Exam 10: Flexible Budgets, Standard Costs and Variance Analysis

(Ignore income taxes in this problem.) Two years ago Leroy paid £8,000 for 100 shares of common stock in the Uptown Company. He obtained a cash dividend of £300 at the end of each year for the next two years. At the end of the second year he sold the stock for £9,000 in cash. Using a discount rate of 12%, what is the net present value of Leroy's investment

(Ignore income taxes in this problem.) Chow Company has gathered the following data on a proposed investment project: Investment required in equipment. £142,500 Annual cash inflows. £30,000 Salvage value. £0 Life of the investment. 8 years Required rate of return. 10\% - The simple rate of return on the investment is closest to

Discuss the advantages and disadvantages of the various DCF and non-DCF methods.

(Ignore income taxes in this problem.) Cause Company is planning to invest in a machine with a useful life of five years and no salvage value. The machine is expected to produce cash flow from operations of £20,000 in each of the five years. Cause's required rate of return is 10%. The maximum price that the company would pay for the machine would be

(Ignore income taxes in this problem.) The Yates Company purchased a piece of equipment that is expected to have a useful life of 7 years with no salvage value at the end of the 7-year period. This equipment is expected to generate a cash inflow of £32,000 each year of its useful life. If this investment has an internal rate of return of 14%, then the initial cost of the equipment is

(Appendix 14D) The release of working capital at the termination of an investment project is not a taxable cash inflow

Which of the following capital budgeting techniques implicitly assumes that the cash flows are reinvested at the company's minimum required rate of return? Net Present Value Internal Rate of Return A. Yes Yes B. Yes No C. No No D. No Yes

In a capital budgeting decision, the required rate of return (discount rate) does not need to be specified in advance for which of the following Net Present Value Internal Rate of Return A. Yes Yes B. Yes No C. No No D. No Yes

Only three years after purchasing a machine, Greenwich Engineering has been given details of a new and improved model. This new model will increase output and help reduce costs. The existing machine cost £150,000 and was being depreciated straight-line over an eight-year period. Current estimated scrap value for the existing machine is only £20,000. The estimated scrap value for the existing machine in 5 years is £14,900. Details of new machine Costs of new machine £180,000. Expected life of the machine is 5 years. At the end of 5 years the estimated scrap value is £15,000. There will also be an additional cost of £5,000 to send workers on a training course for the new machine. The training will be required before the machine is delivered. Additional annual fixed costs of £15,000 will be incurred if the new machine is purchased. This cost is included in the fixed overhead cost per unit given below. Finally the management accountant has estimated that additional working capital of £80,000 will be required if the new machine is purchased. A comparison of the existing and new model is given below: Existing Machine New Machine Capacity (units) 150,000 160,000 £ £ Selling price per unit 2.62 2.95 Cost per unit Labour 1.00 0.90 Materials 0.60 0.48 Fixed overheads 0.20 0.18 The required return is 10 per cent Calculate the annual savings for the new machine