Q&A Hero

Q: Beyer Corporation is considering buying a machine for $25,000. Its estimated useful life is five 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 six-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 nine 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 of 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 is the: A. Net present value rate. B. Payback rate. C. Accounting rate of return. D. Earnings from investment. E. Profit rate.

Q: What is the accounting rate of return for this machine? A. 14.28% B. 17.14% C. 60.0% D. 8.57% E. 7%

Q: What is the payback period for this machine? A. 17.50 years B. 11.67 years C. 5.00 years D. 4.375 years E. 1 year

Q: What is the accounting rate of return for this machine? A. 33.3% B. 16.7% C. 50.0% D. 8.3% E. 4%

Q: What is the payback period for this machine? A. 24 years B. 12 years C. 6 years D. 4 years E. 1 year

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 approximate accounting rate of return? A. 19% B. 33% C. 17% D. 10% E. 25%

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: If a manager were concerned with the time value of money, from which two capital budgeting methods should the manager choose? A. IRR or Payback. B. BET or IRR. C. BET or Payback. D. NPV or ARR. E. NPV or Payback.

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: A given project requires a $25,000 investment and is expected to generate end-of-period annual cash inflows as follows: Year 1 Year 2 Year 3 Total $4,000 $15,000 $6,000 $25,000 Assuming a discount rate of 10%, what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below: i = 10% n = 1 i = 10% n = 2 i = 10% n = 3 .9091 .8264 .7513 A. $6,217.50 B. ($4,459.80) C. ($6,217.50) D. $8,275.00 E. $0.00

Q: A given project requires a $28,500 investment and is expected to generate end-of-period annual cash inflows of $12,000 for each of three years. Assuming a discount rate of 10%, what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below: i = 10% n = 1 i = 10% n = 2 i = 10% n = 3 .9091 .8264 .7513 A. $0.00 B. $2,668.00 C. ($7,461.00) D. $1,341.60 E. $29,841.60

Q: A given project requires a $28,000 investment and is expected to generate end-of-period annual cash inflows as follows: Year 1 Year 2 Year 3 $12,000 $13,000 $12,000 Assuming a discount rate of 10%, what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below. i = 10% n = 1 i = 10% n = 2 i = 10% n = 3 .9091 .8264 .7513 A. $0.00 B. $2,668.00 C. ($7,461.00) D. $30,668.00 E. ($4,966.68)

Q: A given project requires a $30,000 investment and is expected to generate end-of-period annual cash inflows as follows: Year 1 Year 2 Year 3 Total $12,000 $8,000 $10,000 $30,000 Assuming a discount rate of 10%, what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below: i = 10% n = 1 i = 10% n = 2 i = 10% n = 3 .9091 .8264 .7513 A. $0.00 B. $21,000.00 C. ($7,461.00) D. $25,033.32 E. ($4,966.68)

Q: The internal rate of return method is not subject to the limitations of the net present value method when comparing projects with different amounts invested because: A. The internal rate of return is expressed as a percent rather than the absolute dollar value of present value. B. The internal rate of return is expressed as an absolute dollar value rather than the percent of net present value. C. The internal rate of return reflects the time value of money rather than the absolute dollar value of present value. D. The internal rate of return is expressed as an absolute dollar value rather than the time value of money used in net present value. E. The internal rate of return is expressed as a percent rather than the accrual income method used in net present value.

Q: A major 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 varying risk levels over project life. E. Failure to compare dissimilar projects.

Q: Which methods of evaluating a capital investment project use cash flows as a measurement basis? A. Net present value, accounting rate of return, and internal rate of return. B. Internal rate of return, payback period, and accounting rate of return. C. Accounting rate of return, net present value, and payback period. D. Payback period, internal rate of return, and net present value. E. Net present value, payback period, accounting rate of return, and internal rate of return.

Q: Which methods of evaluating a capital investment project ignore the time value of money? A. Net present value and accounting rate of return. B. Accounting rate of return and internal rate of return. C. Internal rate of return and payback period. D. Payback period and accounting rate of return. E. Net present value and payback period.

