Exam 25: Capital Budgeting and Managerial Decisions

Jorgensen Department Store has three departments: Clothing, Toys, and Jewelry. The most recent income statement, showing the total operating profit and departmental results is shown below: Based on this income statement, management is planning on eliminating the hardware department, as it is generating a net loss. If the hardware department is eliminated, the toy department will expand to fill the space, but sales will not change in total, nor will direct expenses. None of the allocated expenses will be avoided, but they will be reallocated. Clothing will be allocated $200,000 of these expenses, and Toys will be allocated $150,000 of these expenses. Prepare a new income statement for Jorgensen Department Store, showing the results if the Hardware Department is eliminated. Should the Hardware Department be eliminated?

Use of the internal rate of return method cannot be used with uneven cash flows.

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

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

The process of analyzing alternative investments and deciding which assets to acquire or sell is known as:

Edgar Company is considering the purchase of new equipment costing $80,000. The projected annual after-tax net income from the equipment is $10,200, after deducting $20,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Edgar requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine.

The _______________________________ is computed by dividing a project's after-tax net income by the average amount invested in it.

Capital budgeting decisions are generally based on:

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

A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $10,000 depreciation on the machine is an example of a(n):

Thompson Company had the following results of operations for the past year: A foreign company (whose sales will not affect Thompson's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. If Thompson accepts the offer, its profits will:

Textel is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows: If Textel can buy 1,000 units from a subcontractor for $100,000, it should:

You have evaluated three projects using the net present value (NPV) method. How would you decide which one of the projects to select?

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.

Daniels Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Daniels requires a 12% return on its investments. The present value of an annuity of 1 for different periods follows: What is the net present value of the machine?

A capital budgeting method that considers how quickly a project recovers costs is known as _____________________. An enhancement to this method that considers the time value of money is called ________________.

The net present value decision rule requires that when an asset's expected cash flows are discounted at the required rate and yield a positive net present value, the project should be ___________________.

Capital budgeting decisions usually involve analysis of:

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?

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.