accounting final chapter 26

average rate of return formula

Estimated average annual income / average investment

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called __________ analysis

capital investment

Decisions to install new equipment, purchase other businesses, and purchase a new building are examples of

capital investment analysis

The process by which management allocates funds among competing capital investment proposals is known as

capital rationing

In capital rationing, alternative proposals are initially screened by establishing minimum standards, using

cash payback and average rate of return methods

The __________ is the expected period of time between the date of an investment and the recovery in cash of the amount invested.

cash payback period

net present value method

compares the amount to be invested with the present value of the net cash inflows

All of the following are factors that may complicate capital investment analysis except a.currency exchange rates. b.current fixed asset levels. c.qualitative factors. d.revenue estimates.

current fixed asset levels

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

depreciation deduction

a short cash payback period is _____

desirable

companies use capital investment analysis to

evaluate long-term investments

the methods not using present values are often useful in..

evaluating capital investment proposals that have relatively short useful lives

cash payback period

expected period of time between the date of an investment and the recovery in cash of the amount invested

__________ assigns likelihoods (probabilities) to various inputs, thus incorporating uncertainty directly into the output (answer).

expected value analysis

The interest rate used in net present value analysis is referred to as the

hurdle rate

interest rate used in net present value analysis is also known as

hurdle rate

cash payback period formula

initial cost / annual net cash inflow

which of the following is a present value method of analyzing capital investment proposals? a.Internal rate of return b.Net present value c.Present value index d.All of these choices are correct.

internal rate of return method

Capital investment evaluation methods can be grouped into which of the following two general categories?

methods that do not use present values and methods that use present values

interest rate return used in net present value analysis is the company's

minimum desired rate of return

In capital rationing, alternative proposals that survive initial screening by cash payback and average rate of return methods are further analyzed using

net present value and internal rate of return methods

The __________ is the amount of cash needed today to yield a series of equal net cash flows at fixed intervals in the future.

present value of an annuity

The expected value of the annual net cash flows is determined by multiplying each of the possible annual net cash flows by its

probability of occurring

time value of money concept

recognizes that a dollar today is worth more than a dollar tomorrow because today's dollar can earn interest

because the methods not using present values are easy to use, they are often used to ...

screen proposals

Two managerial accounting tools useful in considering the uncertainty of estimates are

sensitivity analysis and expected value analysis

average rate of return

sometimes called the accounting rate of return, measures the average income as a percent of the average investment

present value of an annuity

the amount of cash needed today to yield a series of equal net cash flows at fixed time intervals in the future

All of the following are advantages of using the average rate of return except a.the average rate of return method uses present values. b.the average rate of return method emphasizes accounting income, which is often used by investors and creditors in evaluating management performance. c.the average rate of return is easy to compute. d.the average rate of return method includes the entire amount of income earned over the life of the proposal.

the average rate of return method uses present values

net present value method is sometimes called

the discounted cash flow method

if the average rate of return equals or exceeds the minimum rate,

the investment should be made or considered for further analysis

Average Investment Formula

(initial cost + residual value) / 2

Some examples of qualitative considerations that may influence capital investment analysis include the investment proposal's impact on the following

-Product quality -Manufacturing flexibility -Employee morale -Manufacturing productivity -Market (strategic) opportunities

methods that do not use present values

1. average rate of return method 2. cash payback method

two disadvantages in the average rate of return

1. does not directly consider the expected cash flows from the proposal 2. it does not directly consider the timing of the expected cash flows

cash payback method has two disadvantages

1. ignores cash flows occurring after the payback period 2. it does not use present value concepts in valuing cash flows occurring in different periods

three advantages to average rate of return

1. it is easy to compute 2. it includes the entire amount of income earned over the life of the proposal 3. it emphasizes accounting income

methods that use present values

1. net present value method 2. internal rate of return method

cash payback method has two advantages

1. simple to use 2. analyzes cash flows

annuity

a series of equal net cash flows at fixed time intervals (monthly rent, salaries, bond interest)

An advantage of the internal rate of return method is that a.it considers the cash flows of the investment. b.it can rank proposals of equal lives. c.it considers the time value of money. d.All of these choices are correct.

all of these choices are correct

One of the complicating factors of capital investment analyses is the uncertainty related to estimating a.expenses. b.revenues. c.cash flows. d.All of these choices are correct.

all of these choices are correct

One of the complicating factors of capital investment analyses is the uncertainty related to estimating a.revenues. b.cash flows. c.expenses. d.All of these choices are correct

all of these choices are correct

Which of the following considerations may impact capital investment analysis? a.Employee morale b.Product quality c.Market opportunities d.All of these choices are correct.

all of these choices are correct

Which of the following qualitative considerations may impact capital investment analysis? a.Manufacturing flexibility b.Manufacturing control of product quality c.Manufacturing productivity d.All of these choices are correct.

all of these choices are current

Capital investment analysis is the process

by which management plans, evaluates, and controls investments in fixed assets

When using expected value analysis, assigning probabilities to the various outcomes incorporates __________ into the analysis.

uncertainty