Q: For purposes of applying the net present value and the internal rate of return methods, the rate chosen to measure the time adjusted value of money is known as the: A. Internal rate. B. Average rate. C. Prime rate. D. Discount rate. E. Compound rate.

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: 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 of return. D. Maximum rate of return. E. Payback rate of return.

Q: A. Means that a dollar today is worth less than a dollar tomorrow. B. Means that a dollar tomorrow is worth more than a dollar today. C. Means that a dollar today is worth more than a dollar tomorrow. D. Means that Time is money. E. Does not involve the concept of compound interest. Answer: C

Q: The process of restating future cash flows in terms of their present values is called: A. Discounting. B. Capital budgeting. C. Payback period. D. Risk uncertainty. E. Accounting rate of return.

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: Which of the following is an objective of capital budgeting? A. To eliminate all risk. B. To discount all future and past cash flows. C. To earn a satisfactory return on investment. D. To reverse past decisions. E. To reduce the number of investment activities.

Q: The net cash flow of a particular investment project: A. Does not take income taxes into consideration. B. Equals the total of the inflows of the project. C. Equals the total of the outflows of the project. D. Does not include depreciation. E. Is equal to operating income each period.

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: Capital budgeting decisions usually involve analysis of: A. Cash outflows only. B. Short-term investments only. C. Long-term investments only. 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: The payback method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

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

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: Three widely used methods of comparing investment alternatives are payback period, net present value, and rate of return on average investment.

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 net present value capital budgeting method considers all estimated cash flows for the projects expected life.

Q: Accounting rate of return is the simplest capital budgeting method. It gives managers an estimate of how soon they will recover their initial investment.

Q: Neither the net present value nor the internal rate of return methods of evaluating investments consider the time value of money.

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

Q: Lower-risk investments require a higher rate of return compared with higher-risk investments.

Q: For projects financed from borrowed funds, the hurdle rate must exceed the interest rate paid on these funds.

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

Q: A hurdle rate is the minimum acceptable rate of return for an investment.

Q: All capital investment evaluation methods use the time value of money concept.

Q: The process of restating cash flows in terms of their present values is called discounting.

Q: The time value of money concept works on the principle that a dollar tomorrow is worth more than a dollar today.

Q: The time value of money concept works on the principle that a dollar today is worth more than a dollar tomorrow.

Q: Capital budgeting decisions that relate to investments in technology are not as risky as other types of capital budgeting decisions.

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: Wear Company is operating at 70% of its manufacturing capacity of 78,000 product units per year. A customer has offered to buy an additional 18,000 units at $41 each and sell them outside the country so as not to compete with Wear Company. The following data are available: Costs at 70% Capacity: Per Unit Total Direct materials $28.00 $1,528,800 Direct labor 00 163,800 Overhead (fixed and variable) 7.00 382,200 Totals $38.00 $2,074,800 In producing 18,000 additional units fixed overhead costs would remain at their current level but incremental variable overhead costs of $1.28 per unit would be incurred. What is the effect on total income if Wear Company accepts this order?

Q: Highbank Company is operating at 80% of its manufacturing capacity of 62,000 product units per year. A customer has offered to buy an additional 10,000 units at $17 each and sell them outside the country so as not to compete with Highbank. The following data are available: Costs at 80% capacity: Per Unit Total Direct materials $4.00 $198,400 Direct labor 00 99,200 Overhead (fixed and variable) 5.00 248,000 Totals $11.00 $545,600 In producing 10,000 additional units fixed overhead costs would remain at their current level but incremental variable overhead costs of $0.75 per unit would be incurred. What is the effect on total income if Highbank accepts this order?

Q: A company expects to produce and sell a single product. Management desires a 13% return on assets of $2,100,000. The following additional company information is available: Variable costs (per unit) Production costs $62 Nonproduction costs $8 Fixed costs (in total) Overhead $521,280 Nonproduction $397,824 Required: Compute selling price per unit given that markup percentage equals desired profit divided by total costs under the following independent assumptions: a. The company produced and sold 19,200 units b. The company produced and sold 114,888 units

Q: A company expects to produce and sell a single product. Management desires a 14% return on assets of $725,000. The following additional company information is available: Variable costs (per unit) Production costs $58 Nonproduction costs $11 Fixed costs (in total) Overhead $179,872 Nonproduction $49,984 Required: Compute selling price per unit given that markup percentage equals desired profit divided by total costs under the following independent assumptions. a. The company produced and sold 17,600 units b. The company produced and sold 28,732 units

Q: 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 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: a. What is the net return from selling the units as scrap? b. What is the net return from reworking and selling the units? c. Should the company sell the units as scrap or rework them?

