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