Exam 25: Capital Budgeting and Managerial Decisions

A company produces three different products that all require processing on the same machines.There are only 27,000 machine hours available in each year.Production information for each product is: Required: (1)Determine the preferred sales mix if there are no market constraints on any of the products. (2)Determine the preferred sales mix if the demand is limited to 5,000 units for each product. (3)Determine the preferred sales mix if the demand is limited to 3,000 units for each product.

(Essay)

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Question 41

Parker Plumbing has received a special one-time order for 1,500 faucets (units)at $5 per unit.Parker 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.Should the company accept the special order?

(Multiple Choice)

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Question 42

Presented below are terms preceded by letters a through g and followed by a list of definitions 1 through 7.Match the letter of the term with the definition.Use the space provided preceding each definition.

A process of analyzing alternative long-term investments.

Hurdle Rate

The time expected to pass before the net cash flows from an investment equals its initial cost.

Net Cash Flow

Initial cost of an investment subtracted from discounted future cash flows from the investment.

Accounting Rate of Return

Correct Answer:

Verified

A process of analyzing alternative long-term investments.

The time expected to pass before the net cash flows from an investment equals its initial cost.

Initial cost of an investment subtracted from discounted future cash flows from the investment.

A minimum acceptable rate of return.

Annual after-tax net income divided by annual average investment.

Cash inflows minus cash outflows for the period.

A discount rate that results in a net present value of zero.

(Matching)

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Question 43

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

(Short Answer)

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Question 44

Sherman Company can sell all of product A that it produces but only 160,000 units of Z and it has limited production capacity.It can produce 6 units of A per hour or 10 units of Z per hour,and it has 30,000 production hours available.Contribution margin per unit is $12 for A and $10 for Z.What is the most profitable sales mix for this company?

(Essay)

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Question 45

What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

(Essay)

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Question 46

Briefly describe both the payback period method and the net present value method of comparing investment alternatives.

(Essay)

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Question 47

A machine costs $180,000 and is expected to yield an after-tax net income of $10,800 each year.Management estimates the machine will have a ten-year life,a $20,000 salvage value,and straight-line depreciation is used.Compute the accounting rate of return for the investment.

(Multiple Choice)

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Question 48

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

(True/False)

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Question 49

A limitation of the internal rate of return method is:

(Multiple Choice)

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Question 50

If a company has the capacity to produce either 10,000 units of Product X or 10,000 units of Product Y; assuming fixed costs remain constant,production restrictions are the same for both products,and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin.

(True/False)

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Question 51

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?

(Essay)

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Question 52

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.

(True/False)

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Question 53

Two investments with exactly the same payback periods are always equally valuable to an investor.

(True/False)

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Question 54

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.

(True/False)

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Question 55

The potential benefits of one alternative that are lost by choosing another is known as a(n):

(Multiple Choice)

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Question 56

For each of the capital budgeting methods listed below,place an X in the correct column,indicating the measurement basis of each,the ability to make comparison among projects,and whether each method reflects or ignores the time value of money.

(Essay)

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Question 57

The time value of money is considered when calculating the payback period of an investment.

(True/False)

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Question 58

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

(True/False)

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Question 59

The process of restating future cash flows in today's dollars is known as:

(Multiple Choice)

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Question 60

Showing 41 - 60 of 131

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

What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

Briefly describe both the payback period method and the net present value method of comparing investment alternatives.

A machine costs $180,000 and is expected to yield an after-tax net income of $10,800 each year.Management estimates the machine will have a ten-year life,a $20,000 salvage value,and straight-line depreciation is used.Compute the accounting rate of return for the investment.

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

A limitation of the internal rate of return method is:

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.

Two investments with exactly the same payback periods are always equally valuable to an investor.

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.

The potential benefits of one alternative that are lost by choosing another is known as a(n):

For each of the capital budgeting methods listed below,place an X in the correct column,indicating the measurement basis of each,the ability to make comparison among projects,and whether each method reflects or ignores the time value of money.

The time value of money is considered when calculating the payback period of an investment.

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

The process of restating future cash flows in today's dollars is known as:

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

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