Question 1

Methods that ignore present value in capital investment analysis include the internal rate of return method.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Below is a table for the present value of $1 at compound interest. $$\begin{array} { l l l l } 
\text { Year } & 6 \% & 10 \% & 12 \% \
\hline 1 & 0.943 & 0.909 & 0.893 \
2 & 0.890 & 0.826 & 0.797 \
3 & 0.840 & 0.751 & 0.712 \
4 & 0.792 & 0.683 & 0.636 \
5 & 0.747 & 0.621 & 0.567
\end{array}$$ Below is a table for the present value of an annuity of $1 at compound interest. $$\begin{array} { l l l l } 
\text { Year } & 6 \% & 10 \% & 12 \% \
\hline 1 & 0.943 & 0.909 & 0.893 \
2 & 1.833 & 1.736 & 1.690 \
3 & 2.673 & 2.487 & 2.402 \
4 & 3.465 & 3.170 & 3.037 \
5 & 4.212 & 3.791 & 3.605
\end{array}$$
-Using the tables above, what would be the present value of $15,000 to be received at the end of each of the next 2 years, assuming an earnings rate of 6%?

Accepted Answer

A)  $27,495 
B)  $26,040 
C)  $30,000 
D)  $25,350 
A)  $27,495 
B)  $26,040 
C)  $30,000 
D)  $25,350

Question 7

Which of the following is an advantage of the cash payback method?

Accepted Answer

A)  easy to use 
B)  takes into consideration the time value of money 
C)  includes the cash flow over the entire life of the proposal 
D)  emphasizes accounting income 
A)  easy to use 
B)  takes into consideration the time value of money 
C)  includes the cash flow over the entire life of the proposal 
D)  emphasizes accounting income

Question 8

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

Accepted Answer

The time value of money means that a dol

Question 9

Below is a table for the present value of $1 at compound interest. $$\begin{array} { l l l l } 
\text { Year } & 6 \% & 10 \% & 12 \% \
\hline 1 & 0.943 & 0.909 & 0.893 \
2 & 0.890 & 0.826 & 0.797 \
3 & 0.840 & 0.751 & 0.712 \
4 & 0.792 & 0.683 & 0.636 \
5 & 0.747 & 0.621 & 0.567
\end{array}$$ Below is a table for the present value of an annuity of $1 at compound interest. $$\begin{array} { l l l l } 
\text { Year } & 6 \% & { 10 \% }&12\% \
\hline 1 & 0.943 & 0.909 & 0.893 \
2 & 1.833 & 1.736 & 1.690 \
3 & 2.673 & 2.487 & 2.402 \
4 & 3.465 & 3.170 & 3.037 \
5 & 4.212 & 3.791 & 3.605
\end{array}$$
-Using the tables above, what would be the internal rate of return of an investment of $210,600 that would generate an annual cash inflow of $50,000 for the next 5 years?

Accepted Answer

A)  6% 
B)  10% 
C)  12% 
D)  14% 
A)  6% 
B)  10% 
C)  12% 
D)  14%

Question 10

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?

Accepted Answer

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 
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

Question 11

Identify four capital investment evaluation methods discussed in the chapter and discuss the strengths and weaknesses of each method.

Accepted Answer

The four capital investment models discu

Question 12

Match each of the methods that follow with the correct category a-b).
-Cash payback method

Accepted Answer

A) Methods that does not use present value 
B) Methods that uses present value 
A) Methods that does not use present value 
B) Methods that uses present value

Question 13

Match each definition that follows with the term a-f) it defines.
-A measure of the average income as a percent of the average investment

