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Exam 15: Capital Investment Analysis

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Question 21

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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.

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B) False

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Question 22

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Internal rate of return is often called the payback rate of return.

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B) False

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Question 23

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In general, present value methods of analyzing capital investments are more desirable than methods ignoring present values because:

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: ? $\begin{array} { c c c c } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636\end{array}$

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.

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.

In capital rationing, alternative proposals that survive initial screening and further analysis using present value methods are normally evaluated in terms of:

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.

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?

Which of the following is an advantage of the internal rate of return method?​

One of the qualitative characteristics that influence capital investment analysis is product quality.

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: $\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 100,000 & \$ 200,000 \\2 & 80,000 & 170,000 \\3 & 50,000 & 130,000 \\4 & 10,000 & 80,000 \\5 & 10,000 & 80,000\end{array}$ ? The present value index for this investment is:

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?

Which of the following formulas is used to calculate the present value index?

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: $\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 37,500 & \$ 187,500 \\2 & 37,500 & 187,500 \\3 & 37,500 & 187,500 \\4 & 37,500 & 187,500 \\5 & 37,500 & 187,500\end{array}$ ? The cash payback period for this investment is:

A series of unequal cash flows at fixed intervals is termed an annuity.

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:

The computations required for the net present value method are more than the computation required for the average rate of return method.

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.

Care must be taken while making capital investment decisions since it involves a long-term commitment of funds and affects operations for several years.