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Exam 15: Capital Investment Analysis

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Question 51

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The expected average rate of return for a proposed investment of $900,000 in a fixed asset, with a useful life of five years, recognition is given to the effect of straight-line depreciation on the investment, no residual value, and an expected total net income of $360,000 for the 5 years, is:

A) 18.5%.
B) 40%.
C) 12.5%.
D) 16%.

E) None of the above
F) All of the above

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Question 52

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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) :

A) average rate of return.
B) cash payback period.
C) present value index.
D) price-level index.

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

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Question 53

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The two methods that consider the time value of money concept to analyze capital investment proposals are:

In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values.

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 company's profit margin is 15.5%, its asset turnover 0.72, and its financial leverage is 3.25.Determine the company's return on shareholders' equity.

Assume in analyzing alternative proposals that Proposal F has a useful life of six years and Proposal J has a useful life of nine years.What is one widely used method that makes the proposals comparable?

If a proposed expenditure of $80,000 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.

Mars Corp.is choosing between two different capital investment proposals.Machine A has a useful life of 4 years, and Machine B has a useful life of 6 years.Each proposal requires an initial investment of $200,000, and the company desires a rate of return of 10%.Although Machine B has a useful life of 6 years, it could be sold at the end of 4 years for $35,000. ? $\begin{array} { | c | c | } \hline \text { Year } & \begin{array} { c } \text { Present Value } \\\text { of } \$ 1 \text { at } 10 \%\end{array} \\\hline 1 & 0.909 \\\hline 2 & 0.826 \\\hline 3 & 0.751 \\\hline 4 & 0.683 \\\hline 5 & 0.621 \\\hline 6 & 0.513 \\\hline\end{array}$ ? Machine A will generate net cash flow of $70,000 in each of the four years.Machine B will generate $80,000 in year 1, $70,000 in year 2, $60,000 in year 3, and $40,000 per year for the remaining 3 years of its useful life. Which of the following statements portrays the most accurate analysis between the two proposals?

If the desired rate of return on a project is 10%, determine the present value of $40,000 to be received in four years using the following partial table of present value of $1 at compound interest. ? $\begin{array} { c c c c } \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636\end{array}$

The process by which management plans, evaluates, and controls long- term investment decisions involving fixed assets is called cost-volume-profit analysis.

Gamma Inc.is considering the purchase of a machine costing $450,000, having a useful life of five years.Depreciation would be recognized using the straight-line method, and the machine would have no residual value at the end of its useful life.The estimated total net income from the machine is $600,000.The average investment for the machine is:

Heedy Inc.is considering a capital investment proposal that costs $460,000 and has an estimated life of four years, and no residual value.The estimated net cash flows are as follows: ​ $\begin{array} { c c } \text { Year } & \text { Net Cash Flow } \\1 & \$ 195,000 \\2 & 160,000 \\3 & 120,000 \\4 & 80,000\end{array}$ ​ The minimum desired rate of return for net present value analysis is 10%.The present value of $1 at compound interest rates of 10% for 1, 2, 3, and 4 years is 0.909, 0.826, 0.751, and 0.683, respectively.Determine the net present value.

Which of the following is the formula to calculate the return on stockholders' equity?​

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

A capital expenditures budget summarizes the decisions made for the acquisition of fixed assets.

The methods of evaluating capital investment proposals can be grouped into two general categories: (1) methods that ignore present values and (2) methods that use present values.

The rate of return is 10% and the cash to be received in one year is $25,000.Determine the present value amount, using the following partial table of present value of $1 at compound interest: $\begin{array} { l c c c } \hline \text { Year } & 6 \% & 10 \% & 12 \% \\\hline 1 & 0.943 & 0.909 & 0.893 \\2 & 0.890 & 0.826 & 0.797 \\3 & 0.840 & 0.751 & 0.712 \\4 & 0.792 & 0.683 & 0.636\end{array}$

The payback period is determined using which of the following formulas?

The management of London Corporation is considering the purchase of a new machine costing $750,000.The company's desired rate of return is 6%.The present value factors for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively.In addition to this information, use the following data in determining the acceptability in this situation: $\begin{array} { c c c } \text { Year } & \text { Income from Operations } & \text { Net Cash Flow } \\\hline 1 & \$ 37,500 & \$ 187,500 \\2 & 37,500 & 187,500 \\3 & 37,500 & 187,500 \\4 & 37,500 & 187,500 \\5 & 37,500 & 187,500\end{array}$ ? The average rate of return for this investment is: