Question 1

The payback period method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

Accepted Answer

A) True 
 B)False

Question 2

The minimum acceptable rate of return on an investment, often the company's cost of capital, is called the ________.

Accepted Answer

The answer of The minimum acceptable rate of return on...

Question 3

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21.
- The incremental income or loss on reworking the units is:

Accepted Answer

A)  $12,000 loss. 
B)  $20,000 loss. 
C)  $32,000 income. 
D)  $20,000 income. 
E)  $30,000 income. 
A)  $12,000 loss. 
B)  $20,000 loss. 
C)  $32,000 income. 
D)  $20,000 income. 
E)  $30,000 income.

Question 4

Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,000 and will produce cash flows as follows: $\begin{array}{c}
\text {End of}&&\text {Investment}\
\text {Year}\
&\text {A}&\text {B}\
1 & \$ 8,000 & \$ 0 \
2 & 8,000 & 0 \
3 & 8,000 & 24,000
\end{array}$

The present value factors of $\$ 1$ each year at $15 \%$ are:

$\begin{array} { l l } 1 & 0.8696 \ 2 & 0.7561 \ 3 & 0.6575 \end{array}$
- The present value of an annuity of $1 for 3 years at 15% is 2.2832
The net present value of Investment B is:

Accepted Answer

A)  $9,000. 
B)  $780. 
C)  $(5,918). 
D)  $(15,780). 
E)  $39,797. 
A)  $9,000. 
B)  $780. 
C)  $(5,918). 
D)  $(15,780). 
E)  $39,797.

Question 5

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost.
- If Bluebird accepts this additional business, the incremental revenue will be:

Accepted Answer

A)  $33,750. 
B)  $38,750. 
C)  $45,000. 
D)  $11,250. 
E)  $7,500. 
A)  $33,750. 
B)  $38,750. 
C)  $45,000. 
D)  $11,250. 
E)  $7,500.

Question 6

A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $12,500 each year. Compute the accounting rate of return for the investment.

Accepted Answer

A)  10.8%. 
B)  12.5%. 
C)  26.8%. 
D)  22.5%. 
E)  11.8%. 
A)  10.8%. 
B)  12.5%. 
C)  26.8%. 
D)  22.5%. 
E)  11.8%.

Question 7

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

Accepted Answer

A)  It cannot be used when cash flows are not uniform. 
B)  It cannot be used if a company records depreciation. 
C)  It includes the time value of money. 
D)  It cannot be used to compare investments with different initial investments. 
E)  It ignores cash flows beyond the payback period. 
A)  It cannot be used when cash flows are not uniform. 
B)  It cannot be used if a company records depreciation. 
C)  It includes the time value of money. 
D)  It cannot be used to compare investments with different initial investments. 
E)  It ignores cash flows beyond the payback period.

Question 8

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. $$\begin{array} { l r r } 
& \text { Project X } & \text { Project } Y \
\text { Cost of machine } & \$ 68,000 & \$ 60,000 \
\text { Net cash flow: } & & \
\text { Year 1 } & 24,000 & 4,000 \
\text { Year 2 } & 24,000 & 26,000 \
\text { Year 3 } & 24,000 & 26,000 \
\text { Year 4 } & 0 & 20,000
\end{array}$$
- The payback period in years for Project X is:

Accepted Answer

A)  2.00. 
B)  2.83. 
C)  3.50. 
D)  3.83. 
E)  4.00. 
A)  2.00. 
B)  2.83. 
C)  3.50. 
D)  3.83. 
E)  4.00.

Question 9

Capital budgeting is the process of analyzing:

Accepted Answer

A)  Long-term investments. 
B)  Short-term investments. 
C)  Investments with certain outcomes only. 
D)  Cash outflows only. 
E)  Operating revenues. 
A)  Long-term investments. 
B)  Short-term investments. 
C)  Investments with certain outcomes only. 
D)  Cash outflows only. 
E)  Operating revenues.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

The payback period method evaluates alte

Question 12

The payback period method of evaluating an investment fails to consider cash inflows after the point where an investment's costs are fully recovered.

Accepted Answer

A) True 
 B)False

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

Net cash flow is cash inflows minus cash outflows.

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

The answer of For each of the capital budgeting methods...

Question 16

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:
$\begin{array} { l | l | l } 
\hline & \text { Product A } & \text { Product B } \
\hline \text { Sales } & \$ 80,000 & \$ 96,000 \ 
\hline \text { Direct materials } & 3,000 & 6,000 \
\hline \text { Direct labor }  & 30,000 & 45,000 \
\hline  \text { Other cash operating expenses } & 7,500 & 9,000 \
\hline \text { New equipment costs }& 75,000 & 100,000 \
\hline  \text { Estimated useful life (no salvage) }& 5 \text { years } & 5 \text { years }
\end{array}$
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 17

Granfield Company has a piece of manufacturing equipment with a book value of $40,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,000. Granfield can purchase a new machine for $120,000 and receive $22,000 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

Accepted Answer

A)  $22,000 increase 
B)  $52,000 increase 
C)  $22,000 decrease 
D)  $76,000 increase 
E)  $18,000 decrease 
A)  $22,000 increase 
B)  $52,000 increase 
C)  $22,000 decrease 
D)  $76,000 increase 
E)  $18,000 decrease

Question 18

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:
 $$\begin{array} { l | l | l | l | l } 
& & \text { Unit Sales } & \text { Unit Sales } & \
\hline & & \text { Price per } & \text { Price per } & \
\hline & & \text { urnit at } & \text { unit after } & \text { Additional } \
\hline & & \text { Split-Off } & \text { Further } & \text { Processing } \
\hline \text { Product } & \text { Volume } & \text { Point } & \text { Processing } & \text { Costs } \
\hline \text { Stroller } & 20,000 \mathrm { lb } . & \$ 28.00 & \$ 42.00 & \$ 400,000 \
\hline \text { Walker } & 10,000 \mathrm { lb } . & 7.00 & 28.00 & 144.000 \
\hline \text { Jogger } & 5,000 \mathrm { lb } & 36.00 & 58.00 & 120.000 \
\hline \text { Runner } & 5,000 \mathrm { lb } & 18.00 & 22.00 & 40.000
\end{array}$$ 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 19

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

Accepted Answer

A) True 
 B)False

Question 20

Which of the following cash flows is not considered when using the net present value method?

Accepted Answer

A)  Future year-end cash flows. 
B)  Future cash inflows. 
C)  Future cash outflows. 
D)  Non-uniform cash inflows. 
E)  Past cash outflows. 
A)  Future year-end cash flows. 
B)  Future cash inflows. 
C)  Future cash outflows. 
D)  Non-uniform cash inflows. 
E)  Past cash outflows.

Exam 25: Capital Budgeting and Managerial Decisions

The payback period method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

The minimum acceptable rate of return on an investment, often the company's cost of capital, is called the ________.

A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $12,500 each year. Compute the accounting rate of return for the investment.

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

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine \ 68,000 \ 60,000 Net cash flow: Year 1 24,000 4,000 Year 2 24,000 26,000 Year 3 24,000 26,000 Year 4 0 20,000 - The payback period in years for Project X is:

Capital budgeting is the process of analyzing:

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

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

The payback period method of evaluating an investment fails to consider cash inflows after the point where an investment's costs are fully recovered.

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.

Net cash flow is cash inflows minus cash outflows.

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

Which of the following cash flows is not considered when using the net present value method?

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 Resoures and Intangibles

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Accounting for Corporations

Long-Term Liabilities

Investments

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

Present and Future Values in Accounting

Activity-Based Costing

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