Foundations of Accounting for Peregrine Global Services Exam
Questions and Verified Answers| 100% Correct| Grade A+
Capital investment analysis - ✔✔the process by which management plans, evaluates, and
controls investments in fixed assets
Capital investment evaluation methods - ✔✔1. methods that do not use present values
2. Methods that use present values
what two methods do not use present values? - ✔✔The average rate of return method in the cash
payback method
what two methods do use present values? - ✔✔Net present value method, an internal rate of
return method
Average rate of return method - ✔✔A measure of the average income as a percent of the
average investment and fixed assets.
The numerator is the average of the annual income expected to be earned from the investment over the
investment life, an amount that is net of depreciation. The denominator is the average book value of the
investment over the investment life.
Cash payback method - ✔✔expected period of time between the date of an investment and
the recovery in cash of the amount invested
Present value method - ✔✔both the amount in the timing of net, cash flows in evaluating
an investment. divided into the present value of an amount in the present value of annuity
Present value of annuity - ✔✔The sum of the present values of a series of equal cash flows to
be received at fixed intervals.
, Net present value method - ✔✔compares the amount to be invested with the present value of the net
cash inflows
Present Value Index - ✔✔total present value of net cash flow/ amount to be invested
Internal Rate of Return Method - ✔✔uses present value concepts to compute the rate of return from
a capital investment proposal based on its expected net cash flows
income tax - ✔✔A tax on people's earnings
Proposals with Unequal Lives - ✔✔ignoring differences in the useful lives of alternative investments,
can distort the present value analysis and adversely affect decisions. The difference in useful lives can
be addressed by adjusting the cash flow assumptions of the proposals to end at the same time.
Lease versus capital investment - ✔✔Leasing allows a business to use fixed assets without tying up
the large amounts of cash that would be needed to purchase them.
Uncertainty in capital investment analysis - ✔✔The risks associated with uncertainty can be
analyzed and considered by subject and capital investment analysis to sensitivity analysis.
price levels and exchange rates - ✔✔Price levels may change due to inflation which occurs when general
price levels are rising. Well general prices are rising the returns on an investment must exceed the rising
price level or else the cash return on the investment becomes less valuable overtime.
Qualitative Considerations - ✔✔Product quality reduction in the number of defective units,
manufacturing flexibility, reduced inventory is needed to operate, efficiently employee morale
manufacturing, productivity, reduction, or elimination of the need for inspection to determine product
quality and market opportunity
Capital Rationing - ✔✔The process by which management make choices and allocates available
funds among competing capital investment proposals.
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