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Exam 15: Capital Investment Analysis

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Question 31

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Leasing assets may be a favorable alternative to purchasing assets if the asset has a high risk of becoming obsolete.

A) True
B) False

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Question 32

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One issue to consider when investing in assets in foreign countries is:

A) that local currency may weaken to the dollar causing adverse effects on the investment's return.
B) that the dollar may weaken to the local currency causing adverse effects on the investment's return.
C) that local currency may be difficult to exchange into dollars causing problems in receiving a return on the investment.
D) that dollars may be difficult to exchange into local currency causing problems in receiving any return on investment.

E) C) and D)
F) A) and B)

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Question 33

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The two methods that use present values to analyse capital investment proposal consider the _____.

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and a $40,000 residual value, is expected to yield total net income of $200,000 for 5 years.The expected average rate of return on investment is 18.2%.

A 5-year project is estimated to cost $700,000 and have no residual value.If the straight-line depreciation method is used and estimated total income is $231,000, determine the average rate of return giving effect to depreciation on the investment.

A present value index can be used to rank competing capital investment proposals when the net present value method is used.

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

Average total assets divided by average stockholders' equity is the formula for financial leverage.​

For years one through five, a proposed expenditure of $400,000 for a fixed asset with a 5-year life has expected net income of $50,000, $40,000, $20,000, $20,000, and $20,000, respectively, and net cash flows of $130,000, $120,000, $100,000, $100,000, and $100,000, respectively.The cash payback period is 3.5 years.

June Co.is evaluating a project requiring a capital expenditure of $620,000.The project has an estimated life of four years and no salvage value.The estimated net income and net cash flow from the project are as follows: ? $\begin{array}{rrr}\text { Year }&\text {Net Income}&\text { Net Cash Flow }\\1 & \$ 45,000 & \$ 200,000 \\2 & 85,000 & 240,000 \\3 & 5,000 & 160,000 \\4 & 15,000 & 170,000 \\& \$ 150,000 & \$ 770,000\end{array}$ ? The company's minimum desired rate of return is 12%.The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively. Determine: (a) the average rate of return on investment, giving effect to depreciation on the investment, and (b) the net present value.

An anticipated purchase of equipment for $1,000,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows: ? $\begin{array} { c r r } \text { Year } & \text { Net Income } & \text { Net Cash Flow } \\1 & \$ 210,000 & \$ 400,000 \\2 & 180,000 & 320,000 \\3 & 145,000 & 280,000 \\4 & 125,000 & 270,000 \\5 & 60,000 & 220,000 \\6 & 60,000 & 220,000 \\7 & 60,000 & 220,000 \\8 & 60,000 & 220,000\end{array}$ ? What is the cash payback period?

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for 5 years.The expected average rate of return is 30%.

A disadvantage of the average rate of return method of capital investment analysis is that:

The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 for 5 years.The expected average rate of return on investment computed is 20%.

The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis.

In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash payback and the average rate of return methods.

Which of the following is a factor that complicates capital investment analysis?

The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow.

When evaluating two competing proposals with unequal lives, management should give greater consideration to the investment with the longer life because the asset will be useful to the company for a longer period of time.

The internal rate of return method of analyzing capital investment proposals uses the present value concept to compute the rate of return expected from the proposals.