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Exam 25: Capital Investment Analysis

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Question 1

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The cash payback period for this investment is

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

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

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Question 2

Multiple Choice

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The present value index is computed using which of the following formulas?

A) Amount to be invested / Average rate of return
B) Total present value of net cash flow / Amount to be invested
C) Total present value of net cash flow / Average rate of return
D) Amount to be invested / Total present value of net cash flow

E) All of the above
F) None of the above

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Question 3

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The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of 4 years,straight-line depreciation,no residual value,and an expected total net income of $360,000 for the 4 years,is

Match each definition that follows with the term (a-e) it defines. -Can be determined by initial cost divided by annual net cash inflow of an investment

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

A company is considering purchasing a machine for $21,000.The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500.The payback period for the new machine is 6 years.

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

The production department is proposing the purchase of an automatic insertion machine.It has identified 3 machines,each with an estimated life of 10 years.Which machine offers the best internal rate of return? ​ ​

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

Tipper Co.is considering a 10-year project that is estimated to cost $700,000 and has no residual value.Tipper seeks to earn an average rate of return of 15% on all capital projects.Determine the necessary average annual income (using straight-line depreciation)that must be achieved on this project for it to be acceptable to Tipper Company.

Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows?

Match each definition that follows with the term (a-f) it defines. -A formal means of analyzing long-range investment decisions

A company is planning to purchase a machine that will cost $24,000,have a 6-year life,and have no salvage value.The company expects to sell the machine's output of 3,000 units evenly throughout each year.Total income over the life of the machine is estimated to be $12,000.The machine will generate net cash flows per year of $6,000.The average rate of return for the machine is 50%.

The average rate of return for this investment is

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: ​ ​

The process by which management allocates available investment funds among competing investment proposals is called

The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is

Using the tables above,what would be the present value of $25,000 (rounded to the nearest dollar) to be received 4 years from today,assuming an earnings rate of 10%?

An 8-year project is estimated to cost $400,000 and have no residual value.If the straight-line depreciation method is used and the average rate of return is 5%,determine the estimated annual net income.

Match each definition that follows with the term (a-e) it defines. -Often referred to as the discounted cash flow method