# Quiz 25: Capital Budgeting and Managerial Decisions

Business

Q 1Q 1

Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Free

True False

True

Q 2Q 2

Capital budgeting decisions are risky because the outcome is uncertain, large amounts are usually involved, the investment involves a long-term commitment, and the decision could be difficult or impossible to reverse.

Free

True False

True

Q 3Q 3

If the internal rate of return (IRR) of an investment is below the hurdle rate, the project should be accepted.

Free

True False

False

Q 4Q 4

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

Free

True False

Q 5Q 5

An opportunity cost is the potential benefit that is lost by taking a specific action when two or more alternative choices are available.

Free

True False

Free

True False

Free

True False

Free

True False

Q 9Q 9

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

Free

True False

Free

True False

Free

True False

Q 12Q 12

A special order of goods or services should always be accepted when the incremental revenue exceeds the incremental costs.

Free

True False

Q 13Q 13

In a make or buy decision, management should focus on costs that are constant under the two alternatives.

Free

True False

Q 14Q 14

Part of the decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

Free

True False

Free

True False

Q 16Q 16

If a company has the capacity to produce either 10,000 units of Product X or 10,000 units of Product Y; assuming fixed costs remain constant, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin.

Free

True False

Q 17Q 17

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

Free

True False

Q 18Q 18

An advantage of the break-even time (BET) method over the payback period method is that it recognizes the time value of money.

Free

True False

Q 19Q 19

In ranking choices with the break-even time (BET) method, the investment with the highest BET measure gets the highest rank.

Free

True False

Free

True False

Q 21Q 21

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

Free

True False

Free

True False

Q 23Q 23

Two investments with exactly the same payback periods are always equally valuable to an investor.

Free

True False

Q 24Q 24

The payback method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

Free

True False

Q 25Q 25

If two projects have the same risks, the same payback periods, and the same initial investments, they are equally attractive.

Free

True False

Q 26Q 26

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

Free

True False

Q 27Q 27

If the straight-line depreciation method is used, the annual average investment amount used in calculating rate of return is calculated as (beginning book value + ending book value)/2.

Free

True False

Free

True False

Q 29Q 29

If net present values are used to evaluate two investments that have equal costs and equal total cash flows, the one with more cash flows in the early years has the higher net present value.

Free

True False

Q 30Q 30

The net present value decision rule is: When an asset's expected cash flows are discounted at the required rate and yield a positive net present value, the asset should be acquired.

Free

True False

Q 31Q 31

The internal rate of return equals the rate that yields a net present value of zero for an investment.

Free

True False

Free

True False

Q 33Q 33

Capital budgeting decisions usually involve analysis of:
A) Cash outflows only.
B) Short-term investments.
C) Long-term investments.
D) Investments with certain outcomes only.
E) Operating revenues.

Free

Multiple Choice

Q 34Q 34

The process of analyzing alternative investments and deciding which assets to acquire or sell is known as:
A) Planning and control.
B) Capital budgeting.
C) Variance analysis.
D) Master budgeting.
E) Managerial accounting.

Free

Multiple Choice

Q 35Q 35

Capital budgeting decisions are generally based on:
A) Tentative predictions of future outcomes.
B) Perfect predictions of future outcomes.
C) Results from past outcomes only.
D) Results from current outcomes only.
E) Speculation of interest rates and economic performance only.

Free

Multiple Choice

Q 36Q 36

The calculation of annual net cash flow from a particular investment project should include all of the following except:
A) Income taxes.
B) Revenues generated by the investment.
C) Cost of products generated by the investment.
D) Depreciation expense.
E) General and administrative expenses.

Free

Multiple Choice

Q 37Q 37

Capital budgeting decisions are risky because:
A) The outcome is uncertain.
B) Large amounts of money are usually involved.
C) The investment involves a long-term commitment.
D) The decision could be difficult or impossible to reverse.
E) All of these are true

Free

Multiple Choice

Q 38Q 38

The process of restating future cash flows in today's dollars is known as:
A) Budgeting.
B) Annualization.
C) Discounting.
D) Payback period.
E) Capitalizing.

Free

Multiple Choice

Q 39Q 39

A minimum acceptable rate of return for an investment decision is called the:
A) Internal rate of return.
B) Average rate of return.
C) Hurdle rate.
D) Maximum rate.
E) Payback rate.

Free

Multiple Choice

Q 40Q 40

In business decision-making, managers typically examine the two fundamental factors of:
A) Risk and capital investment.
B) Risk and rate of return.
C) Capital investment and rate of return.
D) Risk and payback.
E) Payback and rate of return.

Free

Multiple Choice

Q 41Q 41

A limitation of the internal rate of return method is:
A) Failure to measure time value of money.
B) Failure to measure results as a percent.
C) Failure to consider the payback period.
D) Failure to reflect changes in risk levels over project life.
E) Failure to compare dissimilar projects.

Free

Multiple Choice

Q 42Q 42

An opportunity cost:
A) Is an unavoidable cost.
B) Requires a current outlay of cash.
C) Results from past managerial decisions.
D) Is the lost benefit of choosing an alternative course of action.
E) Is irrelevant in decision making.

Free

Multiple Choice

Q 43Q 43

The potential benefits of one alternative that are lost by choosing another is known as a(n):
A) Alternative cost.
B) Sunk cost.
C) Out-of-pocket cost.
D) Differential cost.
E) Opportunity cost.

Free

Multiple Choice

Q 44Q 44

A cost that requires a current and/or future outlay of cash, and is usually an incremental cost, is a(n):
A) Out-of-pocket cost.
B) Sunk cost.
C) Opportunity cost.
D) Operating cost.
E) Uncontrollable cost.

Free

Multiple Choice

Q 45Q 45

A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n):
A) Uncontrollable cost.
B) Incremental cost.
C) Opportunity cost.
D) Out-of-pocket cost.
E) Sunk cost.

Free

Multiple Choice

Q 46Q 46

A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $10,000 depreciation on the machine is an example of a(n):
A) Incremental cost.
B) Opportunity cost.
C) Variable cost.
D) Sunk cost.
E) Out-of-pocket cost.

Free

Multiple Choice

Q 47Q 47

An additional cost incurred only if a particular action is taken is a(n):
A) Period cost.
B) Pocket cost.
C) Discount cost.
D) Incremental cost.
E) Sunk cost.

Free

Multiple Choice

Q 48Q 48

A company is considering a new project that will cost $19,000. This project would result in additional annual revenues of $6,000 for the next 5 years. The $19,000 cost is an example of a(n):
A) Sunk cost.
B) Fixed cost.
C) Incremental cost.
D) Uncontrollable cost.
E) Opportunity cost.

Free

Multiple Choice

Q 49Q 49

Patrick Corporation inadvertently produced 10,000 defective personal radios. The radios cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Patrick's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Patrick should:
A) Sell the radios for $3 per unit.
B) Correct the defects and sell the radios at the regular price.
C) Sell the radios as they are because repairing them will cause their total cost to exceed their selling price.
D) Sell 5,000 radios to the salvage company and repair the remainder.
E) Throw the radios away.

Free

Multiple Choice

Q 50Q 50

Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should:
A) Produce only Product A
B) Produce only Product B.
C) Produce equal amounts of A and B.
D) Produce A and B in the ratio of 62.5% A to 37.5% B.
E) Produce A and B in the ratio of 40% A and 60% B.

Free

Multiple Choice

Q 51Q 51

Alpha Co. can produce a unit of Beta for the following costs: An outside supplier offers to provide Alpha with all the Beta units it needs at $60 per unit. If Alpha buys from the supplier, Alpha will still incur 40% of its overhead. Alpha should:
A) Buy Beta since the relevant cost to make it is $72.
B) Make Beta since the relevant cost to make it is $56.
C) Buy Beta since the relevant cost to make it is $48.
D) Make Beta since the relevant cost to make it is $48.
E) Buy Beta since the relevant cost to make it is $56.

Free

Multiple Choice

Q 52Q 52

Marcus processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data:
Which product(s) should not be processed further?
A) Acta.
B) Corda.
C) Fando.
D) Limo.
E) None of the products should be processed further.

Free

Multiple Choice

Q 53Q 53

Marsden manufactures a cat food product called Special Export. Marsden currently has 10,000 bags of Special Export on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Prime Cat Food and Feline Surprise at an additional $2,000 cost. The additional processing will yield 10,000 bags of Prime Cat Food and 3,000 bags of Feline Surprise, which can be sold for $8 and $6 per bag, respectively. The net advantage (incremental income) of processing Special Export further into Prime and Feline Surprise would be:
A) $98,000.
B) $96,000.
C) $8,000.
D) $6,000.
E) $2,000.