Accepted Answer

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

Question 14

Below is a table for the present value of $1 at compound interest. $$\begin{array} { l l l l } 
\text { Year } & 6 \% & 10 \% & 12 \% \
\hline 1 & 0.943 & 0.909 & 0.893 \
2 & 0.890 & 0.826 & 0.797 \
3 & 0.840 & 0.751 & 0.712 \
4 & 0.792 & 0.683 & 0.636 \
5 & 0.747 & 0.621 & 0.567
\end{array}$$ Below is a table for the present value of an annuity of $1 at compound interest. $$\begin{array} { l l l l } 
\text { Year } & 6 \% & { 10 \% }&12\% \
\hline 1 & 0.943 & 0.909 & 0.893 \
2 & 1.833 & 1.736 & 1.690 \
3 & 2.673 & 2.487 & 2.402 \
4 & 3.465 & 3.170 & 3.037 \
5 & 4.212 & 3.791 & 3.605
\end{array}$$
-Using the tables above, what is the present value of $3,000 rounded to the nearest dollar) to be received at the end of each of the next 4 years, assuming an earnings rate of 12%?

Accepted Answer

A)  $10,815 
B)  $7,206 
C)  $9,111 
D)  $1,908 
A)  $10,815 
B)  $7,206 
C)  $9,111 
D)  $1,908

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

Below is a table for the present value of $1 at compound interest. $$\begin{array} { l l l l } 
\text { Year } & 6 \% & 10 \% & 12 \% \
\hline 1 & 0.943 & 0.909 & 0.893 \
2 & 0.890 & 0.826 & 0.797 \
3 & 0.840 & 0.751 & 0.712 \
4 & 0.792 & 0.683 & 0.636 \
5 & 0.747 & 0.621 & 0.567
\end{array}$$ Below is a table for the present value of an annuity of $1 at compound interest. $$\begin{array} { l l l l } 
\text { Year } & 6 \% & { 10 \% }&12\% \
\hline 1 & 0.943 & 0.909 & 0.893 \
2 & 1.833 & 1.736 & 1.690 \
3 & 2.673 & 2.487 & 2.402 \
4 & 3.465 & 3.170 & 3.037 \
5 & 4.212 & 3.791 & 3.605
\end{array}$$
-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%?

Accepted Answer

A)  $19,800 
B)  $17,075 
C)  $79,250 
D)  $15,525 
A)  $19,800 
B)  $17,075 
C)  $79,250 
D)  $15,525

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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 
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

Question 19

Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

Accepted Answer

A)  price-level index 
B)  future value index 
C)  rate of investment index 
D)  present value index 
A)  price-level index 
B)  future value index 
C)  rate of investment index 
D)  present value index

Question 20

For Years 1-5, 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

A) True 
 B)False

Exam 25: Capital Investment Analysis

Methods that ignore present value in capital investment analysis include the internal rate of return method.

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

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

The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period.

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

Which of the following is an advantage of the cash payback method?

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

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?

Identify four capital investment evaluation methods discussed in the chapter and discuss the strengths and weaknesses of each method.

Match each of the methods that follow with the correct category a-b). -Cash payback method

Match each definition that follows with the term a-f) it defines. -A measure of the average income as a percent of the average investment

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

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

Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

For Years 1-5, 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.

Introduction to Accounting and Business

Analyzing Transactions

The Adjusting Process

Completing the Accounting Cycle

Accounting for Merchandising Businesses

Inventories

Sarbanes-Oxley, Internal Control, and Cash

Receivables

Fixed Assets and Intangible Assets

Current Liabilities and Payroll

Corporations: Organization, Stock Transactions, and Dividends

Long-Term Liabilities: Bonds and Notes

Investments and Fair Value Accounting

Statement of Cash Flows

Financial Statement Analysis

Managerial Accounting Concepts and Principles

Job Order Costing

Process Cost Systems

Cost Behavior and Cost-Volume-Profit Analysis

Variable Costing for Management Analysis

Budgeting

Performance Evaluation Using Variances From Standard Costs

Performance Evaluation for Decentralized Operations

Differential Analysis, Product Pricing, and Activity-Based Costing

Cost Allocation and Activity-Based Costing

Lean Principles, Lean Accounting, and Activity Analysis

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