Student: ___________________________________________________________________________
1. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called capital investment analysis.
True False
2. The process by which management pla...
1. The process by which management plans, evaluates, and controls long-term investment decisions involving
fixed assets is called capital investment analysis.
True False
2. The process by which management plans, evaluates, and controls long-term investment decisions involving
fixed assets is called cost-volume-profit analysis.
True False
3. Care must be taken involving capital investment decisions, since normally a long-term commitment of funds
is involved and operations could be affected for many years.
True False
4. Only managers are encouraged to submit capital investment proposals because they know the processes and
are able to match investments with long-term goals.
True False
5. The methods of evaluating capital investment proposals can be grouped into two general categories that can
be referred to as (1) methods that ignore present value and (2) present values methods.
True False
6. The methods of evaluating capital investment proposals can be grouped into two general categories that can
be referred to as (1) average rate of return and (2) cash payback methods.
True False
7. Average rate of return equals average investment divided by estimated average annual income.
True False
,8. Average rate of return equals estimated average annual income divided by average investment.
True False
9. The method of analyzing capital investment proposals in which the estimated average annual income is
divided by the average investment is the average rate of return method.
True False
10. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash
flow.
True False
11. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net
discounted cash flow.
True False
12. The computations involved in the net present value method of analyzing capital investment proposals are
less involved than those for the average rate of return method.
True False
13. The computations involved in the net present value method of analyzing capital investment proposals are
more involved than those for the average rate of return method.
True False
14. Methods that ignore present value in capital investment analysis include the cash payback method.
True False
15. Methods that ignore present value in capital investment analysis include the average rate of return method.
True False
16. Methods that ignore present value in capital investment analysis include the internal rate of return method.
True False
,17. Methods that ignore present value in capital investment analysis include the net present value method.
True False
18. The average rate of return method of capital investment analysis gives consideration to the present value of
future cash flows.
True False
19. The cash payback method of capital investment analysis is one of the methods referred to as a present value
method.
True False
20. 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%.
True False
21. 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 37.5%.
True False
22. 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 50%.
True False
23. 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%.
True False
24. In net present value analysis for a proposed capital investment, the expected future net cash flows are
averaged and then reduced to their present values.
True False
, 25. The expected period of time that will elapse between the date of a capital investment and the complete
recovery in cash of the amount invested is called the discount period.
True False
26. The expected period of time that will elapse between the date of a capital investment and the complete
recovery in cash of the amount invested is called the cash payback period.
True False
27. 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.
True False
28. 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 4 years.
True False
29. For years one through five, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has
expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of
$90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3 years.
True False
30. For years one through five, a proposed expenditure of $500,000 for a fixed asset with a 5-year life has
expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of
$90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 5 years.
True False
31. In net present value analysis for a proposed capital investment, the expected future net cash flows are
reduced to their present values.
True False
32. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value
of future cash inflows over the amount to be invested, the proposal should be rejected.
True False
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