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Chapter 15
41. 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
42. Leasing assets may be a favorable alternative to purchasing assets if the asset has a high risk of becoming obsolete.
a.
True
b.
False
Chapter 15
43. The process by which management allocates available investment funds among competing capital investment
proposals is termed present value analysis.
a.
True
b.
False
44. The process by which management allocates available investment funds among competing capital investment
proposals is termed capital rationing.
a.
True
b.
False
Chapter 15
45. A capital expenditures budget summarizes the decisions made for the acquisition of fixed assets.
a.
True
b.
False
46. 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
Chapter 15
47. Average total assets divided by average stockholders' equity is the formula for financial leverage.
a.
True
b.
False
48. Return on stockholders' equity is calculated as the ratio of average stockholders' equity to operating income.
a.
True
b.
False
Chapter 15
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. 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.
Chapter 15
51. 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.
52. 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
Chapter 15
53. 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.
54. Gamma Inc. is considering the purchase of a machine costing $450,000, having a useful life of five years.
Depreciation would be recognized using the straight-line method, and the machine would have no residual value at the
end of its useful life. The estimated total net income from the machine is $600,000. The average investment for the
machine is:
Chapter 15
a.
$600,000.
b.
$150,000.
c.
$225,000.
d.
$300,000.
55. 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 5 years, is:
a.
18.5%.
b.
40%.
c.
12.5%.
d.
16%.
Chapter 15
56. 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 5 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:
a.
5%.
b.
10%.
c.
25%.
d.
15%.
57. 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 5 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
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3
37,500
187,500
4
37,500
187,500
5
37,500
187,500
The cash payback period for this investment is:
a.
3 years.
b.
5 years.
c.
20 years.
d.
4 years.
58. 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 1 through 5 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.
Chapter 15
59. Alpha Inc. is evaluating the purchase of a machine costing $350,000. The expected useful life of the machine is 5
years at the end which it would have no residual value, and the depreciation is assumed to be on straight-line basis. The
estimated total income from the machine is $500,000. The expected average rate of return for this machine is:
a.
26.4%.
b.
42.6%.
c.
38.5%.
d.
57.1%.
60. 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 1 through 5 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:
Chapter 15
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%.
61. 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
Chapter 15
62. The payback period is determined using which of the following formulas?
a.
Amount to be invested / Annual average net income
b.
Annual net cash flow / Amount to be invested
c.
Annual average net income / Amount to be invested
d.
Amount to be invested / Annual net cash flows
63. A disadvantage of the average rate of return method of capital investment analysis is that:
a.
it is very complex to compute.
b.
it does not include the entire amount of income earned over the life of a project.
c.
it does not emphasize accounting income, which is often used by investors and creditors in
evaluating management performance.
d.
it does not directly consider the timing of the expected cash flows.
Chapter 15
64. An anticipated purchase of equipment for $1,000,000, with a useful life of 8 years and no residual value, is expected
to yield the following annual net incomes and net cash flows:
Year
Net Income
Net Cash Flow
1
$210,000
$400,000
2
180,000
320,000
3
145,000
280,000
4
125,000
270,000
5
60,000
220,000
6
60,000
220,000
7
60,000
220,000
8
60,000
220,000
What is the cash payback period?
a.
5 years
b.
4 years
c.
6 years
d.
3 years
Chapter 15
65. 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
66. 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
Chapter 15
67. 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?
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.
Chapter 15
68. 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.
69. Which of the following capital investment evaluation methods uses present values while evaluating different projects?
a.
The breakeven analysis method
b.
The cash payback method
c.
The annuity indexation method
d.
The internal rate of return method
Chapter 15
70. 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
71. 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 12% 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.
$13,660
b.
$15,840
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c.
$12,720
d.
$10,400
72. When several alternative investment proposals of the same amount are being considered, the one with the largest net
present value is the most desirable. If the alternative proposals involve different amounts of investment, it is useful to
prepare a relative ranking of the proposals by using a(n):
a.
average rate of return.
b.
cash payback period.
c.
present value index.
d.
price-level index.
Chapter 15
73. The two methods that use present values to analyse capital investment proposal consider the _____.
a.
time value of money concept
b.
going concern concept
c.
historical cost concept
d.
conservatism concept
74. Cash payment for monthly rent is an example of _____.
a.
the present value index
b.
discounted cash flow
c.
compounding
d.
an annuity
