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Exam 15: Capital Investment Analysis

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Question 51

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One issue to consider when investing in assets in foreign countries is

A) that local currency may weaken to the dollar causing adverse effects on the investment's return.
B) that the dollar may weaken to the local currency causing adverse effects on the investment's return.
C) that local currency may be difficult to exchange into dollars causing problems in receiving a return on the investment.
D) that dollars may be difficult to exchange into local currency causing problems in receiving any return on investment.

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

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Question 52

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Heedy Inc.is considering a capital investment proposal that costs $460,000 and has an estimated life of four 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 10%.The present value of $1 at compound interest rates of 10% for 1,2,3,and 4 years is .909,.826,.751,and .683,respectively.Determine the net present value.

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Question 53

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An analysis of a proposal by the net present value method indicated that the present value exceeded the amount to be invested.Which of the following statements best describes the results of this analysis?

When evaluating a proposal by use of the net present value method,if 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.

June Co.is evaluating a project requiring a capital expenditure of $619,200.The project has an estimated life of four 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 .893,.797,.712,and .636,respectively. Determine: (a)the average rate of return on investment,giving effect to depreciation on the investment,and (b)the net present value.

Mars Corp.is choosing between two different capital investment proposals.Machine A has a useful life of 4 years,and Machine B has a useful life of 6 years.Each proposal requires an initial investment of $200,000,and the company desires a rate of return of 10%.Although Machine B has a useful life of 6 years,it could be sold at the end of 4 years for $35,000. Machine A will generate net cash flow of $70,000 in each of the four years.Machine B will generate $80,000 in year 1,$70,000 in year 2,$60,000 in year 3,and $40,000 per year for the remaining 3 years of its useful life. Which of the following statements portrays the most accurate analysis between the two proposals?

A series of equal cash flows at fixed intervals is termed a(n)

When evaluating two competing proposals with unequal lives,management should give greater consideration to the investment with the longer life because the asset will be useful to the company for a longer period of time.

Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

The present value index for this investment is

Internal rate of return is often called the payback rate of return.

The amount of the average investment for a proposed investment of $70,000 in a fixed asset,with a useful life of four years,straight-line depreciation,no residual value,and an expected total net income of $21,600 for the 4 years,is

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

If a proposed expenditure of $400,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $160,000 and $60,000,respectively,the cash payback period is 2.5 years.

The net present value for this investment is

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.

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

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.

The internal rate of return method is used to analyze a $831,500 capital investment proposal with annual net cash flows of $250,000 for each of the six years of its useful life.

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