Question 1

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 4 years.

Accepted Answer

The cash payback period is calculated by dividing the initial investment by the annual net cash flow. In this case, $80,000 / $32,000 = 2.5 years, not 4 years.

Question 2

If in evaluating a proposal by use of the net present value method 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.

Accepted Answer

The net present value method calculates the present value of future cash inflows minus the present value of the initial investment. If the result is positive, it means that the proposal is profitable and the rate of return exceeds the discount rate used in the analysis.

Question 3

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

Accepted Answer

Net present value analysis involves discounting the expected future net cash flows by a certain rate to determine their present values, which are then compared to the initial investment to determine if the investment is worthwhile.

Question 4

If in evaluating a proposal by use of the net present value method 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.

Accepted Answer

If there is an excess of the present value of future cash inflows over the amount to be invested, it indicates that the rate of return on the proposal is greater than the discount rate used in the analysis, not less.

Question 5

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

Accepted Answer

In net present value analysis, the expected future net cash flows are not averaged; each cash flow is individually discounted to its present value using a specific discount rate before they are summed to determine the net present value.

Question 6

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 3 years.

Accepted Answer

The cash payback period is the amount of time it takes to recover the initial cash outlay for a project. In this case, the initial cash outlay is $250,000 and the cumulative net cash flows for years one through three are $90,000 + $85,000 + $75,000 = $250,000, which means the cash payback period is 3 years. Therefore, the statement is true.

Question 7

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

Accepted Answer

Manufacturing flexibility refers to the ability of a company to adapt to changes in production processes, technology, and market demand. It can have a significant impact on capital investment analysis as it may affect the ability of a company to efficiently utilize and allocate its resources. For example, a company with high flexibility may be able to quickly and cost-effectively switch between producing different products, which could lead to increased profitability and return on investment. On the other hand, a company with low flexibility may face challenges in adapting to changing market conditions, which could result in lower profitability and a higher risk of investment failure.

Question 8

A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality.

Accepted Answer

The impact of investment proposals on product quality is a qualitative characteristic that may influence capital investment analysis. This is because the quality of a company's products can affect customer satisfaction and sales, and thus have an impact on the success of the investment. As such, it is important for decision-makers to take into account the potential effects of a particular investment proposal on product quality when conducting their analysis.

Question 9

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

Accepted Answer

That is correct.

Question 10

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.

Accepted Answer

The definition of cash payback period is correct.

Question 11

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

Accepted Answer

A present value index (PVI) is an alternative to the net present value (NPV) method of evaluating capital investment proposals. It measures the present value of expected future cash inflows relative to the initial investment, and it can be used to rank competing proposals. The higher the PVI, the more desirable the proposal. Therefore, statement A is true.

Question 12

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

Accepted Answer

The net present value method calculates the present value of future cash inflows minus the amount to be invested (also known as the initial cash outflow). If the result is positive, then the proposal is considered acceptable. If the result is negative, then the proposal should be rejected. Therefore, if there is a deficiency (negative result), the correct decision would be to reject the proposal.

Question 13

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 the average annual net income divided by the initial investment. The average annual net income is $300,000 / 5 = $60,000. The average rate of return is $60,000 / $400,000 = 15%, not 37.5%.

Question 14

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

Accepted Answer

The statement is true. The internal rate of return (IRR) method is a capital budgeting technique that calculates the discount rate at which the present value of a project's cash inflows equals the present value of its cash outflows. This rate is known as the internal rate of return (IRR) and is used to evaluate the feasibility of capital investment proposals.

Question 15

If a proposed expenditure of $70,000 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.

Accepted Answer

The answer of If a proposed expenditure of $70,000 for...

Question 16

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.

Accepted Answer

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 payback period. The discount period refers to the period of time used for discounting future cash flows in order to determine their present value.

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 $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 can be calculated as follows:

Average Rate of Return = Total Net Income / Initial Investment

In this case, the total net income is $200,000 and the initial investment is $400,000. Therefore, the average rate of return is:

Average Rate of Return = $200,000 / $400,000 = 0.5 or 50%

However, this does not mean that the investment is expected to yield a 50% return. It simply means that the total net income over the life of the asset is equal to 50% of the initial investment. In other words, the investment is expected to generate $200,000 in net income over 5 years, which is equal to 50% of the initial investment.

Therefore, the statement is false.

Question 18

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

Accepted Answer

The proposal should be rejected if there is a deficiency of the present value of future cash inflows over the amount to be invested. The net present value of a proposal should be positive for it to be accepted.

Question 19

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 average rate of return is calculated as the average annual profit divided by the initial investment. The average annual profit is $200,000 / 5 = $40,000. The average rate of return is $40,000 / $400,000 = 10%.

Question 20

For years one through five, a proposed expenditure of $500,000 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 5 years.

Accepted Answer

The cash payback period is the time it takes for the net cash flows to recover the initial investment. In this case, the total net cash flows over 5 years ($400,000) do not cover the $500,000 investment, so the payback period is longer than 5 years.

Quiz 26: Capital Investment Analysis