Question 1

Match each of the methods that follow with the correct category a-b).
-Average rate of return method

Accepted Answer

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

Question 2

Determine the average rate of return for a project that is estimated to yield total income of $250,000 over 4 years, cost $480,000, and has a $20,000 residual value.

Accepted Answer

The answer of Determine the average rate of return for...

Question 3

Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of

Accepted Answer

A)  sales mix analysis 
B)  variable cost analysis 
C)  capital investment analysis 
D)  variable cost analysis.

Question 4

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 discount period.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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?

Accepted Answer

A)  Ignore the fact that Proposal F has a useful life of 6 years and treat it as if it has a useful life of 9 years. 
B)  Adjust the life of Proposal J to a time period that is equal to that of Proposal F by estimating a residual value at the end of year 6. 
C)  Ignore the useful lives of 6 and 9 years and find an average 7 1/2 years). 
D)  Ignore the useful lives of 6 and 9 years and compute the average rate of return.

Question 8

The expected average rate of return for a proposed investment of $6,000,000 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 $12,000,000 over the 20 years is

Accepted Answer

A)  20% 
B)  10% 
C)  40% 
D)  5%

Question 9

T-Bone 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 is $141,000. Should the company invest in this project?

Accepted Answer

A)  yes, because net present value is +$9,000 
B)  yes, because net present value is -$9,000 
C)  no, because net present value is +$9,000 
D)  no, because net present value is -$9,000

Question 10

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 of this investment: 
-The present value index for this investment is

Accepted Answer

A)  1.00 
B)  0.95 
C)  1.25 
D)  1.05

Question 11

Proposals L and K each cost $600,000, have 6-year lives, and have expected total cash flows of $720,000. Proposal L is expected to provide equal annual net cash flows of $170,000, while the net cash flows for Proposal K are as follows: $$\begin{array} { l r } 
\text { Year 1 } & \$ 250,000 \
\text { Year 2 } & 200,000 \
\text { Year 3 } & 100,000 \
\text { Year 4 } & 50,000 \
\text { Year 5 } & 100,000 \
\text { Year 6 } & 20,000 \
 & \$ 720,000
\end{array}$$ Determine the cash payback period for each proposal. Round your answers to two decimal places.

Accepted Answer

The answer of Proposals L and K each cost $600,000,...

Question 12

Average rate of return equals average investment divided by estimated average annual income.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is a present value method of analyzing capital investment proposals?

Accepted Answer

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

Question 14

BAM Co. is evaluating a project requiring a capital expenditure of $806,250. 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: $\begin{array}{lll}
\text { Year } & \text { Net Income } & \text { Net Cash Flow } \
1 & \$ 75,000 & \$ 285,000 \
2 & 102,000 & 290,000 \
3 & 109,500 & 190,000 \
4 & 36,000 & 125,000 \
\hline&\$322,500&\$890,000
\end{array}$ 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: a) the average rate of return on investment, including the effect of depreciation on the investment, and b) the net present value.

Accepted Answer

The answer of BAM Co. is evaluating a project requiring...

Question 15

A 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the estimated annual net income.

Accepted Answer

The answer of A 6-year project is estimated to cost...

Question 16

The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines and has asked the accountant to analyze them to determine the best cash payback. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Machine } A & \text { Machine B } & \text { Machine C } \
\hline \text { Annual cash flow } & \$ 40,000 & \$ 50,000 & \$ 75,000 \
\hline \text { Average investment } & \$ 300,000 & \$ 250,000 & \$ 500,000 \
\hline
\end{array}$$

Accepted Answer

A)  Machine A 
B)  Machine C 
C)  Machine B 
D)  All are equal.

Question 17

All of the following qualitative considerations may impact upon capital investment analysis except

Accepted Answer

A)  time value of money 
B)  employee morale 
C)  the impact on product quality 
D)  manufacturing flexibility

Question 18

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.

Accepted Answer

A) True 
 B)False

Question 19

Using the following partial table of present value of $1 at compound interest, the present value of $15,000 to be received 3 years hence with earnings at the rate of 6% a year is $$\begin{array} { l l l l } 
\text { Year } & 6 \% & 10 \% & 12 \% \
\hline 1 & 0.943 & 0.909 & 0.893 \
2 & 0.890 & 0.826 & 0.797 \
3 & 0.840 & 0.751 & 0.712 \
4 & 0.792 & 0.683 & 0.636
\end{array}$$

Accepted Answer

A)  $12,600 
B)  $11,880 
C)  $13,350 
D)  $11,265

Question 20

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 of this investment: $$\begin{array} { c l l } 
& \text { Income from } & \text { Net Cash } \
\text { Year } & \text { Operations } & \text { Flow } \
1 & \$ 18,750 & \$ 93,750 \
2 & 18,750 & 93,750 \
3 & 18,750 & 93,750 \
4 & 18,750 & 93,750 \
5 & 18,750 & 93,750
\end{array}$$
-The average rate of return for this investment is

Accepted Answer

A)  5% 
B)  10% 
C)  25% 
D)  15%

Exam 25: Capital Investment Analysis

Match each of the methods that follow with the correct category a-b) . -Average rate of return method

Determine the average rate of return for a project that is estimated to yield total income of $250,000 over 4 years, cost $480,000, and has a $20,000 residual value.

Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of

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 discount period.

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

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

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?

The expected average rate of return for a proposed investment of $6,000,000 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 $12,000,000 over the 20 years is

T-Bone 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 is $141,000. Should the company invest in this project?

Average rate of return equals average investment divided by estimated average annual income.

Which of the following is a present value method of analyzing capital investment proposals?

A 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the estimated annual net income.

All of the following qualitative considerations may impact upon capital investment analysis except

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.