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Exam 25: Capital Investment Analysis

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Question 31

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In capital rationing,an initial screening of alternative proposals is usually performed by establishing minimum standards.Which of the following evaluation methods are often used?

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

E) A) and D)
F) A) and C)

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Question 32

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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.

A) True
B) False

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Question 33

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

The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an asset by the average amount invested in the asset.

Match each definition that follows with the term (a-f) it defines. -The process by which management allocates funds among various capital investment proposals

A project has estimated annual net cash flows of $60,000.It is estimated to cost $240,000.Determine the cash payback period.

The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset,using straight-line depreciation,with a useful life of 20 years,no residual value,and an expected total net income of $10,560,000 over the 20 years is

Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return?

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%.

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?

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

The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method.

A $550,000 capital investment proposal has an estimated life of 4 years and no residual value.The estimated net cash flows are as follows: ​ The minimum desired rate of return for net present value analysis is 12%.The present value of $1 at compound interest of 12% for 1,2,3,and 4 years is 0.893,0.797,0.712,and 0.636,respectively. ​ Determine the net present value.

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

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 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 16.7%.

Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting decisions.

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

Dickerson Co.is evaluating a project requiring a capital expenditure of $810,000.The project has an estimated life of 4 years and no salvage value.The estimated net income and net cash flow from the project are as follows: ​ The company's minimum desired rate of return is 12%.The present value of $1 at compound interest of 12% for 1,2,3,and 4 years is 0.893,0.797,0.712,and 0.636,respectively. Determine the net present value.

The average rate of return for this investment is