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Indicate whether the statement is true or false.
1. The computations required for the net present value method only uses the present value for annuity tables to determine
the value of an investment.
a. True
b. False
2. Qualitative considerations in capital investment decisions are most appropriate for strategic investments or those that
are designed to affect a company’s long-term ability to generate profits.
a. True
b. False
3. When evaluating a proposal by use of the net present value method, if there is a deficiency of the present value of future
cash inflows over the amount to be invested, the proposal should be accepted.
a. True
b. False
4. If net present value is positive, a firm should forego an investment project.
a. True
b. False
5. The process by which management allocates available investment funds among competing capital investment proposals
is termed capital rationing.
a. True
b. False
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 discount period.
a. True
b. False
7. Qualitative considerations are best evaluated using present value methods such as internal rate of return.
a. True
b. False
8. Average rate of return equals average investment divided by estimated average annual income.
a. True
b. False
9. 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. True
b. False
10. Return on stockholders’ equity is calculated as the ratio of average stockholders’ equity to operating income.
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a. True
b. False
11. A qualitative characteristic that influences capital investment analysis is manufacturing productivity.
a. True
b. False
12. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed
assets is called capital investment analysis.
a. True
b. False
13. Leasing assets may be a favorable alternative to purchasing assets if the asset has a high risk of becoming obsolete.
a. True
b. False
14. The internal rate of return method of analyzing capital investment proposals uses the present value concept to compute
the rate of return expected from the proposals.
a. True
b. False
15. The average rate of return method of capital investment analysis gives consideration to the present value of future cash
flows.
a. True
b. False
16. The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash
flow.
a. True
b. False
17. 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.
a. True
b. False
18. A series of unequal cash flows at fixed intervals is termed an annuity.
a. True
b. False
19. The anticipated purchase of a fixed asset for $400,000 with a useful life of five years and no residual value is expected
to yield total income of $150,000 (recognition is given to the effect of straight-line depreciation on the investment). The
expected average rate of return is 15%.
a. True
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b. False
20. Internal rate of return is often called the payback rate of return.
a. True
b. False
21. The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and a $40,000 residual value, is
expected to yield total net income of $200,000 for five years. The expected average rate of return on investment is 18.2%.
a. True
b. False
22. The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow.
a. True
b. False
23. 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 is less than the rate used in the analysis.
a. True
b. False
24. When evaluating a proposal by use of the net present value method, if the present value is less than the amount to be
invested, the rate of return on the proposal is more than the rate used in the analysis.
a. True
b. False
25. Care must be taken while making capital investment decisions since it involves a long-term commitment of funds and
affects operations for several years.
a. True
b. False
26. If the average rate of return on an asset exceeds the minimum rate of return for investments, the asset should be
purchased.
a. True
b. False
27. A company should purchase an asset when the minimum rate of return exceeds its average rate of return.
a. True
b. False
28. The methods of evaluating capital investment proposals can be grouped into two general categories: (1) average rate
of return method and (2) cash payback method.
a. True
b. False
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29. If a proposed expenditure of $80,000 for a fixed asset with a four-year life has an annual expected net cash flow and
net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years.
a. True
b. False
30. The methods of evaluating capital investment proposals can be grouped into two general categories: (1) methods that
ignore present values and (2) methods that use present values.
a. True
b. False
31. 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.
a. True
b. False
32. Average total assets divided by average stockholders’ equity is the formula for financial leverage.
a. True
b. False
33. In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash
payback and the average rate of return methods.
a. True
b. False
34. The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and a $40,000 residual value, is
expected to yield total net income of $500,000 for five years. The expected average rate of return is 50%.
a. True
b. False
35. A present value index can be used to rank competing capital investment proposals when the net present value method
is used.
a. True
b. False
36. For years 1 through 5, a proposed expenditure of $250,000 for a fixed asset with a five-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 2.5 years.
a. True
b. False
37. Average rate of return equals estimated average annual income divided by average investment.
a. True
b. False
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38. For years 1 through 5, a proposed expenditure of $400,000 for a fixed asset with a five-year life has expected net
income of $50,000, $40,000, $20,000, $20,000, and $20,000, respectively, and net cash flows of $130,000, $120,000,
$100,000, $100,000, and $100,000, respectively. The cash payback period is 3.5 years.
