Deck 16: Equipment Acquisition and Disposal

Question 1

Long-term investment decisions are usually driven by the ________________ equipment now rather than later.

A) need for replacing
B) competitive environment and the need for acquiring
C) tax effect of acquiring
D) cost of purchasing
E) discount received on

Answer 1

C

Question 2

The next step in the (requisition) process is to compare the acquisition request with the overall _______________ of the firm. These _________ will be the basis for evaluating proposals for new equipment and making selections.

A) direction / guidelines
B) budget / guidelines
C) strategic plan / plans
D) competitive strategies / strategies
E) long-run objectives / objectives

Answer 2

E

Question 3

The net incremental cash flows should be measured. The ________ life of the project versus the _________ life of the project also must also be considered.

A) useful / economic
B) economic / physical
C) mechanical / financial
D) financial / useful
E) useful / financial

Answer 3

B

Question 4

The capital acquisition process is initiated with a department requesting equipment replacements and expansions. The request is then measured against __________________.

A) the organization's budgets
B) the potential returns on investments
C) the organization's goals
D) the organization's desires and ability to pay
E) the organization's financial health

Question 5

______________ are net economic benefits generated by an investment project.

A) Gross cash flows
B) Returns on investments
C) Profits
D) Net cash flows
E) Sales

Question 6

The acquisition of capital equipment involves the allocation and commitment of funds. These investments usually require significant expenditures and are made with the expectation that the _________ will be extended over several years.

A) returns
B) effectiveness
C) life of the equipment
D) warranty
E) payments

Question 7

The objectives of the company are important because the purchase of any major equipment will probably affect the _______________ of the company for many years in the future.

A) competitive advantage
B) capacity and the methods
C) long range direction and success
D) financial health
E) production process and efficiency

Question 8

The classification of the various capital equipment requests must be based on certain common characteristics. Although equipment classification varies from company to company, capital projects are frequently grouped according to the following categories:
Replacementsxpansion (new products)xpansion (existing products)
Other (heating system for plant)
Other (new construction)
Other (renovation)

Question 9

ompanies on a growth pattern fueled by ______________ acquire new equipment to expand into a newly introduced product line. Investment in capital equipment for expansion purposes should increase incremental revenue.

A) innovation
B) competition
C) increased sales
D) technology
E) customer demand

Question 10

The requisition process is sometimes initiated by a ___________________ or special appropriation for major acquisitions. Sometimes firms place a monetary limit upon acquisition that can be made without special approval.

A) "wish list," low-cost projection
B) special project
C) special project, special promotion
D) member of the board of directors
E) vice president of operations

Question 11

The timing of these capital acquisition decisions is critical to the financial health of a firm. However, once capital investment decisions are made, they are easily reversible.

Question 12

ompany goals may be slightly different across organizations, but all __________ firms must eventually _____________.

A) for profit / maximize profitability
B) manufacturers / become effective
C) non-profit / provide a useful service
D) successful / provide good customer service
E) service / provide good customer service

Question 13

If a capital equipment request survives the new project ideas step, __________ estimates must be considered for each capital investment idea.

A) budget
B) income
C) profit
D) cash-flow
E) depreciation

Question 14

____________________ is usually motivated by a need to increase quality, reduce operating expense, and provide more efficiency.

A) The building of a new plant
B) The replacement of old equipment
C) The need to maintain a competitive advantage
D) Acquiring new technology
E) Increasing the operations budget

Question 15

The ________ cash inflows and outflows of each capital project alternative must be evaluated on an incremental cash-flow basis.

A) pre-tax
B) general
C) standard
D) major
E) after-tax

Question 16

The acquisition of capital equipment is a major decision in most firms. The capital acquisition decision has a significant effect on numerous aspects of the firm's ____________. The tax planning process is also a significant component of this decision.

A) operations
B) competitive advantage
C) financial health
D) strategic plan
E) long-range plan

Question 17

Which of the following items should be applied as criteria to the cash-flow analysis?

A) The economic life of the project.
B) The net cash flow.
C) The net cash investment.
D) All the above
E) "B" and "C" only

Question 18

There are numerous testimonials regarding the use of life cycle ________ for both capital equipment and systems acquisition.

A) expensing
B) depreciating
C) production
D) consideration
E) costing

Question 19

xpanding existing equipment is also a way to increase ________. The other categories of capital investment revolve around the plant, facilities, and construction.

A) market share
B) efficiency
C) output
D) input
E) quality

Question 20

Most of the equipment costs are pegged to ____________.

A) an industry "blue book"
B) the financial analysis process
C) an industrial price listing
D) the going rate
E) industry norms

Question 21

Most loans require the borrower to place a reasonable down payment. Leases generally do require an initial down payment, beyond the first and last monthly payment.

Question 22

The internal rate of return rule is to accept the investment project if the opportunity cost of capital is less than the internal rate of return. If the cost of capital is equal to the IRR, the project has zero NPV. On the other hand if the cost of capital is greater than the IRR, the project has a negative NPV. The IRR will give the same answer as the NPV. The IRR is defined as the discount rate that will make the NPV of the project equal zero.

Question 23

If the lessor assumes the costs of maintenance, insurance, and taxes, it will usually pass the expense to the lessee in the form of increased lease payments.

