1. 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 on this asset would be _____.

1. 15%
2. 14%
3. 13%
4. 16%

2. Cash payback period is computed as _____.

1. Initial Cost multiplied by Annual Net Cash Inflow
2. Initial cost plus Residual Value divided by Net Cash Inflow
3. Estimated Average Annual Income divided by Total Cash Inflow
4. Initial Cost divided by Annual Net Cash Inflow

3 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.

4 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.

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

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

1. The process by which management allocates funds among competing capital investment proposals is called

1. competitive analysis.
2. fund analysis.
3. capital rationing.
4. None of these choices are correct.

2. With capital rationing, alternative proposals are initially screened by establishing minimum standards and applying which of the following methods?

1. Cash payback and net present value methods
2. Net present value and internal rate of return methods
3. Cash payback and average rate of return methods
4. Net present value and average rate of return methods