30 Questions

Chapter 25 Assessment

Questions and Answers

- 1.Capital investment analysis is
- 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.All of the following qualitative considerations may impact upon capital investments analysis except:
- 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.
- 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.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, if an investment is made now for $20,000 that will generate a cash inflow of $8,000 a year for the next 4 years, what would be the net present value (rounded to the nearest dollar) of the investment, (assuming an earnings rate of 10%)?
- 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.
- 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