Question 24

There is also a positive balance sheet effect of leasing simply because the lease is considered an asset.

Question 25

The gross present value recognizes that a dollar to day is worth more than a dollar tomorrow, simply because the dollar today can be invested to start earning interest immediately.

Question 26

or the purpose of the purchasing professional, two methods will be considered: (1) traditional loans and (2) leases. The leasing method has been become very popular in the last 20 years and can be used to finance nearly any kind of fixed asset. The lease-versus-purchase decision usually requires many considerations.

Question 27

In the case of fast-moving technology, it is possible for the lessee to shift the risk level to the lessor. Computer technology is a good example of the risk of ______________.

A) being in the computer business
B) doing business
C) obsolescence
D) being a "cutting-edge" company
E) being in a competitive market

Question 28

leasing arrangement can actually ________ a firm's borrowing capacity.

A) increase
B) worsen
C) lower
D) improve
E) negate

Question 29

The total operating costs also will have a significant effect on the capital acquisition. Which of the following are the principal operating variables that must be investigated?

A) productivity
B) durability
C) dependability
D) All the above
E) "A" and "B" only

Question 30

Payback is the best known investment criterion. Payback is the number of ________ it takes to repay the initial investment.

A) payments
B) quarters
C) years
D) months
E) premiums

Question 31

ffects on future financing. Leasing versus purchasing can also obligate cash needed for other purposes or alternative projects.

Question 32

t (the financial plan analysis) stage, a comprehensive comparison of the selected alternatives is performed. The planned project selections are then measured against the initial company _____________.

A) wants and needs
B) goals and objectives
C) short term plans
D) long term plans
E) strategic plans

Question 33

Tax effect. Lease payments are expenses that can be written off against income immediately. Loans are depreciated over a longer period of time. One major advantage of leases over loans is the impact leases have on land use. When a firm leases land for its operations, it can not deduct the lease expense from income. Purchased land, on the other hand, can be deducted from tax obligations.

Question 34

The difference between the ARR and NPV methods is the timing of the various ____________ cash flows. In other words, if the __________ increases, the project becomes increasingly more attractive.

A) EATCF / EATCF
B) AAACR / AAACR
C) EEPOD / EEPOD
D) ABTCF / ABTCF
E) ACBSP / ACBSP

Question 35

The after-tax borrowing rate is commonly known as the ___________ rate.

A) fixed
B) adjustable
C) current
D) gross
E) discount

Question 36

With cash-flow data in hand, the company can begin the formal process of evaluating capital equipment or projects. The five most commonly used methods for an economic evaluation of individual projects are payback, average rate of return, gross present value, internal rate of return, and profitability index.

Question 37

If expected ________ value is high for leased equipment, the cost of ownership to the lessee may be lower. In this case, the lessee should write a contract that will enable it to buy the fixed asset at the end of the lease term.

A) purchase
B) salvage
C) terminal
D) original
E) acquisition

Question 38

The ___________________ is defined as the present value of future flows divided by the initial investment.

A) profitability index (PI)
B) return on investment (ROI)
C) acid test (AT)
D) profit after tax (PAT)
E) investment index (II)

Question 39

The final selection is usually based on the accept-reject decision. The __________ may be based on the cost of capital, the opportunity cost, and other conceptual standards.

A) current rate
B) profitability rate
C) investment rate
D) hurdle rate
E) rejection rate

Question 40

The average rate of return is the average cash flow after tax ________ the initial investment: The ARR is the most popular evaluation criterion used today.

A) subtracted from
B) divided by
C) multiplied by
D) added to

Question 41

The disposal of capital equipment is becoming more complicated. The _________________________ has developed specific guidelines for disposing of specific types of obsolete equipment.

A) Department of Commerce
B) State Department
C) Department of Transportation
D) Environmental Assurance Agency
E) Environmental Protection Agency

Question 42

espite today's competitive markets, it may not be cost-effective to procure used equipment. Depending on the purpose and expected use of the purchased equipment, it may be more cost-effective to buy new equipment.

Question 43

The __________ function is usually charged with the task of scrapping or selling retired equipment.

A) financial
B) operating
C) sales and marketing
D) maintenance
E) purchasing

Question 44

There are three types of leases:
Sales and leaseback arrangements.Operating lease.apital lease.

Question 45

In cases where significant demand or uses already exist for a particular piece of equipment, the purchase of new equipment is appropriate. The technological advantages of new equipment also may increase productivity in these situations.

Question 46

The _________ stage also will identify mismanagement and flaws in the process. If the process has been unsatisfactory, it should be revised or replaced.

A) audit
B) budgeting
C) decision
D) implementation
E) purchasing

Question 47

Since the lease payment is fixed and other costs associated with the lease (salvage value, operating expenses, and interest rates) are highly uncertain, it is important to evaluate the _______________ rate for a lease-versus-buy decision.

A) discount
B) fixed
C) current
D) standard
E) implicit interest

Question 48

The ____________ process is complex and leads to many assumptions and estimates. The entire project should be audited to analyze the differences.

A) budgeting
B) capital acquisition
C) strategic planning
D) SWOT analysis
E) expansion