Question: Which of the following is a present value method of analyzing capital investment proposals?

Average rate of return Cash payback method Accounting rate of return

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Answer: Internal rate of return method

Question: The expected average rate of return for a proposed investment of $600,000 in a fixed asset, with a useful life of four years, straight-line Depreciation, no residual value, and an expected total net income of $216,000 for the 4 years, is:

Answer: 18%

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Average Rate of Return = Estimated Average Annual Income / Average Investment

$216,000 / 4 = $54,000 estimated average annual income

$600,000 / 2 = $300,000 average investment $54,000 / $300,000 = .18 or 18%

Question: The expected average rate of return for a proposed investment of $44,000 in a fixed asset, using straight line Depreciation, with a useful life of 4 years, no residual value, and an expected total net income of $12,320 is:

Answer: .14

Estimated average annual income: $3,080 ($12,320 / 4)

Average investment:$22,000 ($44,000 / 2)

Average rate of return: 14% ($3,080 / $22,000)

Question: All of the following qualitative considerations may impact upon capital investments analysis except:

Answer: Manufacturing fixed assets

Question: Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects?

Answer: Depreciation deduction

Question: Assume in analyzing alternative proposals that Proposal A has a useful life of five years and Proposal B has a useful life of eight years. What is one widely used method that makes the proposals comparable?

Answer: Adjust the life of Proposal A to a time period that is equal to that of Proposal B by estimating a residual value at the end of year five

Question: All of the following are factors that may complicate capital investment analysis except:

Answer: Current fixed asset levels

Question: Capital rationing involves all of the following except:

Answer: Determination of whether the project should be funded by using operating cash or the issuance of bonds

Question: The process by which management allocates available investment funds among competing investment proposals is called:

Answer: capital rationing

Question: Which of the following factors does not have an impact on the outcome of a capital investment decision?

Answer: Equal proposal lives