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Chapter 25 Investment

30 Questions
Chapter 25 Investment

Chapter 25 Assessment

Questions and Answers
  • 1. 
    • A. 

      The process of analyzing the sales mix

    • B. 

      The process by which management plans, evaluates and controls investments in fixed assets

    • C. 

      The process by which management plans, evaluates and controls investments in other company's stock.

    • D. 

      The process of analyzing financing options.

  • 2. 
    Which of the following is not true of capital investments?
    • A. 

      They involve investments of an immaterial amount.

    • B. 

      They involve investments that earn a reasonable rate of return

    • C. 

      They affect operations for many years.

    • D. 

      They involve the long-term commitment of funds.

  • 3. 
    Which of the following is a method of analyzing capital investment proposals that ignores present value?
    • A. 

      Internal rate of return

    • B. 

      Net present value

    • C. 

      Discounted cash flow

    • D. 

      Average rate of return

  • 4. 
    Decisions to install new equipment, purchase other businesses, and purchase a new building are examples of
    • A. 

      Direct costing decisions

    • B. 

      Capital investment analysis.

    • C. 

      Incremental analysis.

    • D. 

      Absorption cost analysis.

  • 5. 
    The expected average rate of return for a proposed investment of $600,000 in a fixed asset, with a useful life of four years, straight-line Depreciation, no residual value, and an expected total net income of $216,000 for the 4 years, is:
    • A. 

      18%

    • B. 

      15%

    • C. 

      27%

    • D. 

      9%

  • 6. 
    An anticipated purchase of equipment for $400,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows:What is the cash payback period?
    • A. 

      5 years

    • B. 

      4 years

    • C. 

      6 years

    • D. 

      3 years

  • 7. 
    Which of the following is a present value method of analyzing capital investment proposals?
    • A. 

      Average rate of return

    • B. 

      Cash payback method

    • C. 

      Accounting rate of return

    • D. 

      Internal rate of return method

  • 8. 
    Using the following partial table of present value of $1 at compound interest, determine the present value of $25,000 to be received four years hence, with earnings at the rate of 10% a year:
    • A. 

      $19,800

    • B. 

      $17,075

    • C. 

      $15,900

    • D. 

      $22,725

  • 9. 
    The management of Arnold Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:The net present value for this investment is:
    • A. 

      Positive $16,400.

    • B. 

      Positive $25,200.

    • C. 

      Negative $99,600.

    • D. 

      Negative $126,800.

  • 10. 
    • A. 

      Manufacturing productivity.

    • B. 

      Manufacturing fixed assets

    • C. 

      Manufacturing flexibility

    • D. 

      Manufacturing control

  • 11. 
    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?
    • A. 

      Interest deduction

    • B. 

      Alternative minimum tax provision

    • C. 

      Minimum tax provision

    • D. 

      Depreciation deduction

  • 12. 
    Assume in analyzing alternative proposals that Proposal A has a useful life of five years and Proposal B has a useful life of eight years. What is one widely used method that makes the proposals comparable?
    • A. 

      Ignore the fact that Proposal A has a useful life of five years and treat it as if it has a useful life of eight years

    • B. 

      Adjust the life of Proposal A to a time period that is equal to that of Proposal B by estimating a residual value at the end of year five

    • C. 

      Ignore the useful lives of five and eight years and find an average (6 1/2 years).

    • D. 

      Ignore the useful lives of five and eight years and compute the average rate of return

  • 13. 
    All of the following are factors that may complicate capital investment analysis except:
    • A. 

      The federal income tax

    • B. 

      Current fixed asset levels

    • C. 

      Changes in price levels.

    • D. 

      Qualitative factors

  • 14. 
    Capital rationing involves all of the following except:
    • A. 

      Ranking of the proposals.

    • B. 

      Determination of whether the project should be funded by using operating cash or the issuance of bonds

    • C. 

      Establishing of minimum standards by applying the cash payback and the average rate of return.

    • D. 