Free

Multiple Choice

Q 54Q 54

Marsden manufactures a cat food product called Special Export. Marsden currently has 10,000 bags of Special Export on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Prime Cat Food and Feline Surprise at an additional $2,000 cost. The additional processing will yield 10,000 bags of Prime Cat Food and 3,000 bags of Feline Surprise, which can be sold for $8 and $6 per bag, respectively. If Special Export is processed further into Prime Cat Food and Feline Surprise, the total gross profit would be:
A) $68,000.
B) $78,000.
C) $96,000.
D) $98,000.
E) $100,000.

Free

Multiple Choice

Q 55Q 55

Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per unit. Parker currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?
A) No, because additional production would exceed capacity.
B) No, because incremental costs exceed incremental revenue.
C) Yes, because incremental revenue exceeds incremental costs.
D) Yes, because incremental costs exceed incremental revenues.
E) No, because the incremental revenue is too low.

Free

Multiple Choice

Q 56Q 56

Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per unit. Parker currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Parker wishes to earn $1,250 on the special order, the size of the order would need to be:
A) 4,500 units.
B) 2,250 units.
C) 1,125 units.
D) 625 units.
E) 300 units.

Free

Multiple Choice

Q 57Q 57

Textel is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows:
If Textel can buy 1,000 units from a subcontractor for $100,000, it should:
A) Make the product because current factory overhead is less than $100,000.
B) Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000.
C) Buy the product because the total incremental costs of manufacturing are greater than $100,000.
D) Buy the product because total fixed and variable manufacturing costs are greater than $100,000.
E) Make the product because factory overhead is a sunk cost.

Free

Multiple Choice

Q 58Q 58

A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. What should the company do?
A) Sell the units as scrap.
B) Rebuild the units.
C) It does not matter because both alternatives have the same result.
D) Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently.
E) Throw the units away.

Free

Multiple Choice

Q 59Q 59

Thompson Company had the following results of operations for the past year: A foreign company (whose sales will not affect Thompson's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. If Thompson accepts the offer, its profits will:
A) Increase by $30,000.
B) Increase by $6,000.
C) Decrease by $6,000.
D) Increase by $5,200.
E) Increase by $4,300.

Free

Multiple Choice

Q 60Q 60

The break-even time (BET) method is a variation of the:
A) Payback method.
B) Internal rate of return method.
C) Accounting rate of return method.
D) Net present value method.
E) Present value method.

Free

Multiple Choice

Q 61Q 61

The calculation of the payback period for an investment when net cash flow is even (equal) is:
A) Cost of investment/Annual net cash flow
B) Cost of investment/Total net cash flow
C) Annual net cash flow/Cost of investment
D) Total net cash flow/Cost of investment
E) Total net cash flow/Annual net cash flow

Free

Multiple Choice

Q 62Q 62

Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected. If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?
A) Project Y.
B) Project X.
C) Both X and Y are acceptable projects.
D) Neither X nor Y is an acceptable project.
E) Project Y because it has a lower initial investment.

Free

Multiple Choice

Q 63Q 63

The time expected to pass before the net cash flows from an investment would return its initial cost is called the:
A) Amortization period.
B) Payback period.
C) Interest period.
D) Budgeting period.
E) Discounted cash flow period.

Free

Multiple Choice

Q 64Q 64

A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. What is the payback period for the new machine?
A) 4 years.
B) 6 years.
C) 10.5 years.
D) 14 years.
E) 42 years.

Free

Multiple Choice

Q 65Q 65

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4) and $6,000 (year 5). The payback period is:
A) 4.50 years.
B) 4.25 years.
C) 3.50 years.
D) 3.00 years.
E) 2.50 years.

Free

Multiple Choice

Q 66Q 66

A disadvantage of using the payback period to compare investment alternatives is that:
A) It ignores cash flows beyond the payback period.
B) It includes the time value of money.
C) It cannot be used when cash flows are not uniform.
D) It cannot be used if a company records depreciation.
E) It cannot be used to compare investments with different initial investments.

Free

Multiple Choice

Q 67Q 67

A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. The company's tax rate is 40%. What is the payback period for the new machine?
A) 3.0 years.
B) 6.0 years.
C) 7.5 years.
D) 12.0 years.
E) 20.0 years.

Free

Multiple Choice

Q 68Q 68

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and be depreciated over a three-year period with no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the payback period for this machine?
A) 24 years.
B) 12 years.
C) 6 years.
D) 4 years.
E) 1 year.

Free

Multiple Choice

Q 69Q 69

A company is planning to purchase a machine that will cost $24,000, have a six-year life, and be depreciated over a three-year period with no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the accounting rate of return for this machine?
A) 33.3%.
B) 16.7%.
C) 50.0%.
D) 8.3%.
E) 4%.

Free

Multiple Choice

Q 70Q 70

After-tax net income divided by the annual average investment in an investment, is the:
A) Net present value rate.
B) Payback rate.
C) Accounting rate of return.
D) Earnings from investment.
E) Profit rate.

Free

Multiple Choice

Q 71Q 71

A company buys a machine for $60,000 that has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $2,850 after taxes of 30%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?
A) 2.85%.
B) 4.75%.
C) 6.65%.
D) 9.50%.
E) 42.75%.

Free

Multiple Choice

Q 72Q 72

Monterey Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value. Monterey uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Monterey's average investment?
A) $6,000.
B) $7,000.
C) $18,000.
D) $21,000.
E) $36,000.

Free

Multiple Choice

Q 73Q 73

Beyer Corporation is considering buying a machine for $25,000. Its estimated useful life is 5 years, with no salvage value. Beyer anticipates annual net income after taxes of $1,500 from the new machine. What is the accounting rate of return assuming that Beyer uses straight-line depreciation and that income is earned uniformly throughout each year?
A) 6.0%.
B) 8.0%.
C) 8.5%.
D) 10.0%.
E) 12.0%.

Free

Multiple Choice

Q 74Q 74

The accounting rate of return is calculated as:
A) The after-tax income divided by the total investment.
B) The after-tax income divided by the annual average investment.
C) The cash flows divided by the annual average investment.
D) The cash flows divided by the total investment.
E) The annual average investment divided by the after-tax income.

Free

Multiple Choice

Q 75Q 75

The following data concerns a proposed equipment purchase: Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:
A) 62.3%.
B) 32.0%.
C) 15.0%.
D) 7.7%.
E) 5.0%.

Free

Multiple Choice

Q 76Q 76

An estimate of an asset's value to the company, calculated by discounting the future cash flows from the investment at an appropriate rate and then subtracting the initial cost of the investment, is known as:
A) Annual net cash flows.
B) Rate of return on investment.
C) Net present value.
D) Payback period.
E) Unamortized carrying value.

Free

Multiple Choice

Q 77Q 77

Which of the following cash flows is not considered when using the net present value method?
A) Future cash inflows.
B) Future cash outflows.
C) Past cash outflows.
D) Non-uniform cash inflows.
E) All of these are considered.

Free

Multiple Choice

Q 78Q 78

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?
A) Accounting rate of return.
B) Net present value.
C) Payback period.
D) Cash flow method.
E) Return on average investment.

Free

Multiple Choice

Q 79Q 79

The hurdle rate is often set at:
A) The rate the company could earn if the investment were placed in the bank.
B) The company's cost of capital.
C) 10% above the IRR of current projects.
D) 10% above the ARR of current projects.
E) The rate at which the company is taxed on income.

Free

Multiple Choice

Q 80Q 80

Daniels Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Daniels requires a 12% return on its investments. The present value of an annuity of 1 for different periods follows: What is the net present value of the machine?
A) $24,018.
B) $(3,100).
C) $30,000.
D) $26,900.
E) $(29,520).

Free

Multiple Choice

Q 81Q 81

The following present value factors are provided for use in this problem. Norman Co. wants to purchase a machine for $40,000, but needs to earn an 8% return. The expected year-end net cash flows are $12,000 in each of the first three years, and $16,000 in the fourth year. What is the machine's net present value (round to the nearest whole dollar)?
A) $(9,075).
B) $2,685.
C) $42,685.
D) $(28,240).
E) $52,000.

Free

Multiple Choice

Q 82Q 82

Saxon Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: Saxon Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Saxon purchase?
A) Only Machine A is acceptable.
B) Only Machine B is acceptable.
C) Both machines are acceptable, but A should be selected because it has the greater net present value.
D) Both machines are acceptable, but B should be selected because it has the greater net present value.
E) Neither machine is acceptable.

Free

Multiple Choice

Q 83Q 83

A company is considering the purchase of new equipment for $45,000. The projected after-tax net income is $3,000 after deducting $15,000 of depreciation. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 12% return on investment. The present value of an annuity of 1 for various periods follows: What is the net present value of this machine assuming all cash flows occur at year-end?
A) $(1,768)
B) $3,000
C) $15,000
D) $18,000
E) $43,232

Free

Multiple Choice

Q 84Q 84

A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of 1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%?
A) $118,855
B) $583,676
C) $629,788
D) $705,391
E) $1,918,855

Free

Multiple Choice

Q 85Q 85

The rate that yields a net present value of zero for an investment is the:
A) Internal rate of return.
B) Accounting rate of return.
C) Net present value rate of return.
D) Zero rate of return.
E) Payback rate of return.

Free

Multiple Choice

Q 86Q 86

A company is considering a 5-year project. The company plans to invest $60,000 now and it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project. Selected factors for a present value of an annuity of 1 for five years are shown below:
A) The project should be accepted.
B) The project should be rejected because it earns more than 10%.
C) The project earns more than 10% but less than 12%. If the hurdle rate is 12%, the project should be rejected.
D) Only 9% is acceptable.
E) Only 10% is acceptable.

Free

Multiple Choice

Q 87Q 87

Axle Company can produce a product that incurs the following costs per unit: direct materials, $10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the product to Axle for $45. If Axle buys from the supplier, it will still incur 45% of its overhead cost. Compute the net incremental cost or savings of buying.
A) $4.00 savings per unit.
B) $4.00 cost per unit.
C) $2.20 cost per unit.
D) $3.80 cost per unit.
E) $2.20 savings per unit.

Free

Multiple Choice

Q 88Q 88

Barnes manufactures a specialty food product that can currently be sold for $22 per unit and has 20,000 units on hand. Alternatively, it can be further processed at a cost of $12,000 and converted into 12,000 units of Exceptional and 6,000 units of Premium. The selling price of Exceptional and Premium are $30 and $20, respectively. The incremental net income of processing further would be:
A) $40,000.
B) $28,000.
C) $18,000.
D) $44,000.
E) $12,000.

Free

Multiple Choice

Q 89Q 89

Trescott Company had the following results of operations for the past year: A foreign company (whose sales will not affect Trescott's market) offers to buy 3,000 units at $17.00 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. If Trescott accepts the offer, its profits will:
A) Decrease by $4,500.
B) Increase by $4,500.
C) Decrease by $300.
D) Increase by $13,500.
E) Increase by $15,000.

Free

Multiple Choice

Q 90Q 90

Sherman Company can sell all of its products A and Z that it can produce, but it has limited production capacity. It can produce 6 units of A per hour or 10 units of Z per hour, and it has 20,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for this company?
A) 84,000 units of A and 60,000 units of Z.
B) 48,000 units of A and 80,000 units of Z.
C) 60,000 units of A and 100,000 units of Z.
D) 120,000 units of A and 0 units of Z.
E) 0 units of A and 200,000 units of Z.

Free

Multiple Choice

Q 91Q 91

A new manufacturing machine is expected to cost $286,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the payback period for the purchase.
A) 8.7 years.
B) 3.8 years.
C) 4.3 years.
D) 7.3 years.
E) 5.4 years.

Free

Multiple Choice

Q 92Q 92

A new manufacturing machine is expected to cost $286,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the accounting rate of return for the investment.
A) 22.2%.
B) 23.4%.
C) 46.9%.
D) 12.2%.
E) 24.5%.

Free

Multiple Choice

Q 93Q 93

Eagle Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Compute the payback period for this investment. (Round to two decimal places.)
A) 2.85 years.
B) 2.57 years.
C) 3.00 years.
D) 2.50 years.
E) 3.62 years.

Free

Multiple Choice

Q 94Q 94

A machine costs $180,000 and is expected to yield an after-tax net income of $10,800 each year. Management estimates the machine will have a ten-year life, a $20,000 salvage value, and straight-line depreciation is used. Compute the accounting rate of return for the investment.
A) 12.0%.
B) 26.8%.
C) 11.8%.
D) 10.8%.
E) 28.8%.

Free

Multiple Choice

Q 95Q 95

Edgar Company is considering the purchase of new equipment costing $80,000. The projected annual after-tax net income from the equipment is $10,200, after deducting $20,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Edgar requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine.
A) $(15,731).
B) $(4,896).
C) $15,731.
D) $4,896.
E) $32,334.

Free

Multiple Choice

Q 96Q 96

Edgar Company is considering the purchase of new equipment costing $80,000. The projected net cash flows are $35,000 for the first two years and $30,000 for years three and four. The revenue is to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Edgar requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine.
A) $(15,731).
B) $(4,896).
C) $15,731.
D) $4,896.
E) $23,775.

Free

Multiple Choice

Q 97Q 97

Eagle Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Compute the break-even time (BET) period for this investment. (Round to two decimal places.)
A) 2.85 years.
B) 2.57 years.
C) 3.17 years.
D) 2.98 years.
E) 3.62 years.

Free

Multiple Choice

Q 98Q 98

Presented below are terms preceded by letters a through g and followed by a list of definitions 1 through 7. Match the letter of the term with the definition. Use the space provided preceding each definition.

Free

Essay

Q 99Q 99

Presented below are terms preceded by letters a through f and followed by a list of definitions 1 through 6. Match the letter of the terms with the definitions. Use the space provided preceding each definition.

Free

Essay

Free

Essay

Q 101Q 101

Briefly describe the time value of money. Why is the time value of money important in capital budgeting?

Free

Essay

Q 102Q 102

In using the internal rate of return method, management must consider a hurdle rate in making its decisions. What is a hurdle rate? What factors does management have to consider in selecting a hurdle rate?

Free

Essay

Free

Essay

Q 104Q 104

Good management accounting indicates that projects be evaluated using relevant data. In choosing among alternatives, what factors (considerations) are relevant?

Free

Essay

Q 105Q 105

How does the calculation of break-even time (BET) differ from the calculation of payback period (PBP)?

Free

Essay

Q 106Q 106

Briefly describe both the payback period method and the net present value method of comparing investment alternatives.

Free

Essay

Q 107Q 107

When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

Free

Essay

Q 108Q 108

What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

Free

Essay

Q 109Q 109

You have evaluated three projects using the net present value (NPV) method. How would you decide which one of the projects to select?

Free

Essay

Q 110Q 110

Identify at least three reasons for managers to favor the internal rate of return (IRR) over other capital budgeting approaches.

Free

Essay

Q 111Q 111

For each of the capital budgeting methods listed below, place an X in the correct column, indicating the measurement basis of each, the ability to make comparison among projects, and whether each method reflects or ignores the time value of money.

Free

Essay

Q 112Q 112

A company inadvertently produced 6,000 defective portable CD players. The CD players cost $20 each to be manufactured. A salvage company will purchase the defective units as they are for $16 each. The production manager reports that the defects can be corrected for $9 per unit, enabling the company to sell them at the regular price of $30.00. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.

Free

Essay

Q 113Q 113

A company manufactures two products. Each unit of product X requires 10 machine hours and each unit of product Y requires 4 machine hours. The company's productive capacity is limited to 180,000 machine hours. Each unit of product X sells for $15 and has variable costs of $7. Each unit of product Y sells for $8 and has variable costs of $3. If the company can sell all that it produces of both products, what should the sales mix be?

Free

Essay

Q 114Q 114

Fleming Company had the following results of operations for the past year:
A foreign company (whose sales will not affect Fleming's regular sales) offers to buy 2,000 units at $5.00 per unit. In addition to variable manufacturing costs, there would be shipping costs of $1,200 in total on these units. Should Fleming take this order? Explain.

Free

Essay

Q 115Q 115

A company produces three different products that all require processing on the same machines. There are only 27,000 machine hours available in each year. Production information for each product is:
Required:
(1) Determine the preferred sales mix if there are no market constraints on any of the products.
(2) Determine the preferred sales mix if the demand is limited to 5,000 units for each product.
(3) Determine the preferred sales mix if the demand is limited to 3,000 units for each product.

Free

Essay

Q 116Q 116

A company puts four products through a common production process. This process costs $100,000 each year. The four products can be sold when they emerge from this process at the "split-off point", or processed further and then sold. Data about the four products for the coming period are:
Determine which products should be sold at the split-off point and which should be processed further.

Free

Essay

Q 117Q 117

A company has just received a special, one-time order for 1,000 units. Producing the order will have no effect on the production and sales of other units. The buyer's name will be stamped on each unit, at a total cost of $2,000. Normal cost data, excluding stamping, follows:
What selling price per unit will this company require to earn $3,000 on the order?

Free

Essay

Q 118Q 118

Jorgensen Department Store has three departments: Clothing, Toys, and Jewelry. The most recent income statement, showing the total operating profit and departmental results is shown below:
Based on this income statement, management is planning on eliminating the hardware department, as it is generating a net loss. If the hardware department is eliminated, the toy department will expand to fill the space, but sales will not change in total, nor will direct expenses. None of the allocated expenses will be avoided, but they will be reallocated. Clothing will be allocated $200,000 of these expenses, and Toys will be allocated $150,000 of these expenses.
Prepare a new income statement for Jorgensen Department Store, showing the results if the Hardware Department is eliminated. Should the Hardware Department be eliminated?

Free

Essay

Q 119Q 119

Peters, Inc. sells a single product and reports the following results from sales of 100,000 units:
A foreign company wants to purchase 15,000 units. However, they are willing to pay only $36 per unit for this one-time order. They also agree to pay all freight costs. To fill the order, Peters will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance. No additional administrative costs (variable or fixed) will be incurred in association with this special order.
Required:
(1) Should Peters accept the order if it does not affect regular sales? Explain.
(2) Assume that Peters can accept the special order only by giving up 5,000 units of its normal sales. Should Peters accept the special order under these circumstances?

Free

Essay

Q 120Q 120

A company is planning to introduce a new portable TV to its existing product line. Management must decide whether to make the TV case or buy it from an outside supplier. The lowest outside price is $100. If the case is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the following:
Required:
(1) Determine whether the company should make the cases or buy them from the outside supplier.
(2) What decision should be made if only 15,000 cases are needed?
(3) What other factors, besides cost, should the company consider?

Free

Essay

Q 121Q 121

A company must decide between scrapping or rebuilding units that do not pass inspection. The company has 15,000 such units that cost $6 per unit to manufacture. The units were built to satisfy a special order, which must still be satisfied if the defective units are scrapped. The units can be sold as scrap for $2.50 each or they can be reworked for $4.50 each and sold for the full price of $9.00 each. If the units are sold as scrap, the company will have to build 15,000 replacement units and sell them at the full price.
Required:
(1) What is the net return from selling the units as scrap?
(2) What is the net return from reworking and selling the units?
(3) Should the company sell the units as scrap or rework them?

Free

Essay

Q 122Q 122

Bower Co. is reviewing a capital investment of $50,000. This project's projected cash flows over a five-year period are estimated at $20,000 each year.
Required:
(a) Calculate the payback period.
(b) Calculate the break-even time. Assume a 12% hurdle rate and use the table below:
(c) Using the results in (a) and (b), make a recommendation for the project.

Free

Essay

Q 123Q 123

A company is considering purchasing a machine for $75,000. The machine is expected to generate a net after-tax income of $11,250 per year. Depreciation expense would be $7,500. What is the payback period for this machine?

Free

Essay

Q 124Q 124

A company is trying to decide which of two new product lines to introduce in the coming year. The predicted revenue and cost data for each product line follows:
The company has a 30% tax rate, it uses the straight-line depreciation method, and it predicts that cash flows will be spread evenly throughout each year. Calculate each product's payback period. If the company requires a payback period of three years or less, which, if either, product should be chosen?

Free

Essay

Q 125Q 125

A company is considering a proposal to invest $30,000 in a project that would provide the following net cash flows:
Compute the project's payback period.

Free

Essay

Q 126Q 126

A company produces two boat models, Montauk and Orient. Both products are being considered for major investment projects next year. Relevant data follow:
Required:
Use the payback period to evaluate these two investment projects.

Free

Essay

Q 127Q 127

A company is evaluating the purchase of a machine for $900,000 with a six-year useful life and no salvage value. The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is the company's average investment?

Free

Short Answer

Q 128Q 128

A company purchases a machine for $1,000,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year. What is the accounting rate of return?

Free

Short Answer

Q 129Q 129

A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of 1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%?

Free

Essay

Q 130Q 130

A company is considering two projects, Project A and Project
B. The following information is available for each project:
Calculate the profitability index for each project. Based on the profitability index, which project should the company pursue and why?

Free

Essay

Q 131Q 131

A company is considering the purchase of new equipment for $45,000. The projected after-tax net income is $3,000 after deducting $15,000 of depreciation. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 12% return on investment. The present value of an annuity of 1 for various periods follows:
What is the net present value of this machine assuming all cash flows occur at year-end?