a. True
b. False
39. If a proposed expenditure of $400,000 for a fixed asset with a four-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.
a. True
b. False
40. The process by which management allocates available investment funds among competing capital investment
proposals is termed present value analysis.
a. True
b. False
41. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed
assets is called cost-volume-profit analysis.
a. True
b. False
42. Methods that ignore present value in capital investment analysis include the cash payback method.
a. True
b. False
43. One of the qualitative characteristics that influence capital investment analysis is product quality.
a. True
b. False
44. A capital expenditures budget summarizes the decisions made for the acquisition of fixed assets.
a. True
b. False
45. When evaluating a proposal by use of the cash payback method, if net cash flows exceed the capital investment within
the time deemed acceptable by management, the proposal should be accepted.
a. True
b. False
46. In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their
present values.
a. True
b. False
47. The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is
expected to yield total net income of $300,000 for five years. The expected average rate of return is 30%.
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a. True
b. False
48. The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is
expected to yield total net income of $200,000 for five years. The expected average rate of return on investment computed
is 20%.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
49. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed
assets is called _____.
a. absorption cost analysis
b. variable cost analysis
c. capital investment analysis
d. cost-volume-profit analysis
50. 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?
a. Price-level index
b. Present value factor
c. Annuity
d. Present value index
51. The expected average rate of return for a proposed investment of $900,000 in a fixed asset, with a useful life of five
years, recognition is given to the effect of straight-line depreciation on the investment, no residual value, and an expected
total net income of $360,000 for the five years, is _____.
a. 18.5%
b. 40%
c. 12.5%
d. 16%
52. In general, present value methods of analyzing capital investments are more desirable than methods ignoring present
values because _____.
a. the calculations in methods that ignore present value are more complex than those in methods using present value
b. the present value methods consider that a dollar today is worth more than a dollar in the future due to the potential
earning power of that dollar
c. the calculations in methods that consider present value are less complex than those methods ignoring present
value
d. the present value methods consider that a dollar in the future is worth more than a dollar today due to the potential
earning power of that dollar
53. If the rate of earnings is 12% and the cash to be received in two years is $20,000, determine the present value amount,
using the following partial table of present value of $1 at compound interest.
Year 6% 10% 12%
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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
a. $16,520
b. $15,940
c. $14,240
d. $17,860
54. Which of the following is an advantage of the internal rate of return method?
a. It takes into account cash flows occurring only until the time the initial investment is completely paid back.
b. It does not use present value concepts in valuing cash flows occurring in different periods because this concept
can give incorrect results.
c. It ranks proposals based upon the cash flows over their complete useful life, even if the project lives are not the
same.
d. It assumes the cash received from a proposal can be reinvested at the minimum desired rate of return.
55. Purchase of a new machine to replace an old machine is an example of _____.
a. breakeven analysis
b. cost-volume-profit analysis
c. capital investment analysis
d. just-in-time inventory analysis
56. Zed Corporation is evaluating the purchase of a machine that costs $275,000. The annual cash revenues from the
machine would be $50,000, and the annual cash expenses of the machine would be $10,000. What is the estimated cash
payback period for the machine?
a. 8.5 years
b. 3.8 years
c. 6.9 years
d. 5.2 years
57. The management of Retz Corporation is considering the purchase of a new machine costing $500,000. The company’s
desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for one through five years are
0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in
determining the acceptability in this situation:
Year Income from Operations Net Cash Flow
1 $100,000 $200,000
2 80,000 170,000
3 50,000 130,000
4 10,000 80,000
5 10,000 80,000
The cash payback period for this investment is _____.
a. 5 years
b. 3 years
c. 2 years
d. 4 years
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58. Assume in analyzing alternative proposals that Proposal F has a useful life of six years and Proposal J has a useful life
of nine years. What is one widely used method that makes the proposals comparable?
a. Adjust the life of Proposal F to a time period that is equal to that of Proposal J and add its estimated residual value
to the cash inflow at the end of year nine.
b. Adjust the life of Proposal J to a time period that is equal to that of Proposal F and add its estimated residual value
to the cash inflow at the end of year six.
c. Adjust the life of Proposal F and Proposal J to a time period equal to the average of six and nine years (7.5 years)
and add its estimated residual value to the cash inflow at the end of operating life.
d. Adjust the life of Proposal J to a time period that is equal to that of Proposal F and deduct last three years cash
inflow of Proposal J from its total cash inflow.
59. The management of Retz Corporation is considering the purchase of a new machine costing $500,000. The company’s
desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for one through five years are
0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in
determining the acceptability in this situation:
Year Income from Operations Net Cash Flow
1 $100,000 $200,000
2 80,000 170,000
3 50,000 130,000
4 10,000 80,000
5 10,000 80,000
The average rate of return for this investment is _____.
a. 18%
b. 16%
c. 5%
d. 20%
60. All of the following qualitative considerations may impact upon capital investments analysis except _____.
a. manufacturing productivity
b. manufacturing sunk cost
c. manufacturing flexibility
d. manufacturing control
61. Which of the following formulas is used to calculate the present value index?
a. Total present value of net cash flow/Equal annual net cash flows
b. Amount to be invested/Total present value of net cash flow
c. Equal annual net cash flows/Total present value of net cash flow
d. Total present value of net cash flow/Amount to be invested
62. Which of the following concepts is being considered when a company making a capital investment decision converts
all the dollar cash inflows and outflows over the life of a project to their present value?
a. The accounting period concept
b. The time value of money concept
c. The realization concept
d. The matching concept
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63. A company’s profit margin is 15.5%, its asset turnover 0.72, and its financial leverage is 3.25. Determine the
company’s return on shareholders’ equity.
a. 42.5%
b. 36.3%
c. 51.7%
d. 28.4%
64. Which of the following is the formula to calculate the return on stockholders’ equity?
a. Operating income/Average stockholders’ equity
b. Gross income/Average stockholders’ equity
c. Average stockholders’ equity/Operating income
d. Average stockholders’ equity/Gross income
65. Using the following partial table of present value of $1 at compound interest, compute the present value of $20,000
(rounded to nearest dollar) to be received one year from today, assuming an earnings rate of 15%.
Year 10% 15% 20%
1 0.909 0.870 0.833
2 0.826 0.756 0.694
3 0.751 0.658 0.579
4 0.683 0.572 0.482
5 0.621 0.497 0.402
6 0.564 0.432 0.335
7 0.513 0.376 0.279
a. $17,400
b. $17,000
c. $20,000
d. $15,451
66. In capital rationing, alternative proposals that survive initial screening and further analysis using present value
methods are normally evaluated in terms of _____.
a. net income
b. qualitative factors
c. maximum cost
d. net cash flow
67. The process by which management allocates available investment funds among competing investment proposals is
called _____.
a. investment capital management
b. capital budgeting
c. cost-volume-profit analysis
d. capital rationing
68. In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum
standards. Which of the following evaluation methods are normally used?
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
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d. Internal rate of return and net present value methods
69. If the desired rate of return on a project is 10%, determine the present value of $40,000 to be received in four years
using the following partial table of present value of $1 at compound interest.
Year 6% 10% 12%
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
a. $27,320
b. $25,440
c. $31,680
d. $30,040
70. The management of Retz Corporation is considering the purchase of a new machine costing $500,000. The company’s
desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for one through five years are
0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in
determining the acceptability in this situation:
Year Income from Operations Net Cash Flow
1 $100,000 $200,000
2 80,000 170,000
3 50,000 130,000
4 10,000 80,000
5 10,000 80,000
The present value index for this investment is _____.
a. 1.30
b. 0.95
c. 1.05
d. 0.70
71. The rate of return is 10% and the cash to be received in one year is $25,000. Determine the present value amount,
using the following partial table of present value of $1 at compound interest:
Year 6% 10% 12%
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
a. $22,500
b. $25,000
c. $27,275
d. $22,725
72. A project analysis using the net present value method indicates that the present value of cash inflows is $120,000, and
the total amount of investment required at the start of the project is $100,000. Which of the following statements best
describes the results of the project analysis?
