on investment is a measure of profitability for an investment.

Question 12

Young Corporation is considering purchasing equipment that costs $80,000 and is expected to provide the following cash inflows over its five-year useful life: What is the payback period of this investment project (rounded to the nearest year)?
$$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cash inflow } \
\hline 1 & \$ 18,000 \
\hline 2 & 22,000 \
\hline 3 & 24,000 \
\hline 4 & 16,000 \
\hline 5 & 9,000 \
\hline
\end{array}$$

Accepted Answer

The answer of Young Corporation is considering purchasing equipment that...

Question 13

Cash outflows generated by capital investments include all of the following except:

Accepted Answer

Depreciation is a non-cash expense and does not represent a cash outflow. It is an accounting method to allocate the cost of a tangible asset over its useful life.

Question 14

Findell Corporation is considering two projects, A and B, and it has gathered the following estimates for the project What is the present value index for project A?
$$\begin{array} { | l | l | l | } 
\hline & \text { Project A } & \text { Project B } \
\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \
\hline \text { Present value of cash inflows } & \$ 84,360 & \$ 55,100 \
\hline \text { Present value of cash outflows } & \$ 77,000 & \$ 49,000 \
\hline & & \
\hline
\end{array}$$

Accepted Answer

The present value index (PVI) is calculated by dividing the present value of cash inflows by the present value of cash outflows. For Project A, the PVI is $84,360/$77,000 = 1.096.

Question 15

The process by which management evaluates long-term investment decisions involving long term operational assets is called:

Accepted Answer

The process mentioned in the question describes capital investment analysis. Activity based management focuses on improving efficiency and reducing costs, strategic business analysis looks at the overall competitive positioning of the company, and fixed cost analysis seeks to understand the impact of fixed costs on the company's profitability.

Question 16

Cash inflows generated by capital investments include all of the following except:

Accepted Answer

Increase in operating expenses would not generate cash inflows; rather, it would reduce cash inflows. The other options (incremental revenues, cost savings, and reduction in required working capital) would generate cash inflows.

Question 17

The difference between an ordinary annuity and an annuity due is:

Accepted Answer

An ordinary annuity assumes the cash flows occur at the end of the period while an annuity due assumes the cash flows occur at the beginning of the period. This means that with an annuity due, payments are made at the beginning of the period, while with an ordinary annuity, payments are made at the end of the period.

Question 18

The length of time required to recover the initial investment in a capital asset is known as the:

Accepted Answer

The payback period is the time it takes for the initial investment to be recovered, making it the most appropriate answer to the question. The other options (rate of return, investment period, present value period) refer to different financial concepts.

Question 19

Butch's Barbecue thinks that offering delivery will increase their sales. Butch's is considering whether to purchase a used delivery truck costing $12,000. Additional net income from the delivery service will be $1,400 per year. The truck will last approximately 5 years. What is the unadjusted rate of return based on the average investment?

Accepted Answer

To calculate the unadjusted rate of return, we need to first calculate the average investment:

Average Investment = (Initial Investment + Salvage Value) / 2
Salvage Value = $0 (not given)

Average Investment = $12,000 / 2
Average Investment = $6,000

Next, we can calculate the total net income from the delivery service over 5 years:

Total Net Income = Annual Net Income x Number of Years
Total Net Income = $1,400 x 5
Total Net Income = $7,000

Now we can calculate the unadjusted rate of return using the formula:

Unadjusted Rate of Return = Total Net Income / Average Investment

Unadjusted Rate of Return = $7,000 / $6,000

Unadjusted Rate of Return = 1.1667 or 116.67%

Therefore, the unadjusted rate of return is 116.67%, which is approximately 23.3%. Option C is the best choice as the unadjusted rate of return is positive and the investment is profitable.

Question 20

Capital investment decisions involve all of the following, except:

Accepted Answer

Capital investment decisions involve the acquisition of long-term assets, projects requiring substantial investment, and long periods of time to generate returns. Short-term operational assets are typically categorized as operating expenses rather than capital investments. Therefore, option A is not a capital investment decision.

Quiz 10: Planning for Capital Investments