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Exam 15: Capital Investment Analysis

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Question 61

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A project analysis using the net present value method indicates that the present value of cash inflows is $120,000, and the total amount of investment required at the start of the project is $100,000.Which of the following statements best describes the results of the project analysis?

A) The project should be accepted because the actual rate of return expected from the project is more than the minimum desired rate of return.
B) The project should be accepted because the actual rate of return expected from the project is less than the minimum desired rate of return.
C) The project should be rejected because the actual rate of return expected from the project is more than the minimum desired rate of return.
D) The project should be rejected because the actual rate of return expected from the project is less than the minimum desired rate of return.

E) A) and D)
F) A) and C)

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Question 62

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Qualitative considerations are best evaluated using present value methods such as internal rate of return.

A) True
B) False

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Question 63

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The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow.

Alpha Inc.is evaluating the purchase of a machine costing $350,000.The expected useful life of the machine is 5 years at the end which it would have no residual value, and the depreciation is assumed to be on straight-line basis.The estimated total income from the machine is $500,000.The expected average rate of return for this machine is:

Harris Co.is considering a 12-year project that is estimated to cost $900,000 and has no residual value.Harris seeks to earn an average rate of return of 15% on all capital projects.Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Harris Co.

Periods experiencing increase in price levels are known as periods of:

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 income of $150,000 (recognition is given to the effect of straight-line depreciation on the investment).The expected average rate of return is 15%.

A qualitative characteristic that influences capital investment analysis is manufacturing productivity.

Methods that ignore present value in capital investment analysis include the cash payback method.