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Exam 15: Capital Investment Analysis

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Question 21

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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 the 5 years.The expected average rate of return is 30%.

A) True
B) False

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Question 22

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Leasing assets may be a favorable alternative to purchasing assets if the asset has a high risk of becoming obsolete.

A) True
B) False

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Question 23

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

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

Proposals L and K each cost $500,000,have 6-year lives,and have expected total cash flows of $720,000.Proposal L is expected to provide equal annual net cash flows of $125,000,while the net cash flows for Proposal K are as follows: Determine the cash payback period for each proposal.

A present value index can be used to rank competing capital investment proposals when the net present value method is used.

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.

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%.

If the average rate of return on an asset exceeds the minimum acceptable rate of return for investments,the asset should be purchased.

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?

Capital rationing is the process by which management allocates funds among competing capital investment proposals.

The present value index for this investment is

The rate of earnings is 6%,and the cash to be received in one year is $10,000.Determine the present value amount,using the following partial table of present value of $1 at compound interest.

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)

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.

All of the following are factors that may complicate capital investment analysis EXCEPT

Which of the following are present value methods of analyzing capital investment proposals?

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 factor for an annuity of $1 at interest of 6% for 5 years is 4.212.In addition to the this information,use the following data in determining the acceptability in this situation: -The cash payback period for this investment is

Periods in time that experience increasing price levels are known as periods of