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Briefly describe the time value of money.Why is the time value of money important in capital investment analysis?

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The time value of money means that a dol...

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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.

A) True
B) False

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A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $100,000.The present value of the future cash flows at the company's desired rate of return is $105,000.The IRR on the project is 12%.Which of the following statements is true?


A) The project should not be accepted because the net present value is negative.
B) The desired rate of return used to calculate the present value of the future cash flows is less than 12%.
C) The desired rate of return used to calculate the present value of the future cash flows is more than 12%.
D) The desired rate of return used to calculate the present value of the future cash flows is equal to 12%.

E) A) and C)
F) B) and C)

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Using the tables above, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next 4 years, what would be the net present value of the investment, assuming an earnings rate of 10%?


A) $23,500
B) $16,050
C) $25,360
D) $1,860

E) B) and C)
F) A) and B)

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The management of Indiana Corporation is considering the purchase of a new machine costing $400,000.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 of this investment: The management of Indiana Corporation is considering the purchase of a new machine costing $400,000.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 of this investment: The average rate of return for this investment is A) 18% B) 21% C) 53% D) 10% The average rate of return for this investment is


A) 18%
B) 21%
C) 53%
D) 10%

E) All of the above
F) B) and C)

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Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a useful life of 9 years.What is one widely used method to make the net present values of the proposals comparable?


A) Ignore the fact that Proposal F has a useful life of 6 years and treat it as if it has a useful life of 9 years.
B) Adjust the life of Proposal J to a time period that is equal to that of Proposal F by estimating a residual value at the end of year 6.
C) Ignore the useful lives of 6 and 9 years and find an average 7 1/2 years.
D) Ignore the useful lives of 6 and 9 years and compute the average rate of return.

E) B) and D)
F) A) and B)

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Match each definition that follows with the term a-e it defines. -Also referred to as capital budgeting


A) Capital investment analysis
B) Time value of money concept
C) Net present value method
D) Average rate of return
E) Cash payback period

F) B) and E)
G) B) and D)

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Using the following partial table of present value of $1 at compound interest, determine the present value of $50,000 to be received 3 years hence with earnings at the rate of 12% a year: Using the following partial table of present value of $1 at compound interest, determine the present value of $50,000 to be received 3 years hence with earnings at the rate of 12% a year: A) $37,550 B) $31,800 C) $35,600 D) $39,850


A) $37,550
B) $31,800
C) $35,600
D) $39,850

E) B) and D)
F) All of the above

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Using the tables above, what would be the present value of $30,000 to be received 3 years from today, assuming an earnings rate of 6%?


A) $25,200
B) $26,700
C) $23,760
D) $80,190

E) B) and D)
F) B) and C)

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The cash payback method can be used only when net cash inflows are the same for each period.

A) True
B) False

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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%.

A) True
B) False

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Match each definition that follows with the term a-f it defines. -Uses present value concepts to compute the rate of return on an investment from a capital investment proposal based on its' expected net cash flows


A) Capital rationing
B) Annuity
C) Capital investment analysis
D) Internal rate of return method
E) Payback period
F) Accounting rate of return

G) B) and E)
H) B) and C)

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

A) True
B) False

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Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment?


A) evaluating further assets that are dissimilar in nature or have different useful lives
B) using only quantitative measures to evaluate asset purchases
C) analyzing lease versus purchase option
D) considering income tax ramifications

E) A) and D)
F) A) and B)

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Match each definition that follows with the term a-f it defines. -A stream of equal cash flow amounts


A) Capital rationing
B) Annuity
C) Capital investment analysis
D) Internal rate of return method
E) Payback period
F) Accounting rate of return

G) B) and F)
H) None of the above

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A company is contemplating investing in a new piece of manufacturing machinery.The amount to be invested is $210,000.The present value of the future cash flows is $225,000.The company's desired rate of return used in the present value calculations was 12%.Which of the following statements is true?


A) The project should not be accepted because the net present value is negative.
B) The internal rate of return on the project is less than 12%.
C) The internal rate of return on the project is more than 12%.
D) The internal rate of return on the project is equal to 12%.

E) None of the above
F) C) and D)

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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.

A) True
B) False

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The present value index for this investment is


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

E) A) and B)
F) A) and C)

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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.

A) True
B) False

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

A) True
B) False

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