ACC202 Assignments Week 5 - Study Plan Chapter 15

The two capital investment evaluation methods that consider the time value of money concept are:

d. the internal rate of return method and the net present value method.

Which of the following capital investment analysis methods ranks proposals based on the cash flows over their complete useful life, even if the project lives are not the same? a. The internal rate of return method

Which of the following statements is true about the internal rate of return (IRR) method?

b. It uses present value concepts to compute the rate of return from a capital

investment proposal based on its expected net cash flows.

Which of the following is desirable for repaying debt used to purchase investments? c. A short cash payback period

The increase in general price levels in a rapidly growing economy is called: b. inflation.

Which of the following is a disadvantage of the net present value method?

d. It assumes that cash flows can be reinvested at the minimum desired rate of

return.

At the end of the capital rationing process, proposals that are selected for funding are included in the:

c. capital expenditure budget.

Analyze which piece of equipment is a better capital investment based on the information given below. (Round the answer to the nearest whole number.) Equipment 1 Equipment 2

Cost $4,000 $4,000

Minimum desired rate of return 10% 10%

Expected useful life 2 years 3 years

Yearly expected cash flows to be received: Equipment 1 Equipment 2

Year 1 $3,000 $2,500

Year 2 $2,500 $1,500

Year 3 $0 $1,500

Year Present value of $1 at 10%

Year 1 0.909

Year 2 0.826

Year 3 0.751

The residual value of Equipment 2 at the end of the Year 2 is $1,350.

b. Equipment 1 is a better investment as its net present value is greater than that

of Equipment 2.

ACC 202 – STUDY PLAN CHAPTER 15

Which of the following is a qualitative consideration that influences capital investment analysis?

a. Manufacturing productivity

Garnet Inc. is considering the purchase of a piece of equipment or a new dumper. The expected useful life of the equipment is 10 years and is 5 years for the dumper. Garnet will compare the proposals by:

c. adjusting the useful life of the equipment to 5 years.

The partial present value of an annuity of $1 is given below. Calculate the present value of $40,000 to be received annually for three years if interest is compounded at the rate of 15%. Year 15%

1 0.87

2 1.626

3 2.283

4 2.855

c. $91,320

Which of the following capital investment evaluation methods is categorized under methods that do not use present values? b. The average rate of return method

Which of the following would lead to an initially rejected proposal being reconsidered in the capital rationing decision process?

a. A proposal that provides a qualitative benefit

Which of the following is the DuPont formula for return on stockholders' equity?

b. Return on stockholders' equity = Operating Income ÷ Average Stockholders'

Equity

The return on stockholders' equity can be expressed as a product of profit margin, asset turnover, and:

d. financial leverage.

A firm plans to buy a machine costing $600,000. It has a residual value of $25,000 and an expected useful life of six years. The firm’s management estimates total income generated from the machine to be $300,000. Calculate the average rate of return of the machine. a. 16%

At the end of the current year, Auburn Inc. reported the following information:

Sales $250,000

Operating income $72,000

Average total assets $400,000

Average stockholders' equity $125,000

ACC 202 – STUDY PLAN CHAPTER 15

Calculate the financial leverage of Auburn. (Round the answer to one decimal place.) a. 3.2 times

Which of the following is a disadvantage of using the average rate of return method? a. It does not directly consider the expected cash flows from the proposal.

Operating income divided by sales is _____. c. profit margin

Which of the following is an advantage of the cash payback method? c. It is simple to use and understand.

Average rate of return is computed as:

d. Estimated average annual income ÷ Average investment.

A machine with an initial cost of $200,000 has the following net cash inflows over an eight-year life:

Year Net Cash Flow ($)

1 20,000

2 25,000

3 35,000

4 40,000

5 46,000

6 34,000

7 28,000

8 20,000

Calculate the cash payback period for this investment. d. 6 years

Which of the following is a disadvantage of leasing a fixed asset?

a. The company has to pay the rental price as well as the profit to the owner of

the asset.

Sales divided by average total assets is _____. a. asset turnover

At the end of the current year, Chestnut Inc. reported the following information:

Sales $450,000

Operating income $150,000

Average total assets $520,000

Average stockholders' equity $330,000

Calculate the profit margin of Chestnut. (Round the answer to two decimal places.) d. 33.33%