Question 1

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

Accepted Answer

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

Question 2

Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received four years hence, with earnings at the rate of 10% a year:

Accepted Answer

A)  $13,660 
B)  $12,720 
C)  $15,840 
D)  $10,400 
A)  $13,660 
B)  $12,720 
C)  $15,840 
D)  $10,400

Question 3

What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?

Accepted Answer

Capital investment analysis is the proce

Question 4

The amount of the average investment for a proposed investment of $90,000 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:

Accepted Answer

A)  $10,800 
B)  $21,600 
C)  $ 5,400 
D)  $45,000 
A)  $10,800 
B)  $21,600 
C)  $ 5,400 
D)  $45,000

Question 5

Below is a table for the present value of $1 at Compound interest.   Below is a table for the present value of an annuity of $1 at compound interest.
  Using the tables above, what would be the present value of $10,000 (rounded to the nearest dollar) to be received three years from today, assuming an earnings rate of 6%?

Accepted Answer

A)  $8,400 
B)  $8,900 
C)  $7,920 
D)  $11,905 
A)  $8,400 
B)  $8,900 
C)  $7,920 
D)  $11,905

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:   The net present value for this investment is:

Accepted Answer

A)  Negative $118,145 
B)  Positive $118,145 
C)  Positive $19,875 
D)  Negative $19,875 
A)  Negative $118,145 
B)  Positive $118,145 
C)  Positive $19,875 
D)  Negative $19,875

Question 8

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company's desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true?

Accepted Answer

A)  The project should not be accepted because the net present value is negative. 
B)  The desired rate of return used to calculate the present value of the future cash flows is less than 12%. 
C)  The desired rate of return used to calculate the present value of the future cash flows is more than 12%. 
D)  The desired rate of return used to calculate the present value of the future cash flows is equal to 12%. 
A)  The project should not be accepted because the net present value is negative. 
B)  The desired rate of return used to calculate the present value of the future cash flows is less than 12%. 
C)  The desired rate of return used to calculate the present value of the future cash flows is more than 12%. 
D)  The desired rate of return used to calculate the present value of the future cash flows is equal to 12%.

Question 9

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows generated by the project is $145,000. Should they invest in this project?

Accepted Answer

A)  yes, because the rate of return on the project exceeds the desired rate of return used to calculate the present value of the future cash flows. 
B)  no, because the rate of return on the project is less than the desired rate of return used to calculate the present value of the future cash flows. 
C)  no, because net present value is +$5,000 
D)  yes, because the rate of return on the project is equal to the desired rate of return used to calculate the present value of the future cash flows. 
A)  yes, because the rate of return on the project exceeds the desired rate of return used to calculate the present value of the future cash flows. 
B)  no, because the rate of return on the project is less than the desired rate of return used to calculate the present value of the future cash flows. 
C)  no, because net present value is +$5,000 
D)  yes, because the rate of return on the project is equal to the desired rate of return used to calculate the present value of the future cash flows.

Question 10

Periods in time that experience increasing price levels are known as periods of:

Accepted Answer

A)  inflation 
B)  recession 
C)  depression 
D)  deflation 
A)  inflation 
B)  recession 
C)  depression 
D)  deflation

Question 11

Which of the following is true of the cash payback period?

Accepted Answer

A)  The longer the payback, the longer the estimated life of the asset. 
B)  The longer the payback, the sooner the cash spent on the investment is recovered. 
C)  The shorter the payback, the less likely the possibility of obsolescence. 
D)  All of the above are correct. 
A)  The longer the payback, the longer the estimated life of the asset. 
B)  The longer the payback, the sooner the cash spent on the investment is recovered. 
C)  The shorter the payback, the less likely the possibility of obsolescence. 
D)  All of the above are correct.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

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

Question 16

The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:   The net present value for this investment is:

Accepted Answer

A)  Positive $20,140 
B)  Negative $20,140 
C)  Positive $19,875 
D)  Negative $19,875 
A)  Positive $20,140 
B)  Negative $20,140 
C)  Positive $19,875 
D)  Negative $19,875

Question 17

A project has estimated annual net cash flows of $50,000. It is estimated to cost $180,000. Determine the cash payback period.

Accepted Answer

3.6 years

Question 18

The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:   The present value index for this investment is:

Accepted Answer

A)  1.00 
B)  .95 
C)  1.25 
D)  1.05 
A)  1.00 
B)  .95 
C)  1.25 
D)  1.05

Question 19

The accounting rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

Accepted Answer

A) True 
 B)False

Question 20

A company is planning to purchase a machine that will cost $24,000, have a six-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 cash flows per year of $6,000. The accounting rate of return for the machine is 16.7%.

Accepted Answer

A) True 
 B)False

Exam 25: Capital Investment Analysis

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

Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received four years hence, with earnings at the rate of 10% a year:

What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?

The amount of the average investment for a proposed investment of $90,000 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 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 company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company's desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true?

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows generated by the project is $145,000. Should they invest in this project?

Periods in time that experience increasing price levels are known as periods of:

Which of the following is true of the cash payback period?

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

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

If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected.

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

A project has estimated annual net cash flows of $50,000. It is estimated to cost $180,000. Determine the cash payback period.

The accounting rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life.

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 and Product Pricing

Cost Allocation and Activity-Based Costing

Cost Management for Just-In-Time Environments

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