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Chapter 15
1. 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
2. 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
Chapter 15
3. 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
4. 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
Chapter 15
5. 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
6. Average rate of return equals average investment divided by estimated average annual income.
a.
True
b.
False
Chapter 15
7. Average rate of return equals estimated average annual income divided by average investment.
a.
True
b.
False
8. A company should purchase an asset when the minimum rate of return exceeds its average rate of return.
a.
True
b.
False
Chapter 15
9. 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
10. The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow.
a.
True
b.
False
Chapter 15
11. 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
12. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected
to yield total net income of $200,000 for 5 years. The expected average rate of return on investment computed is 20%.
a.
True
b.
False
Chapter 15
13. 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
14. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected
to yield total net income of $300,000 for 5 years. The expected average rate of return is 30%.
a.
True
b.
False
Chapter 15
15. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and a $40,000 residual value, is
expected to yield total net income of $200,000 for 5 years. The expected average rate of return on investment is 18.2%.
a.
True
b.
False
16. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and a $40,000 residual value, is
expected to yield total net income of $500,000 for 5 years. The expected average rate of return is 50%.
a.
True
b.
False
Chapter 15
17. For years one through five, a proposed expenditure of $400,000 for a fixed asset with a 5-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
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 2.5 years.
a.
True
b.
False
Chapter 15
19. For years one through five, 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 2.5 years.
a.
True
b.
False
20. Methods that ignore present value in capital investment analysis include the cash payback method.
a.
True
b.
False
Chapter 15
21. The average rate of return method of capital investment analysis gives consideration to the present value of future cash
flows.
a.
True
b.
False
22. The anticipated purchase of a fixed asset for $400,000 with a useful life of 5 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
b.
False
Chapter 15
23. 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
24. 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
Chapter 15
25. If a proposed expenditure of $400,000 for a fixed asset with a 4-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
26. 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
Chapter 15
27. 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
28. 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
Chapter 15
29. The computations required for the net present value method are less than those the computation required for the
average rate of return method.
a.
True
b.
False
30. The computations required for the net present value method are more than the computation required for the average
rate of return method.
a.
True
b.
False
Chapter 15
31. 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
32. 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
Chapter 15
33. 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
34. 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
Chapter 15
35. Internal rate of return is often called the payback rate of return.
a.
True
b.
False
36. A series of unequal cash flows at fixed intervals is termed an annuity.
a.
True
b.
False
Chapter 15
37. 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
38. Qualitative considerations are best evaluated using present value methods such as internal rate of return.
a.
True
b.
False
Chapter 15
39. One of the qualitative characteristics that influence capital investment analysis is product quality.
a.
True
b.
False
40. A qualitative characteristic that influences capital investment analysis is manufacturing productivity.
a.
True
b.
False
