Chapter 26: Capital Investment Analysis

Question 1

Average rate of return =

Answer 1

Estimated average annual income / average investment

Question 2

Average Investment =

Answer 2

Initial Cost + Residual Value / 2

Question 3

When annual net cash flows are equal, cash payback period =

Answer 3

Initial cost / annual net cash inflow

Question 4

When annual net cash flows are not equal, the cash payback period =

Answer 4

Sum of annual net cash inflows until cumulative total equals the initial cost of proposed investment

Question 5

Present Value Index=

Answer 5

Total present value of net cash flow / amount to be invested

Question 6

The IRR (internal rate of return) starts with….

Answer 6

Proposals net cash flows and works backward to estimate the proposals expected rate of return

Question 7

IRR when annual net cash flows are are expected is found by these steps:

Answer 7

Step 1. PV Factor of annuity = amount to be invested / equal annual net cash flows
Step 2. Locate the PV factor from step 1 on the PV of an annuity Table , the IRR will be found as the header of that column

Question 8

PV of an amount can be found by

Answer 8

Multiplying present value factor found on table by FV (discounting)