Q: Peters, Inc. sells a single product and reports the following results from sales of 100,000 units: Sales ($45/unit) $4,500,000 Less costs and expenses: Direct materials ($16/unit) $1,600,000 Direct labor ($9/unit) 900,000 Variable overhead ($3/unit) 300,000 Fixed overhead ($8.10/unit) 810,000 Variable administrative ($4.50/unit) 450,000 Fixed administrative ($4/unit) 400,000 Total costs and expenses $(4,460,000 ) Operating income $ 40,000 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: a. Should Peters accept the order if it does not affect regular sales? Explain. b. 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?

Q: Jorgensen Department Store has three departments: Clothing, Toys, and Hardware. The most recent income statement, showing the total operating profit and departmental results is shown below: Total Clothing Toys Hardware Sales $2,100,000 $1,000,000 $600,000 $500,000 Cost of goods sold (1,260,000 ) (500,000 ) (400,000 ) (360,000 ) Gross profit 840,000 500,000 200,000 140,000 Direct expenses (420,000 ) (200,000 ) (100,000 ) (120,000 ) Allocated expenses (350,000 ) (100,000 ) (75,000 ) (175,000 ) Net income (loss) $ 70,000 $ 200,000 $ 25,000 $(155,000 ) 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?

Q: 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: Direct materials $ 10 per unit Direct labor 16 per unit Variable overhead 4 per unit Allocated fixed overhead 12 per unit Allocated fixed selling expense 8 per unit What selling price per unit will this company require to earn $3,000 on the order?

Q: A company processes chemicals through a common production process. This process costs $200,000 each year. The four chemicals 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: Unit Sales Unit Sales Price per Price per Gallon at Split-Off Gallon after Further Additional Processing Product Volume Point Processing Costs A 25,000 g. $35.00 $54.00 $500,000 B 12,000 g. 00 36.00 124,000 C 8,000 g. 36.00 54.00 120,000 D 2,000 g. 12.00 21.00 25,000 a. Calculate the incremental profit or loss that would be generated by processing these chemicals further. b. Which chemicals should be sold as is and which should be processed further and why?

Q: Fleming Company had the following results of operations for the past year: Sales (10,000 units at $6.80) $ 68,000 Materials and direct labor (20,000 ) Overhead (40% variable) (10,000 ) Selling and administrative expenses (all fixed) (6,000 ) Operating income $ 32,000 A foreign company (whose sales will not affect Fleming's regular sales) offers to buy 2,000 units at $5 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.

Q: A company manufactures three products. Each unit of product X requires 10 machine hours, each unit of product Y requires 4 machine hours, and each unit of product Z requires 6 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. Each unit of Z sells for $12 and has variable costs of $4. Required: a. Calculate the contribution margin per hour of each of the products. b. Determine the preferred sales mix if there are no market constraints on any of the products. c. Determine the preferred sales mix if the demand is limited to 20,000 units of each.

Q: A company inadvertently produced 5,000 defective portable MP3 players. The players cost $22 each to be manufactured. A salvage company will purchase the defective units as they are for $18 each. The production manager reports that the defects can be corrected for $10 per unit, enabling the company to sell them at the regular price of $33. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.

Q: 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. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.

Q: When deciding whether to sell partially completed products now or to process them further, what is the correct treatment of the manufacturing costs which have been incurred to date?

Q: When a constrained resource exists, how does a company determine the sales mix that will maximize profits? Would sales demand affect this calculation?

Q: Explain and give several examples of qualitative decision factors.

Q: What is the overall decision rule management should apply when considering a segment for elimination?

Q: What is a sunk cost? When would it be relevant to a short-term managerial decision?