Q&A Hero

Q: 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.

Q: 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.

Q: Selling price per unit.......................................................... $ 17.00 Variable costs per unit Direct materials and direct labor .......................................................... $ 10.00 ($200,000/20,000 units) Variable overhead .......................................................... [(40% * $100,000)/20,000 units] Total variable costs per unit.......................................................... ) Contribution margin per unit.......................................................... $ 5.00 Units in order.......................................................... Total contribution margin.......................................................... Less incremental fixed costs: Overhead.......................................................... $ 500 Selling and administrative.......................................................... Total incremental fixed costs.......................................................... ) Incremental income from order..........................................................

Q: Trescott Company had the following results of operations for the past year: Sales (20,000 units at $22)...................................................... $440,000 Direct materials and direct labor...................................................... $200,000 Overhead (40% variable)...................................................... 100,000 Selling and administrative expenses (all fixed)...................................................... 92,000 (392,000 ) Operating income...................................................... $ 48,000 A foreign company (whose sales will not affect Trescotts 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.

Q: 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.

Q: 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.

Q: 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: Interest rate Present value of an annuity of 1 factor 10% 3.7908 12% 3.6048 14% 3.4331 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.

Q: 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

Q: Machine B: Net cash Present value Present value of Year 1 ........................................ $1,000 8696 $ 870 Year 2 ........................................ 2,000 0.7561 1,512 Year 3 ........................................ 11,000 0.6575 Total........................................ $ 9,614 Initial investment........................................ ) Net present value........................................

Q: Machine A: Net cash Present value Present value of Year 1 ........................................ $5,000 8696 $ 4,348 Year 2 ........................................ 4,000 0.7561 3,024 Year 3 ........................................ 2,000 0.6575 Total........................................ $ 8,687 Initial investment........................................ ) Net present value........................................

Q: 1.................. $5,000 $1,000 2................. 4,000 2,000 3................. 2,000 11,000 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.

Q: Saxon Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: End of Machine

Q: Feedback: Net cash Present value Present value of Years 1 3 ........................................ $12,000 5771 $30,925 Year 4........................................ 16,000 0.7350 Total........................................ $42,685 Initial investment........................................ ) Net present value........................................

Q: Periods Present Value Present Value of an of 1 at 8% Annuity of 1 at 8% 1.................... 0.9259 0.9259 2.................... 0.8573 1.7833 3.................... 0.7938 2.5771 4.................... 0.7350 3.3121 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.

Q: 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.

Q: 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.

Q: 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. Future cash flows.

Q: 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.

Q: The following data concerns a proposed equipment purchase: Cost............................................................. ............................................................. .............................................. $144,000 Salvage value............................................................. ............................................................. .............................................. $ 4,000 Estimated useful life ............................................................. ............................................................. .............................................. 4 years Annual net cash flows............................................................. ............................................................. .............................................. $ 46,100 Depreciation method............................................................. .................................. Straight-line 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%.

Q: 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.

Q: 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%.

Q: 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.

Q: 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%.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine $68,000 $60,000 Net cash flow: Year 1 24,000 4,000 Year 2 24,000 26,000 Year 3 24,000 26,000 Year 4 0 20,000 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.

Q: 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

Q: 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.

Q: Thompson Company had the following results of operations for the past year: Sales (16,000 units at $10).............................................. $160,000 Direct materials and direct labor.............................................. $96,000 Overhead (20% variable).............................................. 16,000 Selling and administrative expenses (all fixed) 32,000 (144,000) Operating income.............................................. $ 16,000 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.

Q: 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.

Q: Textel is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows: Direct material .................................................. $45,000 Direct labor.................................................. 30,000 Factory overhead (30% is variable).................................................. 98,000 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.

Q: 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.

Q: 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.

Q: 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.

Q: Marcus processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data: Sales Sales Value Additional Value after with no further Processing further Product Processing Costs processing Acta $1,350 $900 $2,700 Corda 450 225 630 Fando 900 450 1,800 Limo 90 45 180 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.

Q: Alpha Co. can produce a unit of Beta for the following costs: Direct material ..................................................... $ 8 Direct labor..................................................... 24 Overhead..................................................... 40 Total costs per unit..................................................... $72 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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 the options listed are correct.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: Use of the internal rate of return method cannot be used with uneven cash flows.

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

Q: 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.

Q: 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.

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

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

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

Q: The time value of money is considered when calculating the payback period of an investment.

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

Q: When computing payback period, the year in which a capital investment is made is year 1.

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

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

Q: 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.

Q: 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.

Q: 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.

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

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

Q: The concept of incremental cost is the same as the concept of differential cost.

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

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

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

Q: 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.

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

Q: 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.

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

Q: 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 ____________________.