Deck 12: Capital Investment

Question 1

The payback method of investment decision making is generally regarded as:

A)too simplistic.
B)mostly accurate.
C)very accurate.
D)too complex for normal use.

Answer 1

A

Question 2

An advantage of the payback method of investment decision-making is

A)it takes the time value of money into account.
B)it is consistent with return on asset measures.
C)it ignores cash flows after the initial investment is paid back.
D)none of the options is correct

Answer 2

D

Question 3

A company is evaluating an investment proposal using the payback method.Cash inflows are expected to be $16 000 in year 1,$12 000 in year 2 and $8000 in year 3.The initial investment required is $32 000.Assuming even cash inflows within each year the payback period is:

A)2 years
B)2.25 years
C)2.5 years
D)2.6 years

Answer 3

C

Question 4

The first step in investment decision making is:

A)analysis of data.
B)selection of a decision rule.
C)collection of data.
D)identification of all investment alternatives.

Question 5

A retailer invests $1 million in a major computer network to streamline purchasing,inventory control,bill payments and income control.In which category of investment is this capital expenditure most likely to fit?

A)replacement of old assets as they wear out
B)new technology to decrease costs
C)new investments to increase revenue
D)the capital investment project does not fit any of the categories

Question 6

Uncertainty in finance:

A)is defined as the unmeasurable variation in outcomes
B)can be measured with a degree of confidence
C)is defined as measurable variation in outcomes
D)none of the options explains uncertainty in finance

Question 7

The accounting rate of return (ARR)method of investment decision-making measures average profit over the period as a percentage of average

A)net cash inflow.
B)net cash flow.
C)investment.
D)opportunity cost.

Question 8

If investing to replace worn out equipment also leads to technological improvements,this is

A)a bonus.
B)a necessity in the replacement decision.
C)irrelevant as if the old equipment was satisfactory then no improvement is necessary.
D)a waste of money as the more advanced equipment is,the more expensive it is.

Question 9

The formula for the accounting rate of return is:

A)average profit over the period of the investment divided by average investment.
B)average investment divided by average profit over the period of the investment
C)the sum of the expected cash inflows for the period of the investment minus the sum of the expected cash outflows for the period of the investment
D)none of the options gives the formula for the ARR

Question 10

It is generally agreed that the accounting rate of return tool for investment decision making is

A)too simplistic.
B)mostly accurate.
C)very accurate.
D)too complex for normal use.

Question 11

A likely investment to decrease costs for a manufacturing entity is:

A)cloud computing
B)new plant and machinery
C)bill payment systems
D)computer networks

Question 12

The Pizza Place is considering investing $80 000 in a new pizza oven.If it is estimated that,as a result of the investment,net cash inflow will increase by $21 000 pa.for 6 years,the payback period for the oven is:

A)4 years
B)3.8 years
C)5 years
D)6 years

Question 13

After an investment decision is made,the next step is:

A)physically implementation of the project or investment
B)to arrange finance for the project
C)to start the planning process
D)to analyse the data collected for decision making

Question 14

Which of the following is the way entities set their required rate of return (RRR)for investments?

A)the RRR is based on their own past performance
B)the RRR is based on industry averages
C)the RRR is determined by comparing the estimated ARR with currently available yields or returns from other investments outside their industries
D)all of the options are methods used by entities to set their RRR

Question 15

The ARR method of investment evaluation:

A)measures profits and costs in the same way
B)cannot differentiate between two equally profitable projects but with unequal timing of profits.
C)incorporates the time value of money.
D)is at odds with the ROA measure

Question 16

A retailer invests $20 million in capital expenditure projects to open 15 new stores.In which category of investment is this capital expenditure most likely to fit?

A)replacement of old assets as they wear out
B)new technology to decrease costs
C)new investments to increase revenue
D)the capital investment projects do not fit any of the categories

Question 17

Risk in finance:

A)is defined as the unmeasurable variation in outcomes
B)can never be measured with any degree of confidence
C)is defined as measurable variation in outcomes
D)none of the options explains risk in finance

Question 18

A major deficiency of the ARR method is:

A)none of the options is a major deficiency of the ARR method
B)it ignores the timing of cash flows and subsequent profits
C)profits and costs are measured the same way
D)it is too simplistic to calculate

Question 19

If average profit before depreciation is $145 000,annual depreciation is $20 000 per annum for 5 years and investment at the start of the period is
$1 000 000 and at the end of the period is $200 000,the average rate of return is:

A)7.5%
B)0.75%
C)12.5%
D)20.8%

Question 20

A typical feature of investments is:

A)they are risk free
B)they often require large amounts of resources in relation to the asset base of the entity
C)normally a relatively large cash outlay is required initially,but returns are received over a short period of time
D)they rarely span long periods of time

Question 21

A disadvantage of the NPV method is that:

A)the actual return in terms of the percentage of the investment outlay is not revealed
B)optimum outcomes may not be achieved simply by ranking projects according to their NPVs
C)the method relies on the use of an appropriate discount factor for the circumstances
D)all of the options are disadvantages of the NPV method

Question 22

The decision rule for net present value calculations is:

A)to invest if the NPV is above a hurdle level.
B)to invest in projects with the lowest discount rate.
C)to invest in projects with the highest discount rate.
D)to invest if the NPV is positive.

Question 23

Which of the following statements regarding profitable projects is true?

A)an entity can undertake as many profitable projects as it can find at any one time.
B)the project with the highest NPV may not be the best project when capital is limited.
C)profitable projects have an NPV of zero
D)none of the options is true

Question 24

An advantage of the net present value method is that

A)it is simple to calculate.
B)the time value of money is irrelevant.
C)it has an explicit decision rule.
D)it leaves inflation out of the calculation.

Question 25

The net present value of a project:

A)is not affected by taxation
B)may be affected by the taxation benefits that stem from non-cash costs such as depreciation
C)is not affected by the discount rate
D)will not be affected by inflation

Question 26

An oil company is examining a proposal to purchase a new drill.The initial cost of the drill will be $3 500 000.The expected increase in net cash inflow as a result of the purchase is $1 000 000 for the first year and $1 900 000 for each of the next two years.The drill will have zero salvage value.At a discount rate of 15% the net present value of the drill is:

A)$4 338 137
B)-$55 524
C)$55 524
D)$3 555 524

Question 27

The statement concerned with the ARR and the payback methods that is not correct is:

A)both methods are based on accounting profits
B)if two projects have the same ARR the one with the lowest payback period would be

Question 28

A disadvantage of the internal rate of return method of investment analysis is that:

A)the actual rate of percentage return is not revealed
B)it ignores the scale of projects so it does not focus on the generation of absolute wealth
C)the time value of money is ignored
D)it ignores all cash flow after a certain period

Question 29

If the interest rate is 4% receiving $100 in 2 years is equivalent to receiving what amount today?

A)$92
B)$92.45
C)$91.55
D)$71.42

Question 30

With the net present value method of capital investment analysis cash flows are assumed to occur

A)at the start of the period.
B)uniformly throughout the period.
C)in the middle of the period.
D)at the end of the period.

Question 31

An investment with a high risk margin has a high discount rate,which makes the net present value

A)higher.
B)lower.
C)unchanged as the risk has no effect on the NPV.
D)zero.

Question 32

The net present value method of investment decision-making:

A)can only be used if net cash flows are constant throughout the project.
B)assumes that the cash flows have occurred at the end of each relevant period
C)assumes that projects are suitable investments if the NPV equals zero
D)assumes that cash flows have occurred at the beginning of each relevant period

Question 33

An advantage of the payback method of investment analysis is:

A)it provides a crude measure of the riskiness of a project
B)it ignores the time value of money
C)it ignores all cash inflows after payback has occurred
D)none of the options is an advantage of the payback method of investment analysis

Question 34

Which of the following is not likely to affect the discount rate used to determine NPV?

A)inflation
B)risk
C)the opportunity cost of capital
D)deflation

Question 35

An advantage of the NPV method is that it takes into account:

A)the timing of the expected cash flows
B)all of the expected cash flows
C)only cash flows so it is not affected by changes to accounting rules and standards
D)all of the options are advantages of the NPV method

Question 36

Using the NPV method which factor is not relevant in determining the discount rate?

A)the rate of inflation
B)risk
C)the number of years the firm has been in business
D)opportunity cost

Question 37

All of the statements concerning the internal rate of return method of capital decision making are correct except:

A)It is used to find the rate of return of the project
B)Its decision rule is to accept projects that have a return higher than the hurdle rate
C)It takes into account the scale of projects
D)The IRR is the rate of return that discounts the cash flows of a project so that the present value of the cash inflow just equals the present value of the cash outflows

Question 38

To take into account greater risk in investment decision-making the discount rate must be

A)lower.
B)higher.
C)a fixed rate is used.
D)risk has no effect on the discount rate.

