\[\text { Reference: } 10 - 05\] The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: \[\begin{array} { | l | l | l | } \hline & \text { Project } X & \text { Project } Y \\ \hline \text { Cost of equipment needed now } & \$ 80,000 & - \\ \hline \text { Working capital requirement } & - & \$ 80,000 \\ \hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \\ \hline \text { Salvage value in 5 years } & \$ 6,000 & - \\ \hline \end{array}\] Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. -The net present value of project Y is closest to:

A) $15,110. B) $11,708. C) ($11,708). D) $30,250. A) $15,110. B) $11,708. C) ($11,708). D) $30,250.

\[\text { Reference: } 10 - 02\] Oriental Company has gathered the following data on a proposed investment project: \[\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\ \hline \text { Annual net cash flows } & \$ 50,000 \\ \hline \text { Life of the equipment } & 10 \text { years } \\ \hline \text { Salvage value } & \$ 20 \\ \hline \text { Discount rate } & 10 \% \\ \hline \end{array}\] The company uses straight-line depreciation on all equipment. -The payback period for the investment would be:

A) 10 years. B) 4 years. C) 0.25 years. D) 2.41 years. A) 10 years. B) 4 years. C) 0.25 years. D) 2.41 years.

\[\text { Reference: } 10 - 10\] Fast Food, Inc. has purchased a new donut maker. It cost $16,000 and has an estimated life of 10 years with no salvage value. The following annual donut sales and expenses are projected: \[\begin{array} { | l | r | l | } \hline \text { Sales } & & \$ 22,000 \\ \hline \text { Expenses: } & & \\ \hline \text { Flour, etc., required in making donuts } & \$ 10,000 & \\ \hline \text { Salaries } & 6,000 & \\ \hline \text { Depreciation } & 1,600 & 17,600 \\ \hline \text { Net income } & & \$ 4,400 \\ \hline \end{array}\] -The payback period on the new machine is closest to:

A) 3.6 years. B) 5.0 years. C) 1.4 years. D) 2.7 years. A) 3.6 years. B) 5.0 years. C) 1.4 years. D) 2.7 years.

\[\text { Reference: } 10 - 10\] Fast Food, Inc. has purchased a new donut maker. It cost $16,000 and has an estimated life of 10 years with no salvage value. The following annual donut sales and expenses are projected: \[\begin{array} { | l | r | l | } \hline \text { Sales } & & \$ 22,000 \\ \hline \text { Expenses: } & & \\ \hline \text { Flour, etc., required in making donuts } & \$ 10,000 & \\ \hline \text { Salaries } & 6,000 & \\ \hline \text { Depreciation } & 1,600 & 17,600 \\ \hline \text { Net income } & & \$ 4,400 \\ \hline \end{array}\] -The simple rate of return for the new machine is closest to:

A) 27.5%. B) 20.0%. C) 37.5%. D) 80.0%. A) 27.5%. B) 20.0%. C) 37.5%. D) 80.0%.

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: \[\begin{array} { | l | l | l | } \hline & \text { Machine } A & \text { Machine } B \\ \hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\ \hline \text { Overhaul costs needed year } 4 & \$ 10,000 & 20,000 \\ \hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\ \hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\ \hline \end{array}\] Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -\[\begin{array} { | l | l | l | } \hline & \text { Depreciation expense } & \text { Salvage value } \\ \hline \text { A) } & \text { Include } & \text { Include } \\ \hline \text { B) } & \text { Include } & \text { Exclude } \\ \hline \text { C) } & \text { Exclude } & \text { Include } \\ \hline \text { D) } & \text { Exclude } & \text { Exclude } \\ \hline \end{array}\]

A) Choice A. B) Choice B. C) Choice C. D) Choice D. A) Choice A. B) Choice B. C) Choice C. D) Choice D.

Reference: 10-07 UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow): \[\begin{array} { | l | l | } \hline \text { Years } 1 - 10 & \$ 90,000 \\ \hline \text { Year } 11 & \$ ( 20,000 ) \\ \hline \text { Year } 12 & \$ 100,000 \\ \hline \end{array}\] In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%. -The present value of the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the alternators (rounded to the nearest dollar)is:

A) $577,950. B) $596,735. C) $582,735. D) $591,950. A) $577,950. B) $596,735. C) $582,735. D) $591,950.

