Exam 25: Capital Budgeting and Managerial Decisions

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:

A new manufacturing machine is expected to cost $286,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the accounting rate of return for the investment.

In business decision-making, managers typically examine the two fundamental factors of:

In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money. These methods are _______________ and _________________. There are also two primary methods that consider the time value of money; these are ___________________ and ______________________.

Good management accounting indicates that projects be evaluated using relevant data. In choosing among alternatives, what factors (considerations) are relevant?

Capital budgeting decisions are risky because:

A company is considering a 5-year project. It 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:

The following present value factors are provided for use in this problem. Norman Co. wants to purchase a machine for $40,000, but needs to earn an 8% return. The expected year-end net cash flows are $12,000 in each of the first three years, and $16,000 in the fourth year. What is the machine's net present value (round to the nearest whole dollar)?

Another name for relevant cost is unavoidable cost.

Alpha Co. can produce a unit of Beta for the following costs: An outside supplier offers to provide Alpha with all the Beta units it needs at $60 per unit. If Alpha buys from the supplier, Alpha will still incur 40% of its overhead. Alpha should:

An out-of-pocket cost requires a current and/or future outlay of cash.

A company is considering two projects, Project A and Project B. The following information is available for each project: Calculate the profitability index for each project. Based on the profitability index, which project should the company pursue and why?

What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

A company is considering two alternative investment opportunities, each of which requires an initial cash outlay of $110,000. The expected net cash flows from the two projects follow: Required: (1) Based on a comparison of their net present values, and assuming the same discount rate (greater than zero) is required for both projects, which project is the better investment? (Check one answer.) ________________ Project A ________________ Project Z ________________ The projects are equally desirable (2) Use the table values below to find the net present value of the cash flows associated with Project A, discounted at 12%:

A company buys a machine for $60,000 that has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $2,850 after taxes of 30%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?

Relevant costs are also known as __________________.

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.

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: What is the net present value of this machine assuming all cash flows occur at year-end?

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

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