Chapter 25 Investment
Chapter 25 Assessment
- 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.
Correct Answer
B. The process by which management plans, evaluates and controls investments in fixed assets -
- 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.
Correct Answer
A. They involve investments of an immaterial amount.Explanation
They involve the long-term commitment of funds.Rate this question:
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- 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
Correct Answer
D. Average rate of returnExplanation
The two methods of analyzing capital investment proposals that ignore present value are average rate of return and cash payback.Rate this question:
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- 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.
Correct Answer
B. Capital investment 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%
Correct Answer
A. 18%Explanation
Average Rate of Return = Estimated Average Annual Income / Average Investment
$216,000 / 4 = $54,000 estimated average annual income
$600,000 / 2 = $300,000 average investment $54,000 / $300,000 = .18 or 18%Rate this question:
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- 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
Correct Answer
B. 4 yearsExplanation
Because the annual net cash flow is unequal you would add up the yearly amounts until you reach the purchase price. Thus $120,000 + $110,000 + $90,000 + $80,000 = $400,000.Rate this question:
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- 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
Correct Answer
D. Internal rate of return methodExplanation
The net present value method and the internal rate of return method are both methods of analyzing capital investment proposals that are present value methods.Rate this question:
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- 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
Correct Answer
B. $17,075Explanation
The present value would be calculated by taking the discount factor for 10% for 4 years = .683. It would be $25,000 x .683 = $17,075.Rate this question:
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- 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.
Correct Answer
B. Positive $25,200.Explanation
Present value of cash flows of $455,200 less the initial investment of $430,000 = $25,200 positive net present value.Rate this question:
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- 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
Correct Answer
B. Manufacturing fixed assets -
- 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
Correct Answer
D. Depreciation deductionExplanation
There are a variety of ways to calculate Depreciation for capital assets and this can impact income taxes owed.Rate this question:
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- 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
Correct Answer
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 fiveExplanation
Adjusting the lives to be equal by estimating a residual value is the way to make projects with unequal lives comparableRate this question:
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- 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
Correct Answer
B. Current fixed asset levelsExplanation
Current fixed asset levels are not factors that will complicate the capital investment analysis. They are sunk costs.Rate this question:
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- 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
Correct Answer
B. Determination of whether the project should be funded by using operating cash or the issuance of bonds -
- 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
Correct Answer
C. Equal proposal livesExplanation
Unequal, not equal proposal lives is an additional factor that has an impact on a capital investment decision.Rate this question:
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- 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
Correct Answer
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.
Correct Answer
C. Capital investment 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
Correct Answer
B. Capital investment 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
Correct Answer
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%
Correct Answer
B. 14%Explanation
Estimated average annual income: $3,080 ($12,320 / 4)
Average investment:$22,000 ($44,000 / 2)
Average rate of return: 14% ($3,080 / $22,000)Rate this question:
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- 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
Correct Answer
A. 5 yearsExplanation
Because the annual net cash flow is unequal you would add up the yearly amounts until you reach the purchase price. Thus $120,000 + $110,000 + $110,000 + $100,000 + $60,000 = $500,000.Rate this question:
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- 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
Correct Answer
D. $12,600Explanation
It would be calculated by taking the 3 year discount factor for a present value of $1 times the investment. This would be $15,000 x .840 = $12,600.Rate this question:
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- 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
Correct Answer
A. $5,360 -
- 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
Correct Answer
B. 1.08Explanation
Present value of cash flows of $455,200 divided by the initial investment of $420,000 = 1.08Rate this question:
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- 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.
Correct Answer
A. Net present value of the investment -
- 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
Correct Answer
A. Average rate of return of the project. -
- 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
Correct Answer
B. Periods in time that experience increasing price levels -
- 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.
Correct Answer
C. The age of the current fixed assets -
- 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
Correct Answer
B. Verify the best financing option available -
- 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
Correct Answer
B. Factors other than financial factorsExplanation
Non-financial factors are considered after projects survive the initial and secondary screenings.Rate this question:
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Jan 19, 2017Quiz Edited by
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Nov 10, 2009Quiz Created by
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