Question 1

An ________________________ requires a future outlay of cash and is relevant for current and future decision making.

Accepted Answer

The answer of An ________________________ requires a future outlay of...

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

Accepted Answer

A) Accounting rate of return. 
B) Net present value. 
C) Payback period. 
D) Cash flow method. 
E) Return on average investment. 
A) Accounting rate of return. 
B) Net present value. 
C) Payback period. 
D) Cash flow method. 
E) Return on average investment.

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

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. 
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.

Question 6

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

Accepted Answer

A) True 
 B)False

Question 7

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:

Accepted Answer

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. 
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.

Question 8

A company is considering the purchase of new equipment for $45,000.The projected after-tax net income is $3,000 after deducting $15,000 of depreciation.The machine has a useful life of 3 years and no salvage value.Management of the company requires a 12% return on investment.The present value of an annuity of 1 for various periods follows:
Period Present value of an annuity of 1 at 12%
1……) 0.8929
2……) 1.6901
3……) 2.4018
What is the net present value of this machine assuming all cash flows occur at year-end?

Accepted Answer

A) $(1,768) 
B) $3,000 
C) $15,000 
D) $18,000 
E) $43,232 
A) $(1,768) 
B) $3,000 
C) $15,000 
D) $18,000 
E) $43,232

Question 9

Fields Company currently manufactures one of its parts at a cost of $3.25 per unit.This cost is based on a normal production rate of 50,000 units.Variable costs are $2.10 per unit,fixed costs related to making this part are $40,000 per year,and allocated fixed costs are $45,000 per year.Allocated fixed costs are unavoidable whether the company makes or buys the part.Fields is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period.Should the company continue to manufacture the part,or should it buy the part from the outside supplier?
 Support your answer with analyses.

Accepted Answer

@#IMG-DLM& The allocated fixed costs are not relev

Question 10

Briefly describe the time value of money.Why is the time value of money important in capital budgeting?

Accepted Answer

The time value of money means that,typic

Question 11

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):

Accepted Answer

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

Question 12

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

Accepted Answer

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

Question 13

An additional cost incurred only if a particular action is taken is a(n):

Accepted Answer

A) Period cost. 
B) Pocket cost. 
C) Discount cost. 
D) Incremental cost. 
E) Sunk cost. 
A) Period cost. 
B) Pocket cost. 
C) Discount cost. 
D) Incremental cost. 
E) Sunk cost.

Question 14

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.

Accepted Answer

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. 
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.

Question 15

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 16

Eagle Company is considering the purchase of an asset for $100,000.It is expected to produce the following net cash flows.The cash flows occur evenly throughout each year.Compute the payback period for this investment.(Round to two decimal places.) $$\begin{array} { | l | r | l | } 
\hline & \begin{array} { l } 
\text { Annual Net } \
\text { Cash Flows }
\end{array} \
\hline \text { Year 1 } & \$ 40,000 & \
\hline \text { Year 2 } & \$ 40,000 & \
\hline \text { Year 3 } & \$ 35,000 & \
\hline \text { Year 4 } & \$ 35,000 & \
\hline \text { Year 5 } & \$ 30,000 & \
\hline
\end{array}$$

Accepted Answer

A) 2.85 years. 
B) 2.57 years. 
C) 3.00 years. 
D) 2.50 years. 
E) 3.62 years. 
A) 2.85 years. 
B) 2.57 years. 
C) 3.00 years. 
D) 2.50 years. 
E) 3.62 years.

Question 17

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 18

A company is trying to decide which of two new product lines to introduce in the coming year.The predicted revenue and cost data for each product line follows:
   The company has a 30% tax rate,it uses the straight-line depreciation method,and it predicts that cash flows will be spread evenly throughout each year.Calculate each product's payback period.If the company requires a payback period of three years or less,which,if either,product should be chosen?

Accepted Answer

@#IMG-DLM& *Annual depreciation:
A = $ 75,000/5 yr

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

A company inadvertently produced 3,000 defective products.The product cost $15 each to be manufactured and normally sells for $35 each.A salvage company will purchase the defective units as they are for $12 each.The production manager reports that the defects can be corrected for $5 per unit,enabling the company to sell them at a discounted price of $22.00.The repair operations would not affect other production operations.Prepare an analysis that shows which action should be taken.

Accepted Answer

@#IMG-DLM& Because there is an

An ________________________ requires a future outlay of cash and is relevant for current and future decision making.

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

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

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.

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

Briefly describe the time value of money.Why is the time value of money important in capital budgeting?

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):

An additional cost incurred only if a particular action is taken is a(n):

The hurdle rate is often set at:

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

Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Completing the Accounting Cycle

Accounting for Merchandising Operations

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 Costing

Process Costing

Cost-Volume-Profit Analysis

Master Budgets and Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Time Value of Money B

Activity-Based Costing C

Filters

Exam 25: Capital Budgeting and Managerial Decisions

An ________________________ requires a future outlay of cash and is relevant for current and future decision making.

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

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

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.

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

Briefly describe the time value of money.Why is the time value of money important in capital budgeting?

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):

An additional cost incurred only if a particular action is taken is a(n):

The hurdle rate is often set at:

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

Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Completing the Accounting Cycle

Accounting for Merchandising Operations

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 Costing

Process Costing

Cost-Volume-Profit Analysis

Master Budgets and Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Time Value of Money B

Activity-Based Costing C

Filters