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Exam 10: Capital Investment Analysis

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Question 21

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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 $240,000 for the 4 years, is:

A) 40%
B) 20%
C) 60%
D) 24%

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

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Question 22

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

A) cash payback method
B) net present value method
C) internal rate of return method
D) average rate of return method

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

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Question 23

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

A $550,000 capital investment proposal has an estimated life of four years and no residual value. The estimated net cash flows are as follows:

Heather Company is considering the acquisition of a machine that costs $432,000. 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?

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

Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for this project to be acceptable to Tipper Co.

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

Which of the following is true of the cash payback period?

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

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 the 5 years. The expected average rate of return on investment is 25.0%.

The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.

Determine the average rate of return for a project that is estimated to yield total income of $250,000 over four years, cost $480,000, and has a $20,000 residual value.

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

A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality.

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

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The payback period for the machine is 4 years.

The internal rate of return method is used to analyze a $946,250 capital investment proposal with annual net cash flows of $250,000 for each of the six years of its useful life.

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 the 5 years. The expected average rate of return is 30%.

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