Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Butler 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.Butler 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?

Accepted Answer

A) $24,018. 
B) $(3,100). 
C) $30,000. 
D) $26,900. 
E) $(29,520). 
A) $24,018. 
B) $(3,100). 
C) $30,000. 
D) $26,900. 
E) $(29,520).

Question 3

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?

Accepted Answer

@#IMG-DLM& *Annual depreciation: A $2,500,000/5 yr

Question 4

Frederick Co.is thinking about having one of its products manufactured by a subcontractor. Currently,the cost of manufacturing 5,000 units follows:   If Frederick can buy 5,000 units from a subcontractor for $130,000,it should:

Accepted Answer

A) Make the product because current factory overhead is less than $130,000. 
B) Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000. 
C) Make the product because factory overhead is a sunk cost. 
D) Buy the product because total fixed and variable manufacturing costs are greater than $130,000. 
E) Buy the product because the total incremental costs of manufacturing are greater than $130,000. 
A) Make the product because current factory overhead is less than $130,000. 
B) Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000. 
C) Make the product because factory overhead is a sunk cost. 
D) Buy the product because total fixed and variable manufacturing costs are greater than $130,000. 
E) Buy the product because the total incremental costs of manufacturing are greater than $130,000.

Question 5

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.

Accepted Answer

@#IMG-DLM& *Sales value after further processing:

Question 6

Gordon Corporation inadvertently produced 10,000 defective digital watches.The watches cost $8 each to produce.A salvage company will purchase the defective units as they are for $3 each.Gordon'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.Gordon should:

Accepted Answer

A) Sell the watches for $3 per unit. 
B) Correct the defects and sell the watches at the regular price. 
C) Sell the watches as they are because repairing them will cause their total cost to exceed their selling price. 
D) Sell 5,000 watches to the salvage company and repair the remainder. 
E) Throw the watches away. 
A) Sell the watches for $3 per unit. 
B) Correct the defects and sell the watches at the regular price. 
C) Sell the watches as they are because repairing them will cause their total cost to exceed their selling price. 
D) Sell 5,000 watches to the salvage company and repair the remainder. 
E) Throw the watches away.

Question 7

A sunk cost will change with a future course of action.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

internal r

Question 9

Elliot Company can sell all of its products A and Z that it can produce,but it has limited production capacity.It can produce 8 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 Elliot Company?

Accepted Answer

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. 
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.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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?

Accepted Answer

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. 
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.

Question 12

The process of analyzing alternative long-term investments and deciding which assets to acquire or sell is known as:

Accepted Answer

A) Planning and control. 
B) Capital budgeting. 
C) Variance analysis. 
D) Master budgeting. 
E) Managerial accounting. 
A) Planning and control. 
B) Capital budgeting. 
C) Variance analysis. 
D) Master budgeting. 
E) Managerial accounting.

Question 13

Two investments with exactly the same payback periods are not equally valuable to an investor because the timing of net cash flows may be different.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

The internal rate of return method of evaluating capital investments cannot be used with uneven cash flows.

Accepted Answer

A) True 
 B)False

Question 16

An out-of-pocket cost requires a future outlay of cash and is relevant for current and future decision making.

Accepted Answer

A) True 
 B)False

Question 17

A cost that requires a future outlay of cash,and is relevant for current and future decision making,is a(n):

Accepted Answer

A) Out-of-pocket cost. 
B) Sunk cost. 
C) Opportunity cost. 
D) Operating cost. 
E) Uncontrollable cost. 
A) Out-of-pocket cost. 
B) Sunk cost. 
C) Opportunity cost. 
D) Operating cost. 
E) Uncontrollable cost.

Question 18

The accounting rate of return is based on cash flows rather than net income in its calculation.

Accepted Answer

A) True 
 B)False

Question 19

The hurdle rate is often set at:

Accepted Answer

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. 
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.

Question 20

The accounting rate of return is calculated as:

Accepted Answer

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. 
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.

Exam 25: Capital Budgeting and Managerial Decisions

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

Frederick Co.is thinking about having one of its products manufactured by a subcontractor. Currently,the cost of manufacturing 5,000 units follows: If Frederick can buy 5,000 units from a subcontractor for $130,000,it should:

A sunk cost will change with a future course of action.

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

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

The process of analyzing alternative long-term investments and deciding which assets to acquire or sell is known as:

Two investments with exactly the same payback periods are not equally valuable to an investor because the timing of net cash flows may be different.

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

The internal rate of return method of evaluating capital investments cannot be used with uneven cash flows.

An out-of-pocket cost requires a future outlay of cash and is relevant for current and future decision making.

A cost that requires a future outlay of cash,and is relevant for current and future decision making,is a(n):

The accounting rate of return is based on cash flows rather than net income in its calculation.

The hurdle rate is often set at:

The accounting rate of return is calculated as:

Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Completing the Accounting Cycle

Accounting for Merchandising Operations

Inventories and Cost of Sales

Accounting Information Systems

Cash and Internal Controls

Accounting for Receivables

Plant Assets, Natural Resources, and Intangibles

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Accounting for Corporations

Long-Term Liabilities

Investments and International Operations

Reporting the Statement of Cash Flows

Analysis of Financial Statements

Managerial Accounting Concepts and Principles

Job Order Cost Accounting

Process Cost Accounting

Cost-Volume-Profit Analysis

Master Budgets and Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Appendix B: Time Value of Money

Appendix C: Activity-Based Costing

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