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Exam 26: Capital Investment Analysis

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Question 71

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The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $10,560,000 over the 20 years, is

A) 24%
B) 22%
C) 45%
D) 10%

E) None of the above
F) C) and D)

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Question 72

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The average rate of return method of analyzing capital investment decisions measures the average rate of return from using the asset over its entire life.

A) True
B) False

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Question 73

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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) _____ index.

A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 6 years.

What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?

If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash inflow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years.

Which of the following is not considered a complicating factor in capital investment decisions?

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $210,000. The present value of the future cash flows is $225,000. The company's desired rate of return used in the present value computations was 12%. Which of the following statements is true?

A series of equal cash flows at fixed intervals is termed a(n)

Following is a table for the present value of $1 at compound interest: Following is a table for the present value of an annuity of $1 at compound interest: ​ -Using the tables provided, the present value of $30,000 to be received 3 years from today, assuming an earnings rate of 6%, is

Norton Company is considering a project that will require an initial investment of $750,000 and will return $200,000 each year for 5 years. a. If taxes are ignored and the required rate of return is 9%, what is the project's net present value? b. Based on this analysis, should Norton Company proceed with the project? Following is a table for the present value of $1 at compound interest: Following is a table for the present value of an annuity of $1 at compound interest:

Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: The company's minimum desired rate of return for net present value analysis is 15%. The factors for the present value of $1 at compound interest of 15% for 1, 2, 3, and 4 years are 0.870, 0.756, 0.658, and 0.572, respectively.Determine (a) the average rate of return on investment and (b) the net present value for the project.

The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine which one has the best average rate of return.

The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an asset by the average amount invested in the asset.

A qualitative characteristic that may influence capital investment analysis is the investment proposal's impact on manufacturing flexibility.

In capital rationing, alternative proposals are initially screened for minimum standards using which of the following two evaluation methods?

Proposals M and N each cost $550,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows: Determine the cash payback period for each proposal.

The rate of earnings is 12% and the cash to be received in 2 years is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest.

The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. 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, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: The net present value for this investment is

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