Exam (elaborations)
BMAL-590 Week 2 Accounting/Capital Investment Analysis section 2 with complete solutions
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BMAL-590 Week 2 Accounting/Capital Investment Analysis section 2 with complete solutions
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BMAL-590 Week 2 Accounting/CapitalInvestment Analysis section 2
What do companies use to help evaluate long-term investments and compare alternatives? - correct
answer ✔✔capital investment analysis (also called capital budgeting)
What are one of the most important decisions managers make? - correct answer ✔✔capital investment
decisions
what should a capital investment program encourage? - correct answer ✔✔for managers to submit
proposals for capital investments.
Capital investment evaluation methods can be grouped into the following categories: - correct answer
✔✔1. Methods that do not use present values
2. Methods that use present values
Two methods that do not use present values are: - correct answer ✔✔average rate of return method
and the cash payback method.
These methods are often used to initially screen proposals and are useful for proposals with relatively
short useful lives because the timing of cash flows is less important.
Two methods that use present values are: - correct answer ✔✔net present value method and the
internal rate of return method.
These methods consider the time value of money. The time value of money concept recognizes that an
amount of cash invested today will earn income and, therefore, has value over time.
what does the average rate of return method focus on? - correct answer ✔✔Focuses on accounting
income rather than cash flow
, average rate of return (also called the accounting rate of return) computation: - correct answer
✔✔Estimated Avg. Annual
/ (divided by)
IncomeAverage Investment
what is the average investment over the useful life? - correct answer ✔✔if straight-line depreciation and
no residual value are assumed then it equals to one-half of the original cost
cash payback period - correct answer ✔✔The expected period of time that will pass between the date of
an investment and the complete recovery in cash (or equivalent) of the amount invested.
net cash flow - correct answer ✔✔The excess of the cash flowing in from revenue over the cash flowing
out for expenses
Payback Period - correct answer ✔✔Initial Cash Investment
/ (divided by)
Annual Net Cash Flow
present value concepts: - correct answer ✔✔1. present value of an amount
2. present value of annuity
present value index: - correct answer ✔✔total present value of net cash flow
/ (divided by)
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