Question 1

Capital investment analysis ensures that the resources are used wisely.

Accepted Answer

A) True 
 B)False

Question 2

The acceptable proposals are ranked in order of net present value, payback period or rate of return in capital investment decisions.

Accepted Answer

A) True 
 B)False

Question 3

Cost analysis for capital investment decisions is best accomplished by techniques that

Accepted Answer

A)  discount cash flows over a project's life. 
B)  emphasize the liquidity of invested costs. 
C)  clearly distinguish different cost behavior patterns. 
D)  accrue, defer, and allocate costs to short time periods. 
A)  discount cash flows over a project's life. 
B)  emphasize the liquidity of invested costs. 
C)  clearly distinguish different cost behavior patterns. 
D)  accrue, defer, and allocate costs to short time periods.

Question 4

When deciding whether to keep or replace a fixed asset, the asset's carrying value could be relevant to the decision.

Accepted Answer

A) True 
 B)False

Question 5

Automating the existing production process does not come under the purview of capital investment analysis.

Accepted Answer

A) True 
 B)False

Question 6

The proposals that will either meet company strategic goals or produce the minimum rate of return will receive serious review in the preliminary screening process.

Accepted Answer

A) True 
 B)False

Question 7

The cost of capital is the simple average rate of return that a company must pay to its long-term creditors and the shareholders.

Accepted Answer

A) True 
 B)False

Question 8

Annual net cash flows are defined as

Accepted Answer

A)  annual cash inflows minus annual cash outflows. 
B)  annual cash inflows minus annual cash outflows minus depreciation expense. 
C)  annual revenues minus expenses. 
D)  annual cash inflows minus capital investment. 
A)  annual cash inflows minus annual cash outflows. 
B)  annual cash inflows minus annual cash outflows minus depreciation expense. 
C)  annual revenues minus expenses. 
D)  annual cash inflows minus capital investment.

Question 9

The Wyckoff Company specializes in decorative fruit baskets. Currently, the company is analyzing purchase alternatives for a fruit-polishing machine. Data relevant to the decision are as follows:
   
a. Compute the payback period for each of the alternatives. Round answers to two decimal places.
b. Using the net present value method, prepare an analysis to determine which machine the company should purchase. (The company uses a 12 percent minimum desired rate of return.)

Accepted Answer

a. Payback period:
Machine X: $80,000 ÷

Question 10

The objective of capital budgeting is to help only in the preparation of reports that will be submitted to the managers.

Accepted Answer

A) True 
 B)False

Question 11

An advantage of the net present value method is that it considers the time value of money.

Accepted Answer

A) True 
 B)False

Question 12

The net present value method and other methods of capital investment analysis can be used for taking short-term decisions.

Accepted Answer

A) True 
 B)False

Question 13

What criteria must be met for accepting any capital expenditure proposal with respect to minimum rate of return on investment?

Accepted Answer

Most of the companies will fix a minimum

Question 14

The accounting rate-of-return method implements the effects of the time value of money.

Accepted Answer

A) True 
 B)False

Question 15

San Joaquin Manufacturing Company specializes in the production of precision tools. Management is in the process of selecting a new drill press. The press under consideration will cost $180,000 plus necessary installation charges of $25,000. Past experience indicates that the press will last for ten years and should have a residual value at the end of that period of about $15,000. Expected annual cash revenues from the press should average $66,000, and related cash operating costs should be around $30,000. Management has decided on a minimum desired before-tax rate of return of 12 percent.
Present value multipliers:
 $\begin{array}{lrrr} 
& \text { 6 Percent } & \mathbf{1 2} \text { Percent } & \mathbf{1 4} \text { Percent } \
\text { Present value of } \$ 1 \text { at end of ten years } & .558 & .322 & .270 \
\text { Present value of } \$ 1 \text { received in each of the next } & 7.360 & 5.650 & 5.216 \
\text { ten years }
\end{array}$ 
a. Using before-tax information and the net present value method to evaluate this capital investment, determine whether the company should purchase the drill press. Support your answer.
b. If management had decided on a minimum desired before-tax rate of return of 14 percent, should the drill press be purchased? Show all computations to support your answer.

Accepted Answer

a. Decision on purchase of drill press,

Question 16

When using the accounting rate-of-return method, the net income has to be averaged over the life of the investment.

Accepted Answer

A) True 
 B)False

Question 17

The following data have been gathered for a capital investment decision. The amounts relate to a 14 percent discount factor.
 $$\begin{array} { c c c } 
\text { End of Perind } & \text { Present Value af } \$ 1 & \text { Present Value af an Annuity af } \$ 1 \
1 & .877 & .877 \
2 & .769 & 1.646 \
3 & .675 & 2.321 \
4 & .592 & 2.913 \
5 & .519 & 3.432 \
6 & .456 & 3.888
\end{array}$$ 
a. Compute the present value of the following cash flows. Use a discount rate of 14 percent.
 $$\begin{array} { l r } 
\text { Year 1 } & \$ 50,000 \
\text { Year 2 } & 60,000 \
\text { Year 3 } & 40,000 \
\text { Year 4 } & 50,000 \
\text { Year 5 } & 40,000
\end{array}$$ 
b. What would have been the present value of the cash flows if they were received in equal installments over the five-year period at the same discount rate?
c. If the answers to parts (a) and (b) differ, explain the reason(s) why.

Accepted Answer

a.
 @#IMG-DLM& 
b. $240,000 ÷ 5 = $48,000 per year

Question 18

The payback period equals the cost of the capital investment divided by annual sales revenue.

Accepted Answer

A) True 
 B)False

Question 19

Capital investment analysis can be applied in case of expensive and long-term projects.

Accepted Answer

A) True 
 B)False

Question 20

Simple interest is the interest earned on a principal sum that is increased at the end of each period by the interest for that period.

Accepted Answer

A) True 
 B)False

Exam 28: Capital Investment Analysis

Capital investment analysis ensures that the resources are used wisely.

The acceptable proposals are ranked in order of net present value, payback period or rate of return in capital investment decisions.

Cost analysis for capital investment decisions is best accomplished by techniques that

When deciding whether to keep or replace a fixed asset, the asset's carrying value could be relevant to the decision.

Automating the existing production process does not come under the purview of capital investment analysis.

The proposals that will either meet company strategic goals or produce the minimum rate of return will receive serious review in the preliminary screening process.

The cost of capital is the simple average rate of return that a company must pay to its long-term creditors and the shareholders.

Annual net cash flows are defined as

The objective of capital budgeting is to help only in the preparation of reports that will be submitted to the managers.

An advantage of the net present value method is that it considers the time value of money.

The net present value method and other methods of capital investment analysis can be used for taking short-term decisions.

What criteria must be met for accepting any capital expenditure proposal with respect to minimum rate of return on investment?

The accounting rate-of-return method implements the effects of the time value of money.

When using the accounting rate-of-return method, the net income has to be averaged over the life of the investment.

The payback period equals the cost of the capital investment divided by annual sales revenue.

Capital investment analysis can be applied in case of expensive and long-term projects.

Simple interest is the interest earned on a principal sum that is increased at the end of each period by the interest for that period.

Uses of Accounting Information and the Financial Statements

Analyzing Business Transactions

Measuring Business Income

Completing the Accounting Cycle

Financial Reporting and Analysis

The Operating Cycle and Merchandising Operations

Internal Control

Inventories

Cash and Receivables

Current Liabilities and Fair Value Accounting

Long Term Assets

Contributed Capital

Long Term Liabilities

The Corporate Income Statement and the Statement of Stockholders Equity

The Statement of Cash Flows

Financial Performance Measurement

Partnerships

The Changing Business Environment-A Managers Pers

Cost Concepts and Cost Allocation

Costing Systems: Job Order Costing

Costing Systems Process Costing

Activity-Based Systems-Abm and Lean

Cost Behavior Analysis

The Budgeting Process

Performance Management and Evaluation

Standard Costing and Variance Analysis

Short Run Decision Analysis

Filters