Question 39

If two investments are equally profitable:

A)most entities would not be concerned about which investment was chosen
B)most entities would chose the investment where the outlaid cash was recouped over a longer period of time
C)most entities would choose the investment where the outlaid cash was recouped earlier
D)most entities would chose both investments

Question 40

When deflation is a threat,which investment is favoured by defensive investors?

A)high quality bonds
B)defensive shares
C)dividend paying shares
D)all of the options are types of investments favoured by defensive investors

Question 41

The equation used to find the IRR is similar to the NPV equation,except that:

A)the value of the equation is set to zero when finding the IRR
B)the discount rate for IRR is always higher than for NPV
C)the discount rate for IRR is always lower than for NPV
D)none of the options is true

Question 42

The ___________ period is the period of time necessary to recoup the initial investment outlay from net cash flows.

Question 43

An advantage of the net present value method of investment decision-making is that it takes into account the __________ value of the expected future cash flows.

Question 44

Because of dividend imputation,in present value analysis of investments,taxation is treated differently according to whether the entity undertaking the investment is:

A)a sole trader,partnership or company
B)registered for GST
C)large or small
D)none of the options is true

Question 45

More risky investments have a higher discount rate which lowers the present value due to a _________ margin which is added to their opportunity interest rate.

Question 46

___________ cost is the cost of forgoing benefits that would otherwise be available.

Question 47

Which of the following is least like to be a factor in loyalty amongst loyal but largely self-serving customers?

A)product or service always available when required
B)desired product or service always available
C)product or service available at the price the customer is prepared to pay
D)reward for past service

Question 48

Risk in finance is defined as measurable variation in outcomes while ___________ is the unmeasurable variation in outcomes.

Question 49

The net present value and the internal rate of return equations are the same,except that the IRR the equation is set to

A)zero.
B)one.
C)the accounting rate of return.
D)the lowest NPV acceptable to management.

Question 50

With the internal rate of return method,the required rate of return of an entity is normally

A)cost of capital.
B)government bond rate.
C)20%.
D)borrowing rate.

Question 51

The decision rule for the internal rate of return method of investment decision-making is that projects will be accepted for rates that are

A)zero.
B)positive.
C)above the industry average.
D)above the entity's required rate of return.

Question 52

Which of the following is a likely outcome when projects with IRR's greater than the entity's cost of capital are accepted?

A)the investments will return the cost of finance
B)the investments will make additional returns over and above the cost of finance
C)the investments will enhance the wealth of the owners
D)all of the options are likely outcomes

Question 53

In determining whether to keep a machine or replace it,the original cost of the machine (is/is not)________ a factor that must be considered in the decision making process.

Question 54

Most investment analysis:

A)all the options apply to most investment analysis
B)assumes that the relevant finance options are available.
C)assumes that sufficient human resources will be available
D)will be impacted by taxation

Question 55

The internal rate of return of a project is the rate that leads to a net present value that is

A)as low as will be accepted by management.
B)zero.
C)high enough for management to accept.
D)as high as possible.

Question 56

The _____________ rate of return is calculated as average profit divided by average investment.

Question 57

The next step after making an investment decision is often to arrange _______________ and the start the planning and physical implementation of the investment project.

Question 58

Discounted cash flow models assume that $1 received now is worth (more/less)__________________ than $1 received in the future.

Question 59

The impact of tax on a simple investment

A)lowers cash outflows.
B)lowers cash inflows.
C)lowers cash inflows and outflows.
D)has no effect on cash flows.

Question 60

Projects with a higher risk will have a (higher/lower)__________ discount rate.

Question 61

Cash flow analysis for investment decision making can be further complicated by the effect of _______________ benefits that stem from non-cash costs such as depreciation are considered.

Question 62

A disadvantage of the internal rate of return method is that it can conflict with the _________ _______________ value method rankings.

Question 63

Social and environment concerns are (always/sometimes)_________________ recognised in investment decisions.

Question 64

The investor community is placing increasing importance on care of the natural environment and ____________ responsibility in investment decision making.

Question 65

The effect of dividend ______________ on the PV analysis of investments will depend on the on the legal structure of the entity involved.