Chapter 26 Capital Investment Analysis Flashcards
1
Q
Advantages of ARR (Average Rate of Return Method)
A
- It is easy to compute
- It includes the entire amount of income earned over
the life of the proposal - It emphasizes accounting income, which is often used when evaluating management performance
2
Q
Disadvantages of ARR (Average Rate of Return Method)
A
- It does not directly consider the expected cash flows from the proposal
- It does not directly consider the timing of the expected cash flows
3
Q
Advantages of Cash Payback
A
- It is simple to use and understand
- It analyzes cash flows
4
Q
Disadvantages of Cash Payback
A
- It ignores cash flows after the payback period
- No present value concepts in valuing cash flows in different periods
5
Q
Advantages of Net Present Value
A
- It considers the cash flows of the investment
- It considers the time value of money
- It can rank projects with equal lives, using the present value index
6
Q
Disadvantages Net Present Value
A
- It is more complex to compute than methods with no present value
- It assumes the cash flows can be reinvested, at the minimum desired rate of return, which may be false
7
Q
Advantages Internal Rate of Method
A
- It considers the cash flows of the investment
- It considers the Time value of money (TVOM)
- It ranks proposals based upon the cash flows over their complete useful life, even if the lives are not the same
8
Q
Disadvantages Internal Rate of Method
A
- It’s complex to compute, requiring a computer if cash flows aren’t equal,
- It assumes cash received from a proposal can be reinvested at the Internal rate of return (IRR), which may be false
9
Q
What is Capital Investments Analysis-
A
the process by which management plans, evaluates, and controls investments in fixed assets.
10
Q
Time value of money-
A
recognizes that a dollar today is worth
more than a dollar tomorrow because today’s dollar can earn interest.
