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Exam 16: Equipment Acquisition and Disposal

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Question 1

True/False

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The gross present value recognizes that a dollar to day is worth more than a dollar tomorrow, simply because the dollar today can be invested to start earning interest immediately.

A) True
B) False

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Question 2

Multiple Choice

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If a capital equipment request survives the new project ideas step, __________ estimates must be considered for each capital investment idea.

A) budget
B) income
C) profit
D) cash-flow
E) depreciation

F) A) and C)
G) A) and E)

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Question 3

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The disposal of capital equipment is becoming more complicated. The _________________________ has developed specific guidelines for disposing of specific types of obsolete equipment.

In cases where significant demand or uses already exist for a particular piece of equipment, the purchase of new equipment is appropriate. The technological advantages of new equipment also may increase productivity in these situations.

The average rate of return is the average cash flow after tax ________ the initial investment: The ARR is the most popular evaluation criterion used today.

In the case of fast-moving technology, it is possible for the lessee to shift the risk level to the lessor. Computer technology is a good example of the risk of ______________.

Since the lease payment is fixed and other costs associated with the lease (salvage value, operating expenses, and interest rates) are highly uncertain, it is important to evaluate the _______________ rate for a lease-versus-buy decision.

leasing arrangement can actually ________ a firm's borrowing capacity.

Payback is the best known investment criterion. Payback is the number of ________ it takes to repay the initial investment.

or the purpose of the purchasing professional, two methods will be considered: (1) traditional loans and (2) leases. The leasing method has been become very popular in the last 20 years and can be used to finance nearly any kind of fixed asset. The lease-versus-purchase decision usually requires many considerations.

xpanding existing equipment is also a way to increase ________. The other categories of capital investment revolve around the plant, facilities, and construction.

With cash-flow data in hand, the company can begin the formal process of evaluating capital equipment or projects. The five most commonly used methods for an economic evaluation of individual projects are payback, average rate of return, gross present value, internal rate of return, and profitability index.

The capital acquisition process is initiated with a department requesting equipment replacements and expansions. The request is then measured against __________________.

The total operating costs also will have a significant effect on the capital acquisition. Which of the following are the principal operating variables that must be investigated?

The difference between the ARR and NPV methods is the timing of the various ____________ cash flows. In other words, if the __________ increases, the project becomes increasingly more attractive.

The timing of these capital acquisition decisions is critical to the financial health of a firm. However, once capital investment decisions are made, they are easily reversible.

The internal rate of return rule is to accept the investment project if the opportunity cost of capital is less than the internal rate of return. If the cost of capital is equal to the IRR, the project has zero NPV. On the other hand if the cost of capital is greater than the IRR, the project has a negative NPV. The IRR will give the same answer as the NPV. The IRR is defined as the discount rate that will make the NPV of the project equal zero.

The acquisition of capital equipment is a major decision in most firms. The capital acquisition decision has a significant effect on numerous aspects of the firm's ____________. The tax planning process is also a significant component of this decision.

Most of the equipment costs are pegged to ____________.

If the lessor assumes the costs of maintenance, insurance, and taxes, it will usually pass the expense to the lessee in the form of increased lease payments.