Question 1

Identifying the need for a new capital investment is the last step in the six step process of capital investment analysis.

Accepted Answer

A) True 
 B)False  False

Question 2

Qualitative factors that are considered by decision makers include all of the following except

Accepted Answer

A)  impact on other company operations 
B)  revenue from fees 
C)  anticipated future technological improvements 
D)  competition. 
A)  impact on other company operations 
B)  revenue from fees 
C)  anticipated future technological improvements 
D)  competition. B

Question 3

Management of the Krausse Savings and Loan Association is in the process of evaluating the purchase of a new check sorting machine. The model under review will cost $70,000 and will require installation costs of $10,000. Similar machines have a ten-year life, and management has estimated that this sorter will have a residual value of $10,000 at the end of its life. Annual cost savings to be generated by the sorter will average $14,000 over the ten-year period. Management's minimum desired rate of return is 12 percent.
Present value multipliers:
   
a. Using before-tax information and the net present value method to evaluate this capital investment, determine whether the company should purchase the check sorting machine. Support your answer.
b. If management had decided on a minimum desired before-tax rate of return of 14 percent, should the check sorting machine be purchased? Show all computations to support your answer.

Accepted Answer

a. Decision on purchase of machine, using a 12 percent before-tax rate of return:
   The machine will yield more than a 12 percent before-tax return, so an affirmative decision should be made.
b. Decision on purchase of machine, using a 14 percent before-tax rate of return:
   The machine should not be purchased because of the negative net present value.

Question 4

Depending on the mixture of sources of capital, a company's cost of capital will vary.

Accepted Answer

A) True 
 B)False

Question 5

To analyze a capital investment using the accounting rate-of-return method, one can use an estimated amount for the annual net income.

Accepted Answer

A) True 
 B)False

Question 6

The financing structure of Taylor communications is as follows: $$\begin{array} {  |l | c | c | } 
\hline \text { Eaurce of Capital } & \text { Propartion of Capital } & \text { Cast of Capital } \
\hline\text { Debt financing } \$ 300,000 & 30 \% & 6 \% \
\text { Preferred stack, } \$ 100,000 & 10 \% & 8 \% \
\text { Cammon stack, } \$ 400,000 & 40 \% & 12 \% \
\text { Retained earninge, } \$ 200,000 & 20 \% & 12 \% \
\hline
\end{array}$$ The overall cost of capital is

Accepted Answer

A)  2.4% 
B)  4.8% 
C)  .8% 
D)  9.8% 
A)  2.4% 
B)  4.8% 
C)  .8% 
D)  9.8%

Question 7

The minimum rate of return is also known as

Accepted Answer

A)  hurdle rate 
B)  payback period 
C)  net present value 
D)  cost of debt 
A)  hurdle rate 
B)  payback period 
C)  net present value 
D)  cost of debt

Question 8

Seattle, Inc., is contemplating a project that costs $180,000. Expectations are that annual cash revenues will be $70,000 and annual expenses (including depreciation) will total $30,000. The project has a six-year useful life and a residual value of $30,000. Assume Seattle Inc. uses straight line method of depreciation. The project's payback period is

Accepted Answer

A)  2.31 years. 
B)  2.77 years. 
C)  2.14 years. 
D)  2.57 years. 
A)  2.31 years. 
B)  2.77 years. 
C)  2.14 years. 
D)  2.57 years.

Question 9

The accounting rate-of-return method does not consider the time value of money.

Accepted Answer

A) True 
 B)False

Question 10

The expected life, estimated cash flow and investment cost are the three methods used in the evaluation of capital investment proposals.

Accepted Answer

A) True 
 B)False

Question 11

Depreciation expense influences cash flows because it directly affects

Accepted Answer

A)  the amount of income taxes paid by the company. 
B)  cash received from revenues during the current period. 
C)  the carrying value of the asset. 
D)  accumulated depreciation. 
A)  the amount of income taxes paid by the company. 
B)  cash received from revenues during the current period. 
C)  the carrying value of the asset. 
D)  accumulated depreciation.

Question 12

Ordinary annuity cash flows occur at the beginning of the interest period.

Accepted Answer

A) True 
 B)False

Question 13

Employees from every part of the organization participate in capital investment analysis.

Accepted Answer

A) True 
 B)False

Question 14

The accounting rate-of-return method is widely used to measure the estimated performance of a capital investment, primarily because it is very accurate.

Accepted Answer

A) True 
 B)False

Question 15

Capital investment analysis is a decision process for the purchase of capital facilities, such as buildings and equipment.

Accepted Answer

A) True 
 B)False

Question 16

The three techniques used to evaluate capital investment alternatives all use the project's expected net income.

Accepted Answer

A) True 
 B)False

Question 17

When two or more capital investment proposals are being evaluated using the accounting rate-of-return method, the proposal that yields the highest ratio of net income to average cost of investment is selected.

Accepted Answer

A) True 
 B)False

Question 18

You are given the following present value factors at 8 percent, the Tehachapi Glass Company's minimum desired rate of return:
 $\begin{array}{ccc}
\text { End of Period } & \text { Present Value of } \mathbf{\$ 1} & \begin{array}{c}
\text { Present Value of an } \
\text { Annuity of } \mathbf{\$ 1}
\end{array} \
1 & .926 & 926 \
2 & .857 & 1.783 \
3 & .794 & 2.577 \
4 & .735 & 3.312 \
5 & .681 & 3.993 \
6 & .630 & 4.623
\end{array}$ 
The Tehachapi Glass Company is considering the replacement of a piece of equipment. The old machine has a carrying value of $800 and a remaining estimated life of five years, with no residual value at that time. Present residual value is $200. The new equipment will cost $1,200, including transportation and installation. It has an estimated life of five years, with no residual value then. Annual cash operating costs are $405 for the old machine and $165 for the new machine. Round answers to two decimal places. 
a. Compute the present value of the operating cash outflows for the old machine.
b. Compute the present value of the operating cash outflows for the new machine.
c. Compute the present value of the cash operating savings if the new machine is purchased.
d. What is the net present value of the replacement alternative?

Accepted Answer

a. Present value = $405 - 3.993 = $1,617

Question 19

Availability of funds is not the criteria for deciding on the capital investment proposals.

Accepted Answer

A) True 
 B)False

Question 20

A project is accepted under the net present value method when

Accepted Answer

A)  the percentage return is greater than a predetermined minimum percentage. 
B)  total net cash inflows exceed the purchase price of the asset. 
C)  the purchase price of the asset is less than the present value of net cash inflows. 
D)  the present value of net cash inflows exceeds a predetermined minimum amount. 
A)  the percentage return is greater than a predetermined minimum percentage. 
B)  total net cash inflows exceed the purchase price of the asset. 
C)  the purchase price of the asset is less than the present value of net cash inflows. 
D)  the present value of net cash inflows exceeds a predetermined minimum amount.

Exam 28: Capital Investment Analysis

Identifying the need for a new capital investment is the last step in the six step process of capital investment analysis.

Qualitative factors that are considered by decision makers include all of the following except

Depending on the mixture of sources of capital, a company's cost of capital will vary.

To analyze a capital investment using the accounting rate-of-return method, one can use an estimated amount for the annual net income.

The financing structure of Taylor communications is as follows: Eaurce of Capital Propartion of Capital Cast of Capital Debt financing \ 300,000 30\% 6\% Preferred stack, \ 100,000 10\% 8\% Cammon stack, \ 400,000 40\% 12\% Retained earninge, \ 200,000 20\% 12\% The overall cost of capital is

The minimum rate of return is also known as

The accounting rate-of-return method does not consider the time value of money.

The expected life, estimated cash flow and investment cost are the three methods used in the evaluation of capital investment proposals.

Depreciation expense influences cash flows because it directly affects

Ordinary annuity cash flows occur at the beginning of the interest period.

Employees from every part of the organization participate in capital investment analysis.

The accounting rate-of-return method is widely used to measure the estimated performance of a capital investment, primarily because it is very accurate.

Capital investment analysis is a decision process for the purchase of capital facilities, such as buildings and equipment.

The three techniques used to evaluate capital investment alternatives all use the project's expected net income.

When two or more capital investment proposals are being evaluated using the accounting rate-of-return method, the proposal that yields the highest ratio of net income to average cost of investment is selected.

Availability of funds is not the criteria for deciding on the capital investment proposals.

A project is accepted under the net present value method when

Uses of Accounting Information and the Financial Statements

Analyzing Business Transactions

Measuring Business Income

Completing the Accounting Cycle

Financial Reporting and Analysis

The Operating Cycle and Merchandising Operations

Internal Control

Inventories

Cash and Receivables

Current Liabilities and Fair Value Accounting

Long Term Assets

Contributed Capital

Long Term Liabilities

The Corporate Income Statement and the Statement of Stockholders Equity

The Statement of Cash Flows

Financial Performance Measurement

Partnerships

The Changing Business Environment-A Managers Pers

Cost Concepts and Cost Allocation

Costing Systems: Job Order Costing

Costing Systems Process Costing

Activity-Based Systems-Abm and Lean

Cost Behavior Analysis

The Budgeting Process

Performance Management and Evaluation

Standard Costing and Variance Analysis

Short Run Decision Analysis

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