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Exam 15: Capital Investment Analysis

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Question 51

Multiple Choice

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The average rate of return for this investment is:

A) 18%.
B) 16%.
C) 5%.
D) 20%.

E) B) and D)
F) A) and D)

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Question 52

Multiple Choice

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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.

E) B) and D)
F) B) and C)

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Question 53

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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.

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.

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%.

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.

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.

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:

A capital expenditures budget summarizes the decisions made for the acquisition of fixed assets.

A 5-year project is estimated to cost $700,000 and have no residual value.If the straight-line depreciation method is used and estimated total income is $231,000,determine the average rate of return giving effect to depreciation on the investment.

The two methods that use present values to analyse capital investment proposal consider the .

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:

The primary advantages of the average rate of return method of analyzing a capital investment proposal are its ease of computation and the fact that:

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 process by which management plans,evaluates,and controls long- term investment decisions involving fixed assets is called cost-volume-profit analysis.

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

Both proposal M,and N cost $800,000,have a 6-year life,and have expected total cash flows of $1,200,000.Proposal M is expected to provide equal annual net cash flows of $200,000,while the net cash flows for Proposal N are as follows:

The present value index is computed using which of the following formulas?

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.

One issue to consider when investing in assets in foreign countries is: