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- Chapter 26 Multiple Choice

Barbaraann B.

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 $12,000,000 is:

25%

18%

40%

12.5%

25%

Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?

Net present value

Average rate of return

Internal rate of return

Cash payback

Net present value

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Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received four years hence, with earnings at the rate of 10% a year:

$13,660

$12,720

$15,840

$10,400

$13,660

Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows expected from capital investment proposals?

Internal rate of return

Cash payback

Net present value

Average rate of return

Internal rate of return

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:

18%

15%

27%

9%

18%

The average rate of return for this investment is:

18%

16%

58%

10%

18%

The cash payback period for this investment is:

4 years

5 years

20 years

3 years

4 years

Hotaling Corporation is analyzing a capital expenditure that will involve a cash outlay of $146,040. Estimated cash flows are expected to be $30,000 annually for seven years. The present value factors for an annuity of $1 for 7 years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is:

10%

6%

12%

8%

10%

Using the tables above, what would be the present value of $8,000 (rounded to the nearest dollar) to be received two years from today, assuming an earnings rate of 12%?

$6,376

$7,144

$5,696

$5,088

$6,376

Using the tables above, what would be the internal rate of return of an investment of $242,550 and would generate an annual cash inflow of $70,000 for the next 4 years?

6%

10%

12%

cannot be determined from the data given

6%

Which of the following is an advantage of the cash payback method?

It is easy to use.

It takes into consideration the time value of money.

It includes the cash flow over the entire life of the proposal.

It emphasizes accounting income.

It is easy to use.

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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?

5 years

4 years

6 years

3 years

5 years

Jakes Company is considering the acquisition of a machine that costs $360,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual cash flow of $120,000, and annual operating income of $83,721. What is the estimated cash payback period for the machine?

3 years

4.3 years

2.5 years

5 years

3 years

The present value index for this investment is:

1.08

1.45

1.14

.70

1.08

The cash payback period for this investment is:

4 years

5 years

20 years

3 years

4 years

The net present value for this investment is:

Positive $20,140

Negative $20,140

Positive $19,875

Negative $19,875

Positive $20,140

Using the tables above, what would be the present value of $15,000 (rounded to the nearest dollar) to be received at the end of each of the next two years, assuming an earnings rate of 6%?

$27,495

$26,040

$30,000

$25,350

$27,495

The cash payback method is widely used in evaluating investments. The following are reasons why this method is used except:

-The longer the payback, the longer the estimated life of the asset.

-The shorter the payback, the sooner the cash spend on the investment is recovered.

-The shorter the payback, the least likely the possibility of obsolescence

-All of the above are correct.

-The longer the payback, the longer the estimated life of the asset.

The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return?

Machine B

Machine C

Machine A and B

Machine A

Machine B

All of the following qualitative considerations may impact upon capital investments analysis except:

time value of money

employee morale

the impact on product quality

manufacturing flexibility

time value of money

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

inflation

recession

depression

deflation

inflation

In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation method(s) are often used?

-Cash payback method and average rate of return method

-Average rate of return method and net present value method

-Net present value method and cash payback method

-Internal rate of return and net present value methods

-Cash payback method and average rate of return method

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?

5 years

4 years

6 years

3 years

4 years

The present value index is computed using which of the following formulas?

-Amount to be invested/Average rate of return

-Total present value of net cash flow/Amount to be invested

-Total present value of net cash flow/Average rate of return

-Amount to be invested/Total present value of net cash flow

-Total present value of net cash flow/Amount to be invested

The net present value for this investment is:

positive $36,400

positive $55,200

Negative $99,600

Negative $126,800

positive $55,200

The average rate of return for this investment is:

5%

10%

25%

15%

10%

Using the tables above, what would be the present value of $15,000 (rounded to the nearest dollar) to be received one year from today, assuming an earnings rate of 6%?

$13,500

$14,145

$15,500

$12,272

$14,145

Using the tables above, what would be the internal rate of return of an investment that required an investment of $250,000, and would generate an annual cash inflow of $65,946 for the next 5 years?

6%

10%

12%

cannot be determined from the data given

10%

Which of the following is not an advantage of the average rate of return method?

-It is easy to use.

-It takes into consideration the time value of money.

-It includes the amount of income earned over the entire life of the proposal.

-It emphasizes accounting income.

It takes into consideration the time value of money.

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 $8,640,000 is:

25%

18%

40%

9.0%

18%

The average rate of return for this investment is:

18%

21%

53%

10%

21%

The cash payback period for this investment is:

5 years

4 years

2 years

3 years

4 years

The net present value for this investment is:

positive $16,400

positive $25,200

Negative $99,600

Negative $126,800

positive $25,200

The cash payback period for this investment is:

4 years

5 years

20 years

3 years

5 years

The average rate of return for this investment is:

5%

10.5%

25%

15%

10.5%

Using the tables above, what is the present value of $6,000 (rounded to the nearest dollar) to be received at the end of each of the next 4 years, assuming an earnings rate of 10%?

$20,790

$19,020

$14,412

$25,272

$19,020

The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines and have asked the accountant to analyze them to determine the best average rate of return.

Machine B

Machine C

Machine B or C

Machine A

Machine C

The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines and have asked the accountant to analyze them to determine the best cash payback.

Machine A

Machine C

Machine B

All are equal.

Machine C

The production department is proposing the purchase of an automatic insertion machine. They have identified 3 machines and have asked the accountant to analyze them to determine which of the proposals (if any) meet the company’s policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has a estimated useful life of 10 years.

A

B

C

None of the above

B

All of the following qualitative considerations may impact upon capital investments analysis except:

manufacturing productivity

manufacturing sunk cost

manufacturing flexibility

manufacturing control

manufacturing sunk cost

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?

Interest deduction

Depreciation deduction

Minimum tax provision

Charitable contributions

Depreciation deduction

Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment?

-Further evaluate assets that are dissimilar in nature or have different useful lives

-Using only quantitative measures to purchase an asset

-Analyzing the lease vs purchase option.

-Consider income tax ramifications.

-Using only quantitative measures to purchase an asset

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

present value

non-financial factors

maximum cost

net cash flow

non-financial factors

Capital rationing uses the following measures to determine the funding of projects except

-Ranks the proposals with the available funds.

-Determines whether the project should be funded by using operating cash or the issuance of bonds.

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

-Qualitative factors are considered.

-Determines whether the project should be funded by using operating cash or the issuance of bonds.

Capital rationing uses the following measures to determine the funding of projects except

-Ranks the proposals with the available funds.

-Determines whether the project should be funded by using operating cash or the issuance of bonds.

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

-Qualitative factors are considered.

-Determines whether the project should be funded by using operating cash or the issuance of bonds.

The amount of the estimated average income for a proposed investment of $60,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield of $21,600, is:

$10,800

$21,600

$ 5,400

$30,000

$ 5,400

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

absorption cost analysis

variable cost analysis

capital investment analysis

cost-volume-profit analysis

capital investment analysis

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):

average rate of return

consumer price index

present value index

price-level index

present value index

The primary advantages of the average rate of return method are its ease of computation and the fact that:

-it is especially useful to managers whose primary concern is liquidity

-there is less possibility of loss from changes in economic conditions and obsolescence when the commitment is short-term

-it emphasizes the amount of income earned over the life of the proposal

-rankings of proposals are necessary

-it emphasizes the amount of income earned over the life of the proposal

Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of

sales mix analysis.

variable cost analysis.

capital investment analysis.

variable cost analysis.

capital investment analysis.

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

Internal rate of return and average rate of return

Average rate of return and net present value

Net present value and internal rate of return

Net present value and payback

Net present value and internal rate of return

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:

$9,090

$9,000

$9,430

$8,930

$9,430

Dukes Company is considering the acquisition of a machine that costs $375,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual cash flow of $150,000, and annual operating income of $87,500. What is the estimated cash payback period for the machine?

