Deck 12: Capital Investment

Question 1

Which of the following statements is true regarding the decision rule for ARR?

A) All of these statements are true regarding the ARR decision rule.
B) Only investments with an ARR higher than the RRR should be considered.
C) The decision rule for ARR varies among entities.
D) Generally, the investment with the highest ARR is to be accepted.

Answer 1

A

Question 2

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 explain uncertainty in finance.

Answer 2

A

Question 3

A company is evaluating an investment proposal using the payback period method.Cash inflows are expected to be $80 000 in year 1,$120 000 in year 2,$150 000 in year 3,and $180 000 in year 4.The initial investment required is $380 000.Assuming even cash inflows throughout each year,the payback period is:

A) 3 years.
B) 3.17 years.
C) 3.34 years.
D) 3.47 years.

Answer 3

B

Question 4

A multi-national retailer invests $50 million in capital expenditure to open 5 new stores in different countries.Which of the following is the most likely investment category for this type of project?

A) New investments to increase revenue.
B) New technology to decrease costs.
C) Replacement of old assets as they wear out.
D) The capital investment project does not fit into any of these categories.

Question 5

Using the information in the table below,calculate the ARR.
$\begin{array}{|l|r|}\hline\text { Expected net cash flows: } \\\text { - Year 1 } & \$ 60000 \\\hline\text { - Year 2 }& \$ 70000 \\\hline \text {- Year 3 }& \$ 120000 \\\hline\text { - Year 4 }&\$ 90000 \\\hline\text { - Year 5 }& \$ 80000 \\\hline \text {Annual depreciation }& \$ 12000 \\\hline \text {Period of investment} & \text {5 years} \\\hline \text {Initial investment} & \$ 600000 \\\hline \text {Value at end of the investment period }& \$ 50000 \\\hline\end{array}$

A) 30.55%
B) 22.15%
C) 25.85%
D) 26.18%

Question 6

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

A) cloud computing.
B) all of these options.
C) bill payment systems.
D) computer networks to streamline the ordering process.

Question 7

Jimmy's Tacos is considering investing $35 000 in a new 'pop-up' shop beside a popular Melbourne park.Jimmy estimates the net cash inflow will increase by $14,000 each year for the next 5 years.The payback period for the new taco shop is:

A) 2 years.
B) 2.5 years.
C) 3 years.
D) 3.5 years.

Question 8

Using the information in the table below,calculate the ARR.

$\begin{array}{|l|r|}\hline \text {Average profit before depreciation} &\$ 75000 \\\hline\text { Annual depreciation }& \$ 15000 \\\hline \text {Period of investment} & \text {4 years} \\\hline \text {Initial investment }&\$ 800000 \\\hline \text {Value at end of the investment period} & \$ 100000 \\\hline\end{array}$

A) 15%
B) 16.67%
C) 13.33%
D) 18.75%

Question 9

An advantage of the payback period method of investment decision making is:

A) it considers the time value of money.
B) it is difficult to understand.
C) it ignores cash flows after the initial investment is paid back.
D) it is simple to calculate.

Question 10

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

A) the process of physically implementing the project.
B) the planning process.
C) the replacement process.
D) arranging finance.

Question 11

One method of investment decision making that is appealing to managers is the accounting rate of return (ARR).This method measures the average profit over a period as a percentage of the average:

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

Question 12

A major deficiency of the ARR method is:

A) it ignores the importance of cash as the ultimate resource.
B) profits and costs are measured the same way.
C) it ignores the timing of cash flows and subsequent profits.
D) it is too simplistic to be an appropriate decision-support tool by itself.

Question 13

The ARR uses the same methodology as which measure of profitability?

A) Return on equity.
B) Cash flow to sales.
C) Gross profit margin.
D) Return on assets.

Question 14

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

A) mostly accurate.
B) very accurate.
C) too simplistic to be the only tool used in decision-making.
D) too complex for normal use.

Question 15

Most entities,when making an investment decision using the ARR method,will set a minimum level of return known as their Required Rate of Return (RRR).This RRR is based on:

A) industry averages.
B) the entity's past performances.
C) currently available returns from other investments outside the industry.
D) any of the above measures can be used to set a RRR.

Question 16

The first step involved in making an investment decision is the:

A) collection of data.
B) selection of a decision-support tool.
C) identification of all available investment alternatives.
D) interpretation of results.

Question 17

A typical feature of investments is:

A) they involve risk and uncertainty due to inability to accurately predict future revenues and costs.
B) they are easy to reverse without a substantial loss of funds.
C) they normally require a minimal cash outlay in the beginning.
D) they rarely span long periods of time.

Question 18

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 explain risk in finance.

Question 19

When an entity invests solely to replace worn out equipment they also often end up incorporating new technology.This is considered as:

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

Question 20

A retailer invests $500,000 in a new computer network to streamline purchasing,inventory control and bill payments.Which of the following is the most likely investment category for this type of project?

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

Question 21

An advantage of the NPV method is that:

A) it relies on the use of an appropriate discount factor for the circumstances.
B) optimum outcomes are achieved simply by ranking projects according to their NPVs.
C) only cash flows are taken into account, so it is not affected by changes to accounting rules and standards.
D) all of the options are advantages of the NPV method.

Question 22

Which of the following statements is true with regards to the cash flows used in the net present value method?

A) The net cash inflows for each period may have a positive or negative value.
B) The final net cash inflow includes any salvage value that may be gained by selling the investment.
C) All expected cash flows throughout the investment period are considered in the NPV calculation.
D) All the statements are true.

Question 23

A disadvantage of the payback period method of investment analysis is that:

A) it gives a crude measure of calculating risk.
B) it is easy to understand.
C) it ignores all cash inflows after the payback has occurred.
D) all of these options are considered disadvantages.

Question 24

Which of the following statements concerning the internal rate of return method of capital decision making is not correct?

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

Question 25

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

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

Question 26

If two investments are equally profitable,most entities would:
A) choose the investment where the outlaid cash is to be recouped in the shortest amount of time.

A) not be concerned about which investment was chosen.
B) choose the investment where the outlaid cash is to be recouped in the longest amount of time.
D) choose neither investment.

Question 27

The opportunity cost of making an investment is:

A) not relevant when applying the NPV method.
B) equal to the required discount rate.
C) the cost of forgoing a benefit from an alternative investment.
D) the initial cash outlay of the investment.

Question 28

If the interest rate is 8%,receiving $10 000 in 3 years' time is equivalent to receiving what amount today?

A) $10 000
B) $7 938
C) $3 880
D) $9 2559

Question 29

One assumption of the net present value method of investment decision making is:

A) that the cash flows have occurred at the end of each relevant period.
B) that projects are suitable investments if the NPV equals zero.
C) that cash flows are constant throughout the project.
D) that projects with lower NPVs are more profitable.

Question 30

When presented with the choice of multiple profitable projects,which of the following statements is true?

A) The project with the highest NPV may not be the best project when capital is limited.
B) The entity should choose to undertake all the profitable projects at the one time.
C) The entity should choose the project with the lowest NPV.
D) None of the options are true.

Question 31

The investment decision rule for net present value calculations is to invest:

A) in the project with the lowest NPV.
B) in the project with the lowest discount rate.
C) in the project with the highest discount rate.
D) in the project with the highest positive NPV.

Question 32

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

A) 15%
B) the government bond rate.
C) the cost of capital.
D) the current borrowing rate.

Question 33

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

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

Question 34

An advantage of the payback period method of investment analysis is:

A) it treats all cash inflows equally over the investment period.
B) it provides a crude measure of the riskiness of a project.
C) it ignores all cash inflows after payback has occurred.
D) it is difficult to calculate.

