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Exam 15: Capital Investment Analysis

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Question 1

True/False

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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

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Question 2

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All of the following qualitative considerations may impact upon capital investments analysis except:

A) manufacturing productivity.
B) manufacturing sunk cost.
C) manufacturing flexibility.
D) manufacturing control.

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

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Question 3

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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:

The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow.

In capital rationing,an initial screening of alternative proposals is usually performed by establishing minimum standards.Which of the following evaluation methods are normally used?

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?

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.

June Co.is evaluating a project requiring a capital expenditure of $620,000.The project has an estimated life of four years and no salvage value.The estimated net income and net cash flow from the project are as follows:

Sommers Company is evaluating a project requiring a capital expenditure of $300,000.The project has an estimated life of 5 years and no salvage value.The estimated net income and net cash flow from the project are as follows:

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.

Assuming that the desired rate of return is 6%,determine the present value of $10,000 to be received in one year,using the following partial table of present value of $1 at compound interest.

The present value index for this investment is:

The two methods that use present value to analyse capital investment proposals are net present value and .

Using the following partial table of present value of $1 at compound interest,determine the present value of $35,000 to be received three years hence,with earnings at the rate of 10% a year.

Which of the following is a factor that complicates capital investment analysis?

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) :

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

Qualitative considerations in capital investment decisions are most appropriate for strategic investments or those that are designed to affect a company's long­term ability to generate profits.