Exam 25: Capital Budgeting and Managerial Decisions

A company is planning to introduce a new portable computer to its existing product line.Management must decide whether to make the computer case or buy it from an outside supplier.The lowest outside price is $90.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 other factors,besides cost,should the company consider?

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 $12,000 per year including depreciation of $3,000 per year.The company's tax rate is 40%.What is the payback period for the new machine?

A capital budgeting method that considers how quickly a project recovers costs is known as ______________.An enhancement to this method that also considers the time value of money is called ____________. Answers must appear in the order shown above

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%?

Goodfellow Company had the following results of operations for the past year: A foreign company (whose sales will not affect Goodfellow'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.Prepare an analysis of this additional business to show whether Goodfellow should take this order.

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 $200,000 original cost of the machine is an example of a(n):

Minor Electric has received a special one-time order for 1,500 light fixtures (units)at $5 per unit.Minor 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 Minor wishes to earn $1,250 on the special order,the size of the order would need to be:

Poe Company is considering the purchase of new equipment costing $80,000.The projected annual cash inflows are $30,200,to be received at the end of each year.The machine has a useful life of 4 years and no salvage value.Poe 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.

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

In this chapter,you examined several short-term managerial decision tasks.Identify (list)any three of these types of decision tasks: _________________________;_________________________;_________________________ Any three of the above answers are acceptable.

A(n)________________________ requires a future outlay of cash and is relevant for current and future decision making.

A new manufacturing machine is expected to cost $278,000,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.

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

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

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 the company's required rate of return,typically its cost of capital is called the:

When the amount invested differs substantially across projects,NPV is of limited value for comparison purposes.You have evaluated three projects of substantially different investment amounts using the net present value (NPV)method.How would you decide which one of the projects to select?

Spilker Linens Store has three departments: Bath,Kitchen,and Bedding.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 Bedding department,as it is generating a net loss.If the Bedding department is eliminated,the Kitchen department will expand to fill the space,but sales will not change in total,nor will direct expenses.None of Bedding's allocated expenses will be avoided,but they will be reallocated to Bath and Kitchen.Bath will be allocated $100,000 additional expenses,and Kitchen will be allocated $75,000 additional expenses.Prepare a new income statement for Spilker Linens Store,showing the results if the Bedding Department is eliminated and indicate whether eliminating the department is advisable.

Capital budgeting is the process of analyzing:

A disadvantage of using the payback period to compare investment alternatives is that: