Chapter 24 — Capital Investment Analysis

[True or False]

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 $200,000. The expected average rate of return on
investment, giving effect to depreciation, is 50%.
ANS: F DIF: 3 OBJ: 02

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 $200,000. The expected average rate of return on
investment, giving effect to depreciation, is 25.0%.
ANS: F DIF: 3 OBJ: 02

In net present value analysis for a proposed capital investment, the expected future net cash flows are
averaged and then reduced to their present values.
ANS: F DIF: 1 OBJ: 02

The expected period of time that will elapse between the date of a capital investment and the complete
recovery in cash of the amount invested is called the discount period.
ANS: F DIF: 1 OBJ: 02

The expected period of time that will elapse between the date of a capital investment and the complete
recovery in cash of the amount invested is called the cash payback period.
ANS: T DIF: 1 OBJ: 02

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net
cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years.
ANS: T DIF: 3 OBJ: 02

If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net
cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years.
ANS: F DIF: 3 OBJ: 02

For years one through five, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has
expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash
flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3
years.
ANS: T DIF: 3 OBJ: 02

For years one through five, a proposed expenditure of $500,000 for a fixed asset with a 5-year life has
expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash
flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 5
years.
ANS: F DIF: 3 OBJ: 02

In net present value analysis for a proposed capital investment, the expected future net cash flows are
reduced to their present values.
ANS: T DIF: 1 OBJ: 02