Free

Essay

Q 132Q 132

A company is trying to decide which of two new product lines to introduce in the coming year. The company requires a 12% return on investment. The predicted revenue and cost data for each product line follows:
The company has a 30% tax rate and it uses the straight-line depreciation method. The present value of an annuity of 1 for 5 years at 12% is 3.6048. Compute the net present value for each piece of equipment under each of the two product lines. Which, if either of these two investments is acceptable?

Free

Essay

Q 133Q 133

A company is considering two alternative investment opportunities, each of which requires an initial cash outlay of $110,000. The expected net cash flows from the two projects follow:
Required:
(1) Based on a comparison of their net present values, and assuming the same discount rate (greater than zero) is required for both projects, which project is the better investment? (Check one answer.)
________________ Project A
________________ Project Z
________________ The projects are equally desirable
(2) Use the table values below to find the net present value of the cash flows associated with Project A, discounted at 12%:

Free

Essay

Q 134Q 134

A company has a decision to make between two investment alternatives. The company requires a 10% return on investment. Predicted data is provided below:
The present value of an annuity for 6 years at 10% is 4.3553. This company uses straight-line depreciation.
Required:
(a) Calculate the net present value for each investment.
(b) Which investment should this company select? Explain.

Free

Essay

Q 135Q 135

A company is considering a 5-year project. It plans to invest $60,000 now and it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project. Selected factors for a present value of an annuity of 1 for five years are shown below:

Free

Essay

Q 136Q 136

Casco Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $280,000 with a 7-year life, no salvage value, and will be depreciated using straight-line depreciation. The expected annual income related to this equipment follows. Compute the (a) payback period and (b) accounting rate of return for this equipment.

Free

Essay

Q 137Q 137

Braybar Company is deciding between two projects. Each project requires an initial investment of $350,000. The projected net cash flows for the two projects are listed below. The revenue is to be received at the end of each year. Braybar requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below. Use net present value to determine which project should be pursued and explain why.

Free

Essay

Q 138Q 138

A company inadvertently produced 3,000 defective products. The product cost $15 each to be manufactured and normally sells for $35 each. A salvage company will purchase the defective units as they are for $12 each. The production manager reports that the defects can be corrected for $5 per unit, enabling the company to sell them at a discounted price of $22.00. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.

Free

Essay

Q 139Q 139

Sherman Company can sell all of product A that it produces but only 160,000 units of Z and it has limited production capacity. It can produce 6 units of A per hour or 10 units of Z per hour, and it has 30,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for this company?

Free

Essay

Q 140Q 140

Fields Company currently manufactures one of its parts at a cost of $3.25 per unit. This cost is based on a normal production rate of 50,000 units. Variable costs are $2.10 per unit, fixed costs related to making this part are $40,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Fields is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Support your answer with analyses.

Free

Essay

Q 141Q 141

_____________________ is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Free

Essay

Free

Essay

Free

Essay

Q 144Q 144

An ________________________ requires a future outlay of cash and is relevant for current and future decision making.

Free

Essay

Q 145Q 145

An ______________________________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.

Free

Essay

Q 146Q 146

A _____________________ arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions.

Free

Essay

Q 147Q 147

In this chapter, you examined several short-term managerial decision tasks. Identify (list) any three of these types of decision tasks:
___________________________
_________________________
_________________________

Free

Essay

Q 148Q 148

A capital budgeting method that considers how quickly a project recovers costs is known as _____________________. An enhancement to this method that considers the time value of money is called ________________.

Free

Essay

Q 149Q 149

In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money. These methods are _______________ and _________________. There are also two primary methods that consider the time value of money; these are ___________________ and ______________________.

Free

Essay

Q 150Q 150

The _______________________________ is computed by dividing a project's after-tax net income by the average amount invested in it.

Free

Essay

Q 151Q 151

The _______________________________ is computed by discounting the future net cash flows from the investment at the project's required rate of return and then subtracting the initial amount invested.

Free

Essay

Q 152Q 152

The net present value decision rule requires that when an asset's expected cash flows are discounted at the required rate and yield a positive net present value, the project should be ___________________.

Free

Essay

Q 153Q 153

The __________________________ is the rate that yields a net present value of zero for an investment.

Free

Essay