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: \[\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine B } \\ \hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\ \hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\ \hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\ \hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\ \hline \end{array}\] Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -The time value of money is ignored by which method

A) The net present value method. B) The internal rate of return method. C) The simple rate of return method. D) Both the internal rate and simple rate of return methods. A) The net present value method. B) The internal rate of return method. C) The simple rate of return method. D) Both the internal rate and simple rate of return methods.

Reference: 10-08 Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: \[\begin{array} { | l | c | c | } \hline & \begin{array} { l } \text { Present } \\ \text { System } \end{array} & \begin{array} { l } \text { Proposed New } \\ \text { System } \end{array} \\ \hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\ \hline \text { Accumulated depreciation } & \$ 240,000 & - \\ \hline \text { Overhaul costs needed now } & \$ 230,000 & - \\ \hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\ \hline \text { Salvage value now } & \$ 160,000 & - \\ \hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\ \hline \text { Working capital required } & - & \$ 200,000 \\ \hline \end{array}\] Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes. -For what reason are the net present value and internal rate of return methods of capital budgeting superior to the payback method?

A) Both the methods are easier to implement. B) Both the methods reflect the effects of depreciation and income taxes. C) Both the methods consider the time value of money. D) Both the methods require less input. A) Both the methods are easier to implement. B) Both the methods reflect the effects of depreciation and income taxes. C) Both the methods consider the time value of money. D) Both the methods require less input.

Reference: 10-06 The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: \[\begin{array} { | l | c | } \hline \text { Cost of required equipment } & \$ 250,000 \\ \hline \text { Working capital required } & \$ 100,000 \\ \hline \text { Annual operating cash inflows } & \$ 80,000 \\ \hline \text { Cash repair at end of 4 years } & \$ 40,000 \\ \hline \text { Salvage value at end of 6 years } & \$ 90,000 \\ \hline \end{array}\] This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%. -The present value of the net cash flows (all cash inflows less all cash outflows)occurring during year 4 is:

A) $40,000. B) $54,640. C) $27,320. D) $42,790. A) $40,000. B) $54,640. C) $27,320. D) $42,790.

Exam 10: Capital Budgeting Decisions

$\text { Reference: } 10 - 05$ The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: Project X Project Y Cost of equipment needed now \ 80,000 - Working capital requirement - \ 80,000 Annual cash operating inflows \ 23,000 \ 18,000 Salvage value in 5 years \ 6,000 - Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. -The net present value of project Y is closest to:

(Multiple Choice)

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Question 61

Reference: 10-12 Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. -What is the simple rate of return on the initial investment?

(Multiple Choice)

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Question 62

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -If new equipment is replacing old equipment, any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equipment.

(True/False)

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Question 63

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -After-tax cash flows are computed as equal to pre-tax cash flows X (1 + tax rate).

(True/False)

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Question 64

$\text { Reference: } 10 - 02$ Oriental Company has gathered the following data on a proposed investment project: Investment in depreciable equipment \ 200,000 Annual net cash flows \ 50,000 Life of the equipment 10 years Salvage value \ 20 Discount rate 10\% The company uses straight-line depreciation on all equipment. -The payback period for the investment would be:

(Multiple Choice)

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Question 65

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -The present value of a given sum to be received in five years will be exactly twice as great as the present value of an equal sum to be received in ten years.

(True/False)

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Question 66

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -The cost of capital is the average rate of return a company must pay on its short-term bank borrowings.

(True/False)

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Question 67

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -The internal rate of return for a project is the discount rate that makes the net present value of the project equal to zero.

(True/False)

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Question 68

$\text { Reference: } 10 - 10$ Fast Food, Inc. has purchased a new donut maker. It cost $16,000 and has an estimated life of 10 years with no salvage value. The following annual donut sales and expenses are projected: Sales \ 22,000 Expenses: Flour, etc., required in making donuts \ 10,000 Salaries 6,000 Depreciation 1,600 17,600 Net income \ 4,400 -The payback period on the new machine is closest to:

(Multiple Choice)

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Question 69

$\text { Reference: } 10 - 10$ Fast Food, Inc. has purchased a new donut maker. It cost $16,000 and has an estimated life of 10 years with no salvage value. The following annual donut sales and expenses are projected: Sales \ 22,000 Expenses: Flour, etc., required in making donuts \ 10,000 Salaries 6,000 Depreciation 1,600 17,600 Net income \ 4,400 -The simple rate of return for the new machine is closest to:

(Multiple Choice)

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Question 70

$\text { Reference: } 10 - 03$ Apex Corp. is planning to buy production machinery costing $100,000. This machinery's expected useful life is five years, with no residual value. Apex uses a discount rate of 10% and has calculated the following data pertaining to the purchase and operation of this machinery: Year Estimated annual net cash inflow 1 \ 60,000 2 30,000 3 20,000 4 20,000 5 20,000 -The payback period is?

(Multiple Choice)

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Question 71

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: Machine A Machine B Purchase cost new \ 300,000 \ 300,000 Overhaul costs needed year 4 \ 10,000 20,000 Annual cash operating costs \ 130,000 \ 120,000 Salvage value at the end of 8 years \ 20,000 \ 30,000 Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. - Depreciation expense Salvage value A) Include Include B) Include Exclude C) Exclude Include D) Exclude Exclude

(Multiple Choice)

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Question 72

Reference: 10-02 Oriental Company has gathered the following data on a proposed investment project: Investment in depreciable equipment \ 200,000 Annual net cash flows \ 50,000 Life of the equipment 10 years Salvage value \ 20 Discount rate 10\% The company uses straight-line depreciation on all equipment. -Parks Company is considering an investment proposal in which a working capital investment of $10,000 would be required. The investment would provide cash inflows of $2,000 per year for six years. The working capital would be released for use elsewhere when the project is completed. If the company's discount rate is 10%, the investment's net present value is:

(Multiple Choice)

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Question 73

Reference: 10-07 UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow): Years 1-10 \ 90,000 Year 11 \ (20,000) Year 12 \ 100,000 In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%. -The present value of the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the alternators (rounded to the nearest dollar)is:

(Multiple Choice)

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Question 74

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -The immediate cash outflow required for this project would be:

(Multiple Choice)

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Question 75

Reference: 10-09 Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: Project A Project B Cost of equipment needed now \ 120,000 \ 70,000 Working capital investment needed now - \ 50,000 Annual net operating cash inflows \ 50,000 \ 45,000 Salvage value of equipment in 6 years \ 15,000 - Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. -The following data pertain to an investment proposal: Cost of the investment \ 20,000 Annual cost savings \ 5,000 Estimated salvage value \ 1,000 Life of the project 8 years Discount rate 16\% The net present value of the proposed investment is:

(Multiple Choice)

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Question 76

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: Machine A Machine B Purchase cost new \ 300,000 \ 300,000 Overhaul costs needed year 4 \ 10,000 20,000 Annual cash operating costs \ 130,000 \ 120,000 Salvage value at the end of 8 years \ 20,000 \ 30,000 Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -The time value of money is ignored by which method

(Multiple Choice)

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Question 77

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -What would the annual net cash inflows from this project have to be in order to justify investing in remodelling?

(Multiple Choice)

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Question 78

Reference: 10-08 Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: Present System Proposed New System Purchase cost new \ 250,000 \ 300,000 Accumulated depreciation \ 240,000 - Overhaul costs needed now \ 230,000 - Annual cash operating costs \ 180,000 \ 170,000 Salvage value now \ 160,000 - Salvage value at the end of 8 years \ 152,000 \ 165,000 Working capital required - \ 200,000 Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes. -For what reason are the net present value and internal rate of return methods of capital budgeting superior to the payback method?

(Multiple Choice)

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Question 79

Reference: 10-06 The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: Cost of required equipment \ 250,000 Working capital required \ 100,000 Annual operating cash inflows \ 80,000 Cash repair at end of 4 years \ 40,000 Salvage value at end of 6 years \ 90,000 This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%. -The present value of the net cash flows (all cash inflows less all cash outflows)occurring during year 4 is:

(Multiple Choice)

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Question 80

An Introduction to Managerial Accounting

Cost Concepts

Systems Design: Job-Order Costing

Process Costing

Activity-Based Costing

Cost Behaviour: Analysis and Use

Budgeting

Cost-Volume-Profit Relationships

Relevant Costs: the Key to Decision Making

Standard Costs and Variance Analysis

Organizational Structure and Performance Measurement

How Well Am I Doing Financial Statement Analysis Online

How Well Am I Doing Cash Flow Statement Online

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