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Exam 15: Capital Investment Analysis

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Question 41

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The methods of evaluating capital investment proposals can be grouped into two general categories: (1)average rate of return method and (2)cash payback method.

A) True
B) False

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Question 42

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The present value index for this investment is:

A) 1.00.
B) 0.95.
C) 1.25.
D) 1.05.

E) None of the above
F) All of the above

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Question 43

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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 discount period.

The net present value has been computed for Proposals A and B.Relevant data are as follows:

Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return?

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

An analysis of a proposal by the net present value method indicated that the present value exceeded the amount to be invested.Which of the following statements best describes the results of this analysis?

If the rate of earnings is 12% and the cash to be received in two years is $20,000,determine the present value amount,using the following partial table of present value of $1 at compound interest.

Decisions to install new equipment,replace old equipment,and purchase or construct a new building are examples of:

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

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

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

The anticipated purchase of a fixed asset for $400,000 with a useful life of 5 years and no residual value is expected to yield total income of $150,000 (recognition is given to the effect of straight-line depreciation on the investment).The expected average rate of return is 15%.

The cash payback period for this investment is:

Mars Corp.is choosing between two different capital investment proposals.Machine A has a useful life of 4 years,and Machine B has a useful life of 6 years.Each proposal requires an initial investment of $200,000,and the company desires a rate of return of 10%.Although Machine B has a useful life of 6 years,it could be sold at the end of 4 years for $35,000.

The anticipated purchase of a fixed asset for $400,000,with a useful life of 5 years and no residual value,is expected to yield total net income of $300,000 for 5 years.The expected average rate of return is 30%.

The net present value for this investment is:

The process by which management plans,evaluates,and controls long-term investment decisions involving fixed assets is called:

Using the following partial table of present value of $1 at compound interest,compute the present value of $20,000 (rounded to nearest dollar) to be received one year from today,assuming an earnings rate of 15%.

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