Exam 25: Short-Run Decision Analysis and Capital Budgeting

The common costs shared by two or more products before they are split off are called joint costs.

Management of Moore City Trust is in the process of evaluating the purchase of a new check sorting machine.The model under review will cost $44,000 and will require installation costs of $5,000.Similar machines have a ten-year life,and management has estimated that this sorter will have a residual value of $2,500 at the end of its life.Annual cost savings to be generated by the sorter will average $9,500 over the ten-year period.Management's minimum desired before-tax rate of return is 14 percent. Present value multipliers: a.Using before-tax information and the net present value method to evaluate this capital investment,determine whether the company should purchase the check sorting machine.Support your answer. b.If management had decided on a minimum desired before-tax rate of return of 16 percent,should the check sorting machine be purchased? Show all computations to support your answer.Round answers to nearest dollar.

Fresno Manufacturing Company specializes in the production of precision tools.Management is in the process of selecting a new drill press.The press under consideration will cost $92,000 plus necessary installation charges of $5,000.Experience indicates that the press will last for five years and should have a residual value at the end of that period of about $10,000.Expected annual cash revenues from the press should average $45,000,and related cash operating costs should be around $20,000.Management has decided on a minimum desired before-tax rate of return of 10 percent. Present value multipliers: a.Using before-tax information and the net present value method to evaluate this capital investment,determine whether the company should purchase the drill press.Support your answer. b.If management has decided on a minimum desired before-tax rate of return of 12 percent,should the drill press be purchased? Show all computations to support your answer.

Availability of funds is one of the criteria for deciding on the capital investment proposals.

Which of the following methods uses the time value of money for capital investment analysis?