Year6%10%12%1.943.909.8932.890.826.7973.840.751.7124.792.683.636
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82. Using the following partial table of present value of $1 at compound interest, determine the present value of$20,000 to be received four years hence, with earnings at the rate of 10% a year:Year6%10%12%1.943.909.8932.890.826.7973.840.751.7124.792.683.636A.$13,660B.$12,720C.$15,840D.$10,400
83. When several alternative investment proposals of the same amount are being considered, the one with thelargest net present value is the most desirable. If the alternative proposals involve different amounts ofinvestment, it is useful to prepare a relative ranking of the proposals by using a(n):
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84. Which method of evaluating capital investment proposals uses present value concepts to compute the rate ofreturn from the net cash flows expected from capital investment proposals?
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85. A series of equal cash flows at fixed intervals is termed a(n):
125Chapter 25(10) /CapitalInvestment Analysis20.The rate of earnings is 6% and the cash to be received in one year is $10,000. Determine the presentvalue amount, using the following partial table of present value of $1 at compound interest:Year6%10%12%1.943.909.8932.890.826.7973.840.751.7124.792.683.636DIF:ModerateOBJ:25(10)-02
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NAT:AACSB Analytic | IMA-Investment Decisions21.Using the following partial table of present value of $1 at compound interest, determine the presentvalue of $20,000 to be received four years hence, with earnings at the rate of 10% a year:Year6%10%12%1.943.909.8932.890.826.7973.840.751.7124.792.683.636a. $13,660b. $12,720c. $15,840d. $10,400ANS:ADIF:ModerateOBJ:25(10)-02
NAT:AACSB Analytic | IMA-Investment Decisions22.When several alternative investment proposals of the same amount are being considered, the onewith the largest net present value is the most desirable. If the alternative proposals involve differentamounts of investment, it is useful to prepare a relative ranking of the proposals by using a(n):DIF:EasyOBJ:25(10)-02
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NAT:AACSB Analytic | IMA-Investment Decisions
The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called capital investment analysis.
The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called cost-volume-profit analysis.
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.
Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals.
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.
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.
Average rate of return equals average investment divided by estimated average annual income.
Average rate of return equals estimated average annual income divided by average investment.
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.
The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow.
The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow.
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.
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.
Methods that ignore present value in capital investment analysis include the cash payback method.
Methods that ignore present value in capital investment analysis include the net present value method.
Methods that ignore present value in capital investment analysis include the average rate of return method.
Methods that ignore present value in capital investment analysis include the internal rate of return method.
The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows.
The cash payback method of capital investment analysis is one of the methods referred to as a present value method.
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 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%.
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%.
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%.
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.
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.
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.
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.
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.
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.
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.
In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values.
If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis.
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.
If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis.
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 accepted.
A present value index can be used to rank competing capital investment proposals when the net present value method is used.
The internal rate of return method of analyzing capital investment proposals uses the present value concept to compute an internal rate of return expected from the proposals.
A series of equal cash flows at fixed intervals is termed an annuity.
A qualitative characteristic that may impact upon capital investment analysis is manufacturing control.
A qualitative characteristic that may impact upon capital investment analysis is employee morale.
A qualitative characteristic that may impact upon capital investment analysis is manufacturing productivity.
A qualitative characteristic that may impact upon capital investment analysis is the impact of investment proposals on product quality.
A qualitative characteristic that may impact upon capital investment analysis is manufacturing flexibility.
Charitable contributions are often used as a means of reducing the amount of income tax expense arising from capital investment projects.
The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis.
The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing.
A capital expenditures budget summarizes the decisions made for the acquisition of fixed assets for several future years.
Capital rationing is the process by which management decides how to divide the capital budget among the various departments or divisions in the company.