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Capital investment analysis |
The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets |
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Capital investment analysis |
Decisions to install new equipment, replace old equipment an purchase or construct a new building are examples of: |
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d. All of the above |
Which of the following is important when evaluating long term investments? a. Investments must earn a reasonable rate of return b. Employees are able to determine and propose capital equipment for their divisions or departments c. Proposals should match long term goal d. all of the above |
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Net present value and internal rate of return |
Which of the following are present value methods of analyzing capital investment proposals? |
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Net present value |
Which of the following is a present value method of analyzing capital investment proposals? |
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has a time value |
By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money: |
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Average rate of return and cash payback method |
Which of the following are two methods of analyzing analyzing capital investment proposals that both ignore present value? |
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Average rate of return method |
The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is |
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It emphasizes the amount of income earned over the life of the proposal |
The primary advantages of the average rate of return method are its ease of computation and the fact that: |
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Net present value |
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? |
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Present value index |
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? |
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The proposal is desirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis |
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? |
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Internal rate of return |
Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return? |
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Average rate of return |
Which of the following is a method of analyzing capital investment proposals that ignores present value? |
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Methods that ignore present value |
The methods of evaluating capital investment proposals can be separated into two general groups – present value methods and |
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Present value index |
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: |
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Internal rate of return |
Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows expected from capital investment proposals? |
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Annuity |
A series of equal cash flows at fixed intervals is termed an: |
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Total present value of net cash flow/amount to be invested |
The present value index is computed using which of the following formulas? |
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Amount to be invested/annual net cash flow |
The present value factor for an annuity of $1 is determined using which of the following formulas? |
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It takes into consideration the time value of money |
Which of the following is not an advantage of the average rate of return method? |
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It is easy to use |
Which of the following is an advantage of the cash payback method? |
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a. The longer the payback, the longer the estimated life of the asset |
The cash payback method is widely used in evaluating investments. The following are reasons why this method is used except: a. the longer the payback, the longer the estimated life of the asset b. the shorter the payback, the sooner the cash spend on the investment is recovered. c. The shorter the payback, the least likely the possibility of obsolescence. d. All of the above is correct |
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b. manufacturing sunk cost |
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 |
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a. time value of money |
All of the following qualitative considerations may impact upon capital investment analysis except: a. time value of money b. employee morale c. the impact on product quality d. manufacturing flexibility |
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depreciation deduction |
Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects? |
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Adjust the life of Proposal J to a time period that is equal to that of Proposal F by estimating a residual value at the end of year six |
Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a useful life of 9 years. What is one widely used method that makes the proposals comparable? |
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Inflation |
Periods in time that experience increasing price levels are known as periods of: |
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Equal proposal lives |
Which of the following is not considered as a complicating factor in capital investment decisions? |
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Using only quantitative measures to purchase an asset |
Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment? |
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Sunk cost |
All of the following are factors that may complicate capital investment analysis except: |
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Capital rationing |
The process by which management allocates available investment funds among competing investment proposals is called |
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Cash payback method and average rate of return method |
In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation method(s) are often used? |
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Non-financial factors |
In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of: |
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Determines whether the project should be funded by using operating cash or issuance of bonds |
Capital rationing uses the following measures to determine the funding of projects except: |
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True |
The process by which a management plans, evaluates, and controls long-term investment decisions involving fixed assets is called capital investment analysis. |
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True |
Care must be taken involving capital investment decisions, since normally a long-term committment of funds is involved and operations could be affected for many years. |
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True |
The method sof evaluating capital investment proposals can be grouped into 2 general categories that can be referred to as (1) methods that ignore present value and (2) present value methods. |
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True |
Average rate of return equals estimated average annual income divided by the average investment. |
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True |
The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method. |
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True |
The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow |
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True |
The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method. |
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True |
Methods that ignore present value in capital investment analysis include the cash payback method |
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True |
Methods that ignore present value in capital investment analysis include the average rate of return method |
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True |
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. |
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True |
In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values |
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True |
If in evaluating a proposal by use of the net present value method, there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected |
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True |
If in evaluating a proposal by use of the net present value method 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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True |
A present value index can be used to rank competing capital investment proposals when the net present value method is used. |
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True |
The internal rate of return method of analyzing capital investment proposals uses the present value concept to compute an internal rate of return expected from the proposals. |
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True |
A series of equal cash flows at fixed intervals is termed an annuity |
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True |
A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality |
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True |
A qualitative characteristic that may impact upon capital investment analysis is manufacturing flexibility |
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True |
A qualitative characteristic that may impact upon capital investment analysis is employee morale |
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True |
A qualitative characteristic that may impact upon capital investment analysis is manufacturing productivity |
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True |
A qualitative characteristic that may impact upon capital investment analysis is manufacturing control |
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True |
The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing |
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True |
A capital expenditures budget summarizes the decisions made for the acquisition of fixed assets for several future years. |
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False |
The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called cost-volume-profit analysis. |
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False |
Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals |
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False |
The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) average rate of return (2) cash payback method |
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False |
Average rate of return equals average investment divided by estimated average annual income |
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False |
The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow. |
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False |
The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method. |
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False |
Methods that ignore present value in capital investment analysis include the internal rate of return method |
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False |
Methods that ignore present value in capital investment analysis include the net present value method |
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False |
The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows |
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False |
The cash payback method of capital investment analysis is one of the methods referred to as a present value method. |
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False |
In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and then reduced to their present values. |
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False |
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. |
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False |
If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted |
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False |
If in evaluating a proposal by use of the net present value method 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 is less than the rate used in the analysis |
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False |
Charitable contributions are often used as a means of reducing the amount of income tax expense arising from capital investment projects |
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False |
The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis |
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False |
Capital rationing is the process by which management decides how to divide the capital budget among the various departments or divisions in the company |
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