Question 35

A manufacturer is considering the purchase of a new processing machine.The initial cost of the machine will be $300 000.The expected increase in net cash inflow as a result of the purchase is $75 000 for the first year and $160 000 for each of the next two years.The machine will have a salvage value of zero.At a discount rate of 5%,the net present value of the machine is:

A) $354 758
B) $41 201
C) $54 758
D) $68 934

Question 36

What is the reason for calculating the present values of all the expected cash flows of a project?

A) So that the initial investment may be matched with the expected cash inflows in terms of the same monetary units with the same purchasing power.
B) To overcome the problem of recognising that $1 received in 2 years' time is worth more than $1 received now.
C) To overcome the problem of a fluctuating discount rate.
D) To remove any opportunity costs.

Question 37

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) high enough for management to accept.
C) the highest of all investments being considered.
D) equal to zero.

Question 38

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) the timing of cash flows is not considered.
C) it does not take into account all of the expected cash flows.
D) all of the options are disadvantages of the NPV method.

Question 39

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

Question 40

Discounted cash flow techniques recognise that:

A) $1 received in the future is worth less than $1 received today.
B) $1 received in the future is worth more than $1 received today.
C) $1 received in the future is equal to $1 received today.
D) none of the above options is correct

Question 41

Ranking projects with a higher NPV above other projects when capital is limited is considered to be a/an _________ (advantage/disadvantage)of the NPV method.

Question 42

The accounting rate of return is calculated as average _____________ divided by average_____________.

Question 43

The two cash flow measures that overcome the time value of money problem are:

A) NPV and PP.
B) IRR and ARR.
C) NPV and IRR.
D) ARR and PP.

Question 44

Once an investment decision has been made,the next step is often the ___________ decision.

Question 45

Which of the following is least likely to build customer loyalty?

A) Reward for past service.
B) Product or service always available when required.
C) Fast response times.
D) Completing supply contracts within the time parameters.

Question 46

The cost of forgoing benefits from an alternative investment is known as the ___________ cost.

Question 47

Which of the following statements is true when projects with IRRs greater than the entity's cost of capital are accepted?
A) The projects will enhance the wealth of the owners.

A) The projects will return the cost of finance.
B) The projects will make additional returns over and above the cost of finance.
D) All of the statements are true.

Question 48

Social and environment factors have become important concerns for a/an (increasing/decreasing)_________________number of investments.

Question 49

Making an investment decision also requires consideration of:

A) any taxation impacts.
B) social responsibilities.
C) available monetary and human resources.
D) All of the above require consideration.

Question 50

The dividend imputation scheme means investors in companies that pay income tax are able to claim back which of the following against their dividend income?

A) tax expenses.
B) tax credits.
C) tax debits.
D) the full amount of dividend income.

Question 51

Discounted cash flow models assume that $100 received now is worth (more/less)__________________ than $100 received in the future.

Question 52

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 53

When considering 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

The ___________ (shorter/longer)a payback period is,the greater the risk.

Question 55

When analysing most investment options,which of the following statements is true?

A) The analysis assumes that the relevant finance options are available.
B) The analysis assumes that sufficient human resources will be available.
C) The investment will be impacted by taxation.
D) All of the options are true in regards to most investment analysis.

Question 56

Uncertainty in investment decisions is the unmeasurable variation in outcomes while ___________ is defined as the measurable variation in outcomes.

Question 57

In Australia,the dividend imputation scheme treats taxation on investments differently according to whether the entity undertaking the investment is:

A) classified as large or small.
B) a sole trader, partnership or company.
C) registered for GST.
D) a public or private company.

Question 58

A project with a higher discount rate will generally have a (higher/lower)__________level of risk.

Question 59

The taxation impact on a simple investment is that:

A) cash outflows are lower.
B) cash inflows are lower.
C) both cash inflows and outflows are lower.
D) cash flows are not affected.

Question 60

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

Question 61

Investments requiring specialised services must also consider whether or not the ____________ with the relevant skills will be available when they are needed.

Question 62

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

Question 63

Cash flow analysis for investment decision making can be further complicated by the effect of _______________.