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a. The project should be accepted because the actual rate of return expected from the project is more than the
minimum desired rate of return.
b. The project should be accepted because the actual rate of return expected from the project is less than the
minimum desired rate of return.
c. The project should be rejected because the actual rate of return expected from the project is more than the
minimum desired rate of return.
d. The project should be rejected because the actual rate of return expected from the project is less than the
minimum desired rate of return.
73. Mars Corp. is choosing between two different capital investment proposals. Machine A has a useful life of four years,
and Machine B has a useful life of six 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 six years, it could be sold at the end of four years
for $35,000.
Year Present Value
of $1 at 10%
1 0.909
2 0.826
3 0.751
4 0.683
5 0.621
6 0.513
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 three years of its useful life.
Which of the following statements portrays the most accurate analysis between the two proposals?
a. Mars should invest in Machine A because the net present value of Machine A after four years is higher than the
net present value of Machine B after four years.
b. Mars should invest in Machine B because the net present value of Machine A after four years is lower and the net
present value of Machine B after six years.
c. Mars should invest in Machine B because the net present value of Machine A after four years is lower than the net
present value of Machine B after four years.
d. Mars should invest in Machine A because the net present value of Machine A after four years is higher than the
net present value of Machine B after six years.
74. Periods experiencing increase in price levels are known as periods of _____.
a. inflation
b. recession
c. depression
d. deflation
75. The amount of the estimated average income for a proposed investment of $60,000 in a fixed asset, giving effect to
depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield
of $22,300, is _____.
a. $10,800
b. $5,575
c. $5,400
d. $15,000
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76. Using the following partial table of present value of $1 at compound interest, determine the present value of $35,000
to be received three years hence, with earnings at the rate of 10% a year.
Year 6% 10% 12%
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
a. $26,285
b. $29,400
c. $24,920
d. $23,905
77. Which of the following is a qualitative consideration that influences capital investments analysis?
a. Time value of money
b. Internal rate of return
c. Changes in price level
d. Manufacturing flexibility
78. Which of the following capital investment evaluation methods uses present values while evaluating different projects?
a. The break-even analysis method
b. The cash payback method
c. The annuity indexation method
d. The internal rate of return method
79. Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000
to be received three years hence, with earnings at the rate of 10% a year.
Year 6% 10% 12%
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
a. $14,240
b. $16,800
c. $15,020
d. $15,840
80. Which of the following is a factor that complicates capital investment analysis?
a. Equal proposal lives
b. Certainty of estimates of revenues, expenses, and cash flows
c. Sunk cost
d. Leasing alternative
81. The management of London Corporation is considering the purchase of a new machine costing $750,000. The
company’s desired rate of return is 6%. The present value factors for $1 at compound interest of 6% for one through five
years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively. In addition to this information, use the following data in
determining the acceptability in this situation:
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Year Income from Operations Net Cash Flow
1 $37,500 $187,500
2 37,500 187,500
3 37,500 187,500
4 37,500 187,500
5 37,500 187,500
The net present value for this investment is _____.
a. positive $39,750
b. positive $118,145
c. negative $118,145
d. negative $39,750
82. The two methods that consider the time value of money concept to analyze capital investment proposals are _____.
a. the net present value method and the internal rate of return method
b. the net present value method and the average rate of return method
c. the internal rate of return method and the average rate of return method
d. the cash payback method and the net present value method
83. The management of Retz Corporation is considering the purchase of a new machine costing $500,000. The company’s
desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for one through five years are
0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in
determining the acceptability in this situation:
Year Income from Operations Net Cash Flow
1 $100,000 $200,000
2 80,000 170,000
3 50,000 130,000
4 10,000 80,000
5 10,000 80,000
The net present value for this investment is _____.
a. positive $150,000
b. negative $24,170
c. positive $24,170
d. negative $150,000
84. The management of London Corporation is considering the purchase of a new machine costing $750,000. The
company’s desired rate of return is 6%. The present value factors for $1 at compound interest of 6% for 1 through five
years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively. In addition to this information, use the following data in
determining the acceptability in this situation:
Year Income from Operations Net Cash Flow
1 $37,500 $187,500
2 37,500 187,500
3 37,500 187,500
4 37,500 187,500
5 37,500 187,500
The average rate of return for this investment is _____.