Chapter 25(10): Capital Investment Analysis
61.
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
62.
Decisions to install new equipment, replace old equipment, and purchase or construct a new building are
examples
of
a.
sales mix analysis
b.
variable cost analysis
c.
capital investment analysis
d.
variable cost analysis
63.
The methods of evaluating capital investment proposals can be separated into two general groups—present value
methods and
a.
past value methods
b.
straight-line methods
c.
reducing value methods
d.
methods that ignore present value
64.
Which of the following are two methods of analyzing capital investment proposals that both ignore present value?
a.
internal rate of return and average rate of return
b.
net present value and average rate of return
c.
internal rate of return and net present value
d.
average rate of return and cash payback method
65.
Which of the following is a method of analyzing capital investment proposals that ignores present value?
a.
internal rate of return
b.
net present value
c.
discounted cash flow
d.
average rate of return
66.
Which of the following are present value methods of analyzing capital investment proposals?
a.
internal rate of return and average rate of return
b.
average rate of return and net present value
c.
net present value and internal rate of return
d.
net present value and payback
67.
Which method of evaluating capital investment proposals uses the concept of present value to compute a rate
of
return?
a.
average rate of return
b.
accounting rate of return
c.
cash payback period
d.
internal rate of return
68.
Which of the following is a present value method of analyzing capital investment proposals?
a.
average rate of return
b.
cash payback method
c.
accounting rate of return
d.
net present value
69.
The method of analyzing capital investment proposals that divides the estimated average annual income by
the
average investment is
a.
cash payback method
b.
net present value method
c.
internal rate of return method
d.
average rate of return method
70.
The primary advantages of the average rate of return method are its ease of computation and the fact that
a.
it is especially useful to managers whose primary concern is liquidity
b.
there is less possibility of loss from changes in economic conditions and obsolescence when the
commitment
is short-term
c.
it emphasizes the amount of income earned over the life of the proposal
d.
rankings of proposals are necessary
71.
The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of 4
years, straight-line depreciation, no residual value, and an expected total net income of $360,000 for the 4 years,
is
a. 45%
b. 22.5%
c. 11.3%
d. 5.5%
72.
The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of
4
years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the 4 years,
is
a. $30,000
b. $21,600
c. $5,400
d. $60,000
73.
The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect
to
depreciation (straight-line method), with a useful life of 4 years, no residual value, and an expected total
income
yield of $25,300, is
a. $12,650
b. $25,300
c. $6,325
d. $45,000
74.
An anticipated purchase of equipment for $490,000 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
$60,000
$110,000
2
50,000
100,000
3
50,000
100,000
4
40,000
90,000
5
40,000
90,000
6
40,000
90,000
7
40,000
90,000
8
40,000
90,000
What is the cash payback period?
a.
5 years
b.
4 years
c.
6 years
d.
3 years
75.
Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to
have
a useful life of 6 years, a negligible residual value, an annual net cash flow of $150,000, and annual
operating
income of $87,500. What is the estimated cash payback period for the machine?
a.
3.5 years
b.
4 years
c.
4.5 years
d.
5 years
76.
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
a. 20%
b. 10%
c. 40%
d. 5%
The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. 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:
Income from
Net Cash
Year
Operations
Flow
1
$100,000
$180,000
2
40,000
120,000
3
40,000
100,000
4
10,000
90,000
5
10,000
120,000
77.
The cash payback period for this investment is
a.
5 years
b.
4 years
c.
2 years
d.
3 years
78.
The average rate of return for this investment is
a. 18%
b. 16%
c. 58%
d. 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:
Income from
Operations
Net Cash
Flow
$18,750
$93,750
18,750
93,750
18,750
93,750
18,750
93,750
18,750
93,750
79.
The average rate of return for this investment is
a.
5%
b. 10%
c. 25%
d. 15%
80.
The cash payback period for this investment is
a.
4 years
b.
5 years
c.
20 years
d.
3 years
81.
The expected average rate of return for a proposed investment of $650,000 in a fixed asset, with a useful life of 4
years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is
a. 13.9%
b. 36.9%
c. 18.5%
d. 9.25%
82.
Which of the following is not an advantage of the average rate of return method?
a.
easy to use
b.
takes into consideration the time value of money
c.
includes the amount of income earned over the entire life of the proposal
d.
emphasizes accounting income
83.
Which of the following is an advantage of the cash payback method?
a.
easy to use
b.
takes into consideration the time value of money
c.
includes the cash flow over the entire life of the proposal
d.
emphasizes accounting income
84.
An anticipated purchase of equipment for $520,000, 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
$60,000
$120,000
2
50,000
110,000
3
50,000
110,000
4
40,000
100,000
5
40,000
80,000
6
40,000
80,000
7
40,000
60,000
8
40,000
60,000
What is the cash payback period?
a.
5 years
b.
4 years
c.
6 years
d.
3 years
85.
Heidi Company is considering the acquisition of a machine that costs $420,000. The machine is expected to have
a
useful life of 6 years, a negligible residual value, an annual net cash flow of $120,000, and annual operating
income
of $83,721. What is the estimated cash payback period for the machine?
a.
3.5 years
b.
5 years
c.
5.1 years
d.
4 years
86.
The expected average rate of return for a proposed investment of $4,800,000 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 $10,560,000
over
the 20 years is
a. 24%
b. 22%
c. 45%
d. 10%
87.
The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. The
company’s desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1
through 5 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
$180,000
2
40,000
120,000
3
20,000
100,000
4
10,000
90,000
5
10,000
90,000
The cash payback period for this investment is
a.
5 years
b.
4 years
c.
2 years
d.
3 years
88.
The management of Indiana Corporation is considering the purchase of a new machine costing $400,000. 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 of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
60,000
120,000
3
30,000
100,000
4
10,000
90,000
5
10,000
90,000
The average rate of return for this investment is
a. 18%
b. 21%
c. 53%
d. 10%
89.
The management of Charlton 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 of this
investment:
Year
Income from
Operations
Net Cash
Flow
1
$20,000
$95,000
2
20,000
95,000
3
20,000
95,000
4
20,000
95,000
5
20,000
95,000
The cash payback period for this investment is
a.
4 years
b.
5 years
c.
19 years
d.
3.3 years
90.
Which of the following is true of the cash payback period?
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 answers are correct
91.
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.
Machine A
Machine B
Machine C
Annual cash flow
$40,000
$50,000
$75,000
Average investment
$300,000
$250,000
$500,000
a.
Machine A
b.
Machine C
c.
Machine B
d.
All are equal.
92.
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 average rate of return.
Machine A
Machine B
Machine C
Estimated average income
$40,000
$50,000
$75,000
Average investment
$300,000
$250,000
$500,000
a.
Machine B
b.
Machine C
c.
Machine B or C
d.
Machine A
Chapter 25(10): Capital Investment Analysis
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 of this
investment:
Year
Income from
Operations
Net Cash
Flow
1
$20,000
$95,000
2
20,000
95,000
3
20,000
95,000
4
20,000
95,000
5
20,000
95,000
93.
The cash payback period for this investment is
a.
4 years
b.
5 years
c.
20 years
d.
3 years
94.
The average rate of return for this investment is
a.
5%
b. 10.5%
c. 25%
d. 15%
95.
The net present value for this investment is
a. $20,140
b. $(20,140)
c. $19,875
d. $(19,875)
96.
Which method of evaluating capital investment proposals uses present value concepts to compute the rate of
return
from the net cash flows?
a.
internal rate of return method
b.
cash payback method
c.
net present value method
d.
average rate of return method
97.
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 index
b.
consumer price index
c.
present value index
d.
price-level index
98.
A series of equal cash flows at fixed intervals is termed a(n)
a.
present value index
b.
price-level index
c.
net cash flow
d.
annuity
99.
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
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. $12,600
b. $11,880
c. $13,350
d. $11,265
100.
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.
future value index
c.
rate of investment index
d.
present value index
101.
The rate of earnings is 6% and the cash to be received in 4 years is $20,000. The present value amount, using the
following partial table of present value of $1 at compound interest is
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. $12,720
c. $15,840
d. $16,800
102.
The present value index is computed using which of the following formulas?
a.
Amount to be invested/Average rate of return
b.
Total present value of net cash flow/Amount to be invested
c.
Total present value of net cash flow/Average rate of return
d.
Amount to be invested/Total present value of net cash flow
103.
An analysis of a proposal by the net present value method indicated that the present value of future cash inflows
exceeded the amount to be invested. Which of the following statements best describes the results of this
analysis?
a.
The proposal is desirable and the rate of return expected from the proposal exceeds the minimum rate
used
for the analysis.
b.
The proposal is desirable and the rate of return expected from the proposal is less than the minimum
rate
used for the analysis.
c.
The proposal is undesirable and the rate of return expected from the proposal is less than the minimum
rate
used for the analysis.
d.
The proposal is undesirable and the rate of return expected from the proposal exceeds the minimum
rate
used for the analysis.
104.
The formula for calculating the present value factor for an annuity of $1 is
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/Equal annual net cash flows
105.
Which method for evaluating capital investment proposals reduces the expected future net cash flows
originating
from the proposals to their present values and computes a net present value?
a.
net present value
b.
average rate of return
c.
internal rate of return
d.
cash payback
106.
The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. 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 of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
40,000
120,000
3
40,000
100,000
4
10,000
90,000
5
10,000
120,000
The net present value for this investment is
a. $36,400
b. $55,200
c. $(16,170)
d. $(126,800)