Deck 15: Capital Investment Analysis

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 $300,000 for 5 years.The expected average rate of return is 30%.

Answer 1

True

Question 2

Average rate of return equals average investment divided by estimated average annual income.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

For years one through five, a proposed expenditure of $400,000 for a fixed asset with a 5-year life has expected net income of $50,000, $40,000, $20,000, $20,000, and $20,000, respectively, and net cash flows of $130,000, $120,000, $100,000, $100,000, and $100,000, respectively.The cash payback period is 3.5 years.

Question 5

A company should purchase an asset when the minimum rate of return exceeds its average rate of return.

Question 6

The methods of evaluating capital investment proposals can be grouped into two general categories: (1) methods that ignore present values and (2) methods that use present values.

Question 7

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 2.5 years.

Question 8

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 2.5 years.

Question 9

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

Question 10

The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow.

Question 11

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and a $40,000 residual value, is expected to yield total net income of $200,000 for 5 years.The expected average rate of return on investment is 18.2%.

Question 12

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 5 years.The expected average rate of return on investment computed is 20%.

Question 13

Average rate of return equals estimated average annual income divided by average investment.

Question 14

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

Question 15

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and a $40,000 residual value, is expected to yield total net income of $500,000 for 5 years.The expected average rate of return is 50%.

Question 16

If the average rate of return on an asset exceeds the minimum rate of return for investments, the asset should be purchased.

Question 17

The methods of evaluating capital investment proposals can be grouped into two general categories: (1) average rate of return method and (2) cash payback method.

Question 18

The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow.

Question 19

Care must be taken while making capital investment decisions since it involves a long-term commitment of funds and affects operations for several years.

Question 20

Methods that ignore present value in capital investment analysis include the cash payback method.

Question 21

Internal rate of return is often called the payback rate of return.

Question 22

If a proposed expenditure of $400,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $160,000 and $60,000, respectively, the cash payback period is 2.5 years.

Question 23

When evaluating a proposal by use of the cash payback method, if net cash flows exceed the capital investment within the time deemed acceptable by management, the proposal should be accepted.

Question 24

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

Question 25

The computations required for the net present value method are less than those the computation required for the average rate of return method.

Question 26

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

Question 27

One of the qualitative characteristics that influence capital investment analysis is product quality.

Question 28

The computations required for the net present value method are more than the computation required for the average rate of return method.

Question 29

Qualitative considerations are best evaluated using present value methods such as internal rate of return.

Question 30

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

Question 31

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 income of $150,000 (recognition is given to the effect of straight-line depreciation on the investment).The expected average rate of return is 15%.

Question 32

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

Question 33

Qualitative considerations in capital investment decisions are most appropriate for strategic investments or those that are designed to affect a company's long-term ability to generate profits.

Question 34

When evaluating a proposal by use of the net present value method, if 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.

Question 35

When evaluating a proposal by use of the net present value method, if 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.

Question 36

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.

Question 37

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.

Question 38

The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

Question 39

When evaluating a proposal by use of the net present value method, if the present value is less than the amount to be invested, the rate of return on the proposal is more than the rate used in the analysis.

Question 40

A qualitative characteristic that influences capital investment analysis is manufacturing productivity.

Question 41

Alpha Inc.is evaluating the purchase of a machine costing $350,000.The expected useful life of the machine is 5 years at the end which it would have no residual value, and the depreciation is assumed to be on straight-line basis.The estimated total income from the machine is $500,000.The expected average rate of return for this machine is:

A) 26.4%.
B) 42.6%.
C) 38.5%.
D) 57.1%.

Question 42

Average total assets divided by average stockholders' equity is the formula for financial leverage.​

Question 43

Return on stockholders' equity is calculated as the ratio of average stockholders' equity to operating income.
​

Question 44

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

Question 45

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.

Question 46

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

Question 47

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

Question 48

The management of Retz Corporation is considering the purchase of a new machine costing $500,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively.In addition to the foregoing information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 100,000 & \$ 200,000 \\2 & 80,000 & 170,000 \\3 & 50,000 & 130,000 \\4 & 10,000 & 80,000 \\5 & 10,000 & 80,000\end{array}$$ ? The average rate of return for this investment is:

A) 18%.
B) 16%.
C) 5%.
D) 20%.

Question 49

The management of Retz Corporation is considering the purchase of a new machine costing $500,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively.In addition to the foregoing information, use the following data in determining the acceptability in this situation:? $$\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 100,000 & \$ 200,000 \\2 & 80,000 & 170,000 \\3 & 50,000 & 130,000 \\4 & 10,000 & 80,000 \\5 & 10,000 & 80,000\end{array}$$ ? The cash payback period for this investment is:

A) 5 years.
B) 3 years.
C) 2 years.
D) 4 years.

Question 50

Gamma Inc.is considering the purchase of a machine costing $450,000, having a useful life of five years.Depreciation would be recognized using the straight-line method, and the machine would have no residual value at the end of its useful life.The estimated total net income from the machine is $600,000.The average investment for the machine is:

A) $600,000.
B) $150,000.
C) $225,000.
D) $300,000.

Question 51

The two methods that consider the time value of money concept to analyze capital investment proposals are:

A) the net present value method and the internal rate of return method.
B) the net present value method and the average rate of return method.
C) the internal rate of return method and the average rate of return method.
D) the cash payback method and the net present value method.

Question 52

Which of the following concepts is being considered when a company making a capital investment decision converts all the dollar cash inflows and outflows over the life of a project to their present value?

A) The accounting period concept
B) The time value of money concept
C) The realization concept
D) The matching concept

Question 53

The amount of the estimated average income for a proposed investment of $60,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield of $22,300, is:

A) $10,800.
B) $5,575.
C) $5,400.
D) $15,000.

Question 54

The expected average rate of return for a proposed investment of $900,000 in a fixed asset, with a useful life of five years, recognition is given to the effect of straight-line depreciation on the investment, no residual value, and an expected total net income of $360,000 for the 5 years, is:

A) 18.5%.
B) 40%.
C) 12.5%.
D) 16%.

Question 55

The management of London Corporation is considering the purchase of a new machine costing $750,000.The company's desired rate of return is 6%.The present value factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively.In addition to this information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 37,500 & \$ 187,500 \\2 & 37,500 & 187,500 \\3 & 37,500 & 187,500 \\4 & 37,500 & 187,500 \\5 & 37,500 & 187,500\end{array}$$ ? The cash payback period for this investment is:

A) 3 years.
B) 5 years.
C) 20 years.
D) 4 years.

Question 56

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

Question 57

Purchase of a new machine to replace an old machine is an example of:

A) breakeven analysis.
B) cost-volume-profit analysis.
C) capital investment analysis.
D) just-in-time inventory analysis.

Question 58

The management of London Corporation is considering the purchase of a new machine costing $750,000.The company's desired rate of return is 6%.The present value factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively.In addition to this information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 37,500 & \$ 187,500 \\2 & 37,500 & 187,500 \\3 & 37,500 & 187,500 \\4 & 37,500 & 187,500 \\5 & 37,500 & 187,500\end{array}$$ ? The average rate of return for this investment is:

A) 5%.
B) 10%.
C) 25%.
D) 15%.

Question 59

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

A) absorption cost analysis.
B) variable cost analysis.
C) capital investment analysis.
D) cost-volume-profit analysis.

Question 60

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

Question 61

A disadvantage of the average rate of return method of capital investment analysis is that:

A) it is very complex to compute.
B) it does not include the entire amount of income earned over the life of a project.
C) it does not emphasize accounting income, which is often used by investors and creditors in
Evaluating management performance.
D) it does not directly consider the timing of the expected cash flows.

Question 62

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):

A) average rate of return.
B) cash payback period.
C) present value index.
D) price-level index.

Question 63

The management of London Corporation is considering the purchase of a new machine costing $750,000.The company's desired rate of return is 6%.The present value factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively.In addition to this information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 37,500 & \$ 187,500 \\2 & 37,500 & 187,500 \\3 & 37,500 & 187,500 \\4 & 37,500 & 187,500 \\5 & 37,500 & 187,500\end{array}$$ ? The net present value for this investment is:

A) positive $39,750.
B) positive $118,145.
C) negative $118,145.
D) negative $39,750.

Question 64

A project analysis using the net present value method indicates that the present value of cash inflows is $120,000, and the total amount of investment required at the start of the project is $100,000.Which of the following statements best describes the results of the project analysis?

A) The project should be accepted because the actual rate of return expected from the project is more than the minimum desired rate of return.
B) The project should be accepted because the actual rate of return expected from the project is less than the minimum desired rate of return.
C) The project should be rejected because the actual rate of return expected from the project is more than the minimum desired rate of return.
D) The project should be rejected because the actual rate of return expected from the project is less than the minimum desired rate of return.

Question 65

The management of London Corporation is considering the purchase of a new machine costing $750,000.The company's desired rate of return is 6%.The present value factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively.In addition to this information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 37,500 & \$ 187,500 \\2 & 37,500 & 187,500 \\3 & 37,500 & 187,500 \\4 & 37,500 & 187,500 \\5 & 37,500 & 187,500\end{array}$$ ? The present value index for this investment is:

A) 1.00.
B) 0.95.
C) 1.25.
D) 1.05.

Question 66

The management of Retz Corporation is considering the purchase of a new machine costing $500,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively.In addition to the foregoing information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 100,000 & \$ 200,000 \\2 & 80,000 & 170,000 \\3 & 50,000 & 130,000 \\4 & 10,000 & 80,000 \\5 & 10,000 & 80,000\end{array}$$ ? The net present value for this investment is:

A) positive $150,000.
B) negative $24,170.
C) positive $24,170.
D) negative $150,000.

Question 67

Zed Corporation is evaluating the purchase of a machine that costs $275,000.The annual cash revenues from the machine would be $50,000, and the annual cash expenses of the machine would be $10,000.What is the estimated cash payback period for the machine?

A) 8.5 years
B) 3.8 years
C) 6.9 years
D) 5.2 years

Question 68

The rate of return is 10% and the cash to be received in one year is $25,000.Determine the present value amount, using the following partial table of present value of $1 at compound interest: $$\begin{array} { l c c c } \hline \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636\end{array}$$

A) $22,500
B) $25,000
C) $27,275
D) $22,725

Question 69

Cash payment for monthly rent is an example of _____.

A) the present value index
B) discounted cash flow
C) compounding
D) an annuity

Question 70

The payback period is determined using which of the following formulas?

A) Amount to be invested / Annual average net income
B) Annual net cash flow / Amount to be invested
C) Annual average net income / Amount to be invested
D) Amount to be invested / Annual net cash flows

Question 71

Which of the following formulas is used to calculate the present value index?

A) Total present value of net cash flow / Equal annual net cash flows
B) Amount to be invested / Total present value of net cash flow
C) Equal annual net cash flows / Total present value of net cash flow
D) Total present value of net cash flow / Amount to be invested

Question 72

An anticipated purchase of equipment for $1,000,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: ? $$\begin{array} { c r r } \text { Year } & \text { Net Income } & \text { Net Cash Flow } \\1 & \$ 210,000 & \$ 400,000 \\2 & 180,000 & 320,000 \\3 & 145,000 & 280,000 \\4 & 125,000 & 270,000 \\5 & 60,000 & 220,000 \\6 & 60,000 & 220,000 \\7 & 60,000 & 220,000 \\8 & 60,000 & 220,000\end{array}$$ ?
What is the cash payback period?

A) 5 years
B) 4 years
C) 6 years
D) 3 years

Question 73

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%. ? $$\begin{array} { c c c c } \text { Year } & 10 \% & 15 \% & 20 \% \\\hline 1 & 0.909 & 0.870 & 0.833 \\2 & 0.826 & 0.756 & 0.694 \\3 & 0.751 & 0.658 & 0.579 \\4 & 0.683 & 0.572 & 0.482 \\5 & 0.621 & 0.497 & 0.402 \\6 & 0.564 & 0.432 & 0.335 \\7 & 0.513 & 0.376 & 0.279 \\\hline\end{array}$$

A) $17,400
B) $17,000
C) $20,000
D) $15,451

Question 74

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

A) $13,660
B) $15,840
C) $12,720
D) $10,400

Question 75

The two methods that use present values to analyse capital investment proposal consider the _____.

A) time value of money concept
B) going concern concept
C) historical cost concept
D) conservatism concept

Question 76

The management of Retz Corporation is considering the purchase of a new machine costing $500,000.The company's desired rate of return is 10%.The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively.In addition to the foregoing information, use the following data in determining the acceptability in this situation: $$\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 100,000 & \$ 200,000 \\2 & 80,000 & 170,000 \\3 & 50,000 & 130,000 \\4 & 10,000 & 80,000 \\5 & 10,000 & 80,000\end{array}$$ ? The present value index for this investment is:

A) 1.30.
B) 0.95.
C) 1.05.
D) 0.70.

Question 77

Which of the following capital investment evaluation methods uses present values while evaluating different projects?

A) The breakeven analysis method
B) The cash payback method
C) The annuity indexation method
D) The internal rate of return method

Question 78

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

A) the calculations in methods that ignore present value are more complex than those in methods using present value.
B) the 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.
C) the calculations in methods that consider present value are less complex than those methods ignoring present value.
D) the present value methods consider that a dollar in the future is worth more than a dollar today due to the potential earning power of that dollar.

Question 79

Which of the following is an advantage of the internal rate of return method?​

A) It takes into account cash flows occurring only till the time the initial investment is completely paid back.
B) It does not use present value concepts in valuing cash flows occurring in different periods because this concept can give incorrect results.
C) It ranks proposals based upon the cash flows over their complete useful life, even if the project lives are not the same.
D) ​It assumes the cash received from a proposal can be reinvested at the minimum desired rate of return.

Question 80

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?

A) Price-level index
B) Present value factor
C) Annuity
D) Present value index