3 years

4.3 years

2.5 years

5 years

2.5 years

The present value index for this investment is:

.88

1.45

1.14

.70

1.14

The net present value for this investment is:

Negative $118,145

Positive $118,145

Positive $19,875

Negative $19,875

Positive $19,875

Gossman Corporation is analyzing a capital expenditure that will involve a cash outlay of $104,904. Estimated cash flows are expected to be $36,000 annually for four years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is:

2%

2.4%

14%

3%

14%

Using the tables above, what is the present value of $3,000 (rounded to the nearest dollar) to be received at the end of each of the next 3 years, assuming an earnings rate of 10%?

$7,510

$6,759

$7,461

$24,870

$7,461

The expected average rate of return for a proposed investment of $500,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is:

18%

48%

24%

12%

24%

Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received three years hence, with earnings at the rate of 10% a year:

$14,240

$16,800

$15,020

$15,840

$15,020

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

Income Tax

Lease versus Capital Investment

Equal Proposal Lives

Qualitative Considerations

Equal Proposal Lives

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

the leasing alternative

changes in price levels

sunk cost

the federal income tax

sunk cost

The present value factor for an annuity of $1 is determined using which of the following formulas?

Amount to be invested/Annual average net income

Annual net cash flow/Amount to be invested

Annual average net income/Amount to be invested

Amount to be invested/Annual net cash flow

Amount to be invested/Annual net cash flow

Which of the following is a present value method of analyzing capital investment proposals?

Average rate of return

Cash payback method

Accounting rate of return

Net present value

Net present value

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

Internal rate of return

Net present value

Discounted cash flow

Average rate of return

Average rate of return.

Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis?

Price-level index

Present value factor

Annuity

Present value index

Present value index

The methods of evaluating capital investment proposals can be separated into two general groups--present value methods and:

past value methods

straight-line methods

cash payback methods

methods that ignore present value

methods that ignore present value

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

Internal rate of return and average rate of return

Net present value and average rate of return

Internal rate of return and net present value

Average rate of return and cash payback method

Average rate of return and cash payback method

The amount of the average investment for a proposed investment of $60,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the 4 years, is:

$10,800

$21,600

$ 5,400

$30,000

$30,000

By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money:

-has an international rate of exchange

-is the language of business

-is the measure of assets, liabilities, and stockholders' equity on financial statements

-has a time value

-has a time value

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

present value index

price-level index

net cash flow

annuity

annuity

The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is:

cash payback method

net present value method

internal rate of return method

average rate of return method

average rate of return method

Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return?

Average rate of return

Accounting rate of return

Cash payback period

Internal rate of return

Internal rate of return

Which of the following is important when evaluating long-term investments?

-Investments must earn a reasonable rate of return

-Employees are able to determine and propose capital equipment for their divisions or departments

-Proposals should match long term goals.

-All of the above.

-All of the above.

The cash payback period for this investment is:

5 years

4 years

2 years

3 years

3 years

The present value index for this investment is:

1.00

.95

1.25

1.05

1.05

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 12%)?

$20,352

$352

$24,296

$4,296

$4,296

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

$8,900

$9,090

$7,970

$8,260

$8,260

Using the tables above, what would be the present value of $8,000 (rounded to the nearest dollar) to be received one year from today, assuming an earnings rate of 12%?

$7,544

$7,120

$7,272

$7,144

$7,144

Using the tables above, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a year for the next 4 years, what would be the net present value (rounded to the nearest dollar) of the investment cash inflows, (assuming an earnings rate of 12%)?

$20,352

$3,969

$22,190

$21,259

$21,259

The process by which management allocates available investment funds among competing investment proposals is called:

investment capital

investment rationing

cost-volume-profit analysis

capital rationing

capital rationing

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