Chapter 24 — Capital Investment Analysis

[True or False]

The process by which management plans, evaluates, and controls long-term investment decisions
involving fixed assets is called capital investment analysis.
ANS: T DIF: 1 OBJ: 01

The process by which management plans, evaluates, and controls long-term investment decisions
involving fixed assets is called cost-volume-profit analysis.
ANS: F DIF: 1 OBJ: 01

Care must be taken involving capital investment decisions, since normally a long-term commitment of
funds is involved and operations could be affected for many years.
ANS: T DIF: 1 OBJ: 01

The methods of evaluating capital investment proposals can be grouped into two general categories
that can be referred to as (1) methods that ignore present value and (2) present values methods.
ANS: T DIF: 1 OBJ: 02

The methods of evaluating capital investment proposals can be grouped into two general categories
that can be referred to as (1) average rate of return and (2) cash payback methods.
ANS: F DIF: 1 OBJ: 02

Average rate of return equals average investment divided by estimated average annual income.
ANS: F DIF: 1 OBJ: 02

Average rate of return equals estimated average annual income divided by average investment.
ANS: T DIF: 1 OBJ: 02

The method of analyzing capital investment proposals in which the estimated average annual income
is divided by the average investment is the average rate of return method.
ANS: T DIF: 1 OBJ: 02

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net
cash flow.
ANS: T DIF: 1 OBJ: 02

The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net
discounted cash flow.
ANS: F DIF: 1 OBJ: 02