Question

1. Which of the following capital investment evaluation methods use present values?

A. Net present value method

B.Average rate of return method

C. Both "Net present value method" and "Average rate of return method"

D. Neither "Net present value method" nor "Average rate of return method"

2. A common characteristic found in capital investment evaluation methods that use present values is ________.

1. no interest rate
2. an interest rate
3. their ease of use
4. None of these choices are correct.

3.  Assume that management is evaluating the purchase of a new machine as follows:

• Cost of new machine: $800,000
• Residual value: $0
• Estimated total income from machine: $300,000
• Expected useful life: 5 years

The average rate of return of a new equipment is _____.

1. 15%
2. 15.5%
3. 17%
4. 17.5%

4. All of the following are advantages of using the average rate of return method except ________.

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, which is often used by investors and creditors in evaluating management performance
4. it directly considers the expected cash flows from the proposal

5.  Which of the following is a disadvantage of using the net present value method of evaluating an investment proposal?

1. It considers the cash flows of the investment.
2. It considers the time value of money.
3. It can rank projects with equal lives, using the present value index.
4. It assumes cash flows can be reinvested at the minimum desired rate of return.

6. The present value index is computed as ________.

1. total present value of net cash flow divided by amount to be invested
2. cost divided by amount to be invested
3. total future value of net cash flows divided by amount to be invested
4. None of these choices are correct.

7.   ________ method of evaluating an investment proposal uses present value concepts to compute the rate of return based on the investment’s expected net cash flows.

1. Net Present Value
2. Internal Rate of Return (IRR)
3. Payback Period
4. None of these choices are correct.

8. A general increase in price levels is called ________.

1. inflation
2. deflation
3. stagflation
4. None of these choices are correct.

Answer 1

lo option A Net present value 2. option B An Intrest Rate 3. option A 15% [300,000/3 7 ( 800,000 -0% [ Aug income cost-residual value 14. option b Directly considers the expected cashflonos from proposals 5. option D. It assumer cash flown can be dernverted at minimum desired rate of return. 6. ophion di total prevent ralue of netcashflow divided by amount to be invested to option & Internal Rate of Return. 8. option & Inflation.