      Evaluation of qualitative factors

  • 15. 
    Which of the following factors does not have an impact on the outcome of a capital investment decision?
    • A. 

      Income tax considerations

    • B. 

      Changes in price level

    • C. 

      Equal proposal lives

    • D. 

      Lease versus capital investment

  • 16. 
    Which of the following is not true of capital investments?
    • A. 

      They involve the long-term commitment of funds.

    • B. 

      They affect operations for many years.

    • C. 

      They involve some of the most important business decisions that management makes

    • D. 

      They involve investments of an immaterial amount

  • 17. 
    The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called:
    • A. 

      Absorption cost analysis

    • B. 

      Full costing analysis

    • C. 

      Capital investment analysis

    • D. 

      Cost-volume-profit analysis.

  • 18. 
    Decisions to install new equipment, replace old equipment, and purchase a new building are examples of
    • A. 

      Direct costing decisions

    • B. 

      Capital investment analysis

    • C. 

      Incremental analysis

    • D. 

      Absorption cost analysis

  • 19. 
    Which of the following are two methods of analyzing capital investment proposals that both ignore present value?
    • A. 

      Internal rate of return and average rate of return

    • B. 

      Net present value and average rate of return

    • C. 

      Internal rate of return and net present value

    • D. 

      Average rate of return and cash payback method

  • 20. 
    The expected average rate of return for a proposed investment of $44,000 in a fixed asset, using straight line Depreciation, with a useful life of 4 years, no residual value, and an expected total net income of $12,320 is:
    • A. 

      28%

    • B. 

      14%

    • C. 

      56%

    • D. 

      12.5%

  • 21. 
    An anticipated purchase of equipment for $500,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows:What is the cash payback period?
    • A. 

      5 years

    • B. 

      4 years

    • C. 

      6 years

    • D. 

      3 years

  • 22. 
    Below is a table for the present value of $1 at Compound interest.Below is a table for the present value of an annuity of $1 at compound interest.Using the tables above, what would be the present value of $15,000 (rounded to the nearest dollar) to be received three years from today, assuming an earnings rate of 6%?
    • A. 

      $13,500

    • B. 

      $14,145

    • C. 

      $15,500

    • D. 

      $12,600

  • 23. 
    • A. 

      $5,360

    • B. 

      $352

    • C. 

      $25,360

    • D. 

      $4,296

  • 24. 
    The management of Arnold Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:The present value index for this investment is:
    • A. 

      1.45

    • B. 

      1.08

    • C. 

      1.14

    • D. 

      .7

  • 25. 
    All of the following qualitative considerations may impact upon capital investments analysis except:
    • A. 

      Net present value of the investment

    • B. 

      Employee morale.

    • C. 

      The impact on product quality.

    • D. 

      Manufacturing flexibility.

  • 26. 
    All of the following qualitative considerations may impact upon capital investments analysis except:
    • A. 

      Average rate of return of the project.

    • B. 

      Employee morale

    • C. 

      The impact on product quality.

    • D. 

      Manufacturing flexibility

  • 27. 
    Inflation is:
    • A. 

      Periods in time that experience decreasing price levels

    • B. 

      Periods in time that experience increasing price levels

    • C. 

      Periods of time with serious economic downturns

    • D. 

      Periods of time with improving economic results

  • 28. 
    All of the following are factors that may complicate capital investment analysis except:
    • A. 

      Qualitative factors

    • B. 

      Changes in price levels

    • C. 

      The age of the current fixed assets

    • D. 

      The federal income tax.

  • 29. 
    Capital rationing uses the following measures to determine the funding of projects except:
    • A. 

      Ranks the proposals with the available funds

    • B. 

      Verify the best financing option available

    • C. 

      Establish minimum standards by applying the cash payback and the average rate of return

    • D. 

      Qualitative factors are considered

  • 30. 
    In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of:
    • A. 

      Present value calculations

    • B. 

      Factors other than financial factors

    • C. 

      Maximum cost of the project

    • D. 

      Net cash flow of the project

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