Question 1

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

Accepted Answer

The formula for calculating average rate of return is (total net earnings or gains / total investment) x 100%. The estimated annual income is not a factor in the calculation.

Question 2

Methods that ignore present value in capital investment analysis include the internal rate of return method.

Accepted Answer

The internal rate of return (IRR) method does not ignore present value; it specifically calculates the rate at which the net present value of all the cash flows (both incoming and outgoing) from a project or investment equals zero.

Question 3

Care must be taken involving capital investment decisions,since normally a long-term commitment of funds is involved and operations could be affected for many years.

Accepted Answer

Capital investment decisions involve large sums of money and have long-term consequences. It is important to carefully evaluate the risks and rewards of any investment before committing funds, as these decisions can have a significant impact on the financial health and future of the company.

Question 4

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

Accepted Answer

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow. Net discounted cash flow takes into account discounting future cash flows to present values.

Question 5

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

Accepted Answer

The net present value method takes into account present value in capital investment analysis.

Question 6

The cash payback method of capital investment analysis is one of the methods referred to as a present value method.

Accepted Answer

The cash payback method is not a present value method as it does not take into account the time value of money. It simply calculates how many years it will take for the initial investment to be repaid through cash flows from the investment. Present value methods, on the other hand, use discounted cash flows to account for the time value of money.

Question 7

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 as follows: total net income/initial investment x 100%. Therefore, 200,000/400,000 x 100% = 50%. The given information already states the expected rate of return on investment as 50%, so this statement is true. However, it is not possible for the expected total net income to be equal to the initial investment, as stated in the question. This is because the total net income is the profit generated by the fixed asset over its useful life, while the initial investment is the cost of purchasing the fixed asset. Therefore, the statement that the purchase will yield total net income of $400,000 (equal to the initial investment) is false.

Question 8

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

Accepted Answer

Net cash flow is the result of subtracting expenses from revenues, which represents the excess of cash flowing in over cash flowing out.

Question 9

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 expected average rate of return on investment is calculated by dividing the annual net income by the initial investment. With a total net income of $200,000 over 5 years, the annual net income is $40,000. Dividing $40,000 by the initial investment of $400,000 gives an expected average rate of return of 10%, not 25%.

Question 10

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

Accepted Answer

The cash payback method only looks at the amount of time it takes for a project to recoup its initial investment, without considering the time value of money or the overall profitability of the investment.

Question 11

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

Accepted Answer

The methods for evaluating capital investment proposals indeed fall into two main categories: those that ignore present value, such as the payback period and accounting rate of return methods, and present value methods, such as net present value (NPV) and internal rate of return (IRR).

Question 12

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

Accepted Answer

The average rate of return method focuses on the average annual profit of an investment, not taking into account the present value of future cash flows.

Question 13

Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals.

Accepted Answer

While managers may have a better understanding of the processes and long-term goals, anyone in a company can potentially submit a capital investment proposal. It ultimately depends on the company's policies and procedures for submitting proposals.

Question 14

Methods that ignore present value in capital investment analysis include the average rate of return method.

Accepted Answer

The average rate of return method does not consider present value in capital investment analysis.

Question 15

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

Accepted Answer

The methods of evaluating capital investment proposals are generally grouped into two categories: (1) non-discounting methods such as the average rate of return and cash payback period, and (2) discounting methods such as the net present value (NPV) and internal rate of return (IRR).

Question 16

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 (Total Net Income / Initial Investment) / Useful Life. In this case, it would be ($300,000 / $400,000) / 5 = 15%.

Question 17

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 30%.

Accepted Answer

The expected average rate of return can be calculated using the formula:
Average rate of return = (Total net income / Initial cost) x 100

In this case, the total net income is $300,000 and the initial cost is $400,000. Plugging these values into the formula yields:

Average rate of return = (300,000 / 400,000) x 100 = 75%

Since the expected average rate of return (75%) is higher than the given expected rate of return (30%), the purchase of the fixed asset is expected to be profitable. Therefore, the statement is true.

Question 18

The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method.

Accepted Answer

This statement is true. The average rate of return method calculates the average annual income that is expected to be generated by a capital investment proposal and divides it by the average investment required to obtain that income.

Question 19

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

Accepted Answer

This is the correct formula for calculating the average rate of return.

Question 20

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

Accepted Answer

Capital investment analysis is the process of planning, evaluating and controlling long-term investment decisions involving fixed assets such as buildings, machinery, and land. Therefore, the statement is true.

Quiz 25: Capital Investment Analysis