Question 1

If the payback period for a project is greater than its economic life the

Accepted Answer

A)  project will always be profitable. 
B)  entire initial investment will never be recovered. 
C)  project would only be acceptable if the company's cost of capital was low. 
D)  project's return will always exceed the company's cost of capital.

Question 2

Flamingo Music produces 60000 CDs on which to record music. The CDs have the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 11,000 \
\text { Direct Labor } & 15,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & 7,000
\end{array}$$ Flamingo could avoid $6000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60000 units externally what is the maximum external price that Flamingo would expect to pay for the units?

Accepted Answer

A)  $30000 
B)  $29000 
C)  $35000 
D)  $36000

Question 3

Which of the following would generally not affect a make-or-buy decision?

Accepted Answer

A)  Selling expenses 
B)  Direct labor 
C)  Variable manufacturing costs 
D)  Opportunity cost

Question 4

JP Company is considering two capital investment proposals. Estimates regarding each project are provided below: $\begin{array}{lr}
&\text { Project Echo}&\text { Project Charlie }\
\text { Initial investment } & \$ 400,000&\$600,000 \
\text { Annual net income } & 20,000 &42,000\
\text { Net annual cash inflow } & 100,000&142,000 \
\text { Estimated useful life } & 5 \text { years } &6 \text { years } \
\text { Salvage value } & 0&0
\end{array}$ The company requires an 11% rate of return on all new investments.  The cash payback period for Project Echo is

Accepted Answer

A)  20 years. 
B)  10 years. 
C)  5 years. 
D)  4 years.

Question 5

Use the following table $\text { Present Value of an Annuity of } 1$$\begin{array}{rrrr}
\text { Period } & 8 \% & 9 \% & 10 \%\
1 & .926 & .917 & .909 \
2 & 1.783 & 1.759 & 1.736 \
3 & 2.577 & 2.531 & 2.487
\end{array}$ A company has a minimum required rate of return of 10% and is considering investing in a project that requires an investment of $99000 and is expected to generate cash inflows of $42000 at the end of each year for three years. The present value of future cash inflows for this project is

Accepted Answer

A)  $99000. 
B)  $104454. 
C)  $114898. 
D)  $5454.

Question 6

An investment costing $90000 is being contemplated by Mergenthaler Inc. The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $16870.
Instructions
Compute the approximate internal rate of return for this investment. (Table G-2 is needed)

Accepted Answer

The answer of An investment costing $90000 is being contemplated...

Question 7

A company is considering purchasing factory equipment that costs $320000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased annual revenues are expected to be $90000 and annual operating expenses exclusive of depreciation expense are expected to be $40000. The straight-line method of depreciation would be used. If the equipment is purchased the annual rate of return expected on this equipment is

Accepted Answer

A)  31.3%. 
B)  6.25%. 
C)  3.125%. 
D)  15.6%.

Question 8

It costs Maker Company $22 of variable and $15 of fixed costs to produce one Panini press which normally sells for $57. A foreign wholesaler offers to purchase 1000 Panini presses at $40 each. Maker would incur special shipping costs of $5 per press if the order were accepted. Maker has sufficient unused capacity to produce the 1000 Panini presses. If the special order is accepted what will be the effect on net income?

Accepted Answer

A)  $13000 decrease 
B)  $13000 increase 
C)  $22000 decrease 
D)  $7000 increase

Question 9

The focus of a sell or process further decision is

Accepted Answer

A)  incremental revenue. 
B)  incremental cost. 
C)  both incremental revenue and incremental cost. 
D)  neither incremental revenue nor incremental cost.

Question 10

If a company anticipates that other sales will be affected by the acceptance of a special order then

Accepted Answer

A)  lost sales should be considered in the incremental analysis. 
B)  lost sales should not be considered in the incremental analysis. 
C)  the order should not be accepted. 
D)  the order will only be accepted if the plant is below capacity.

Question 11

From a quantitative standpoint a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated.

Accepted Answer

A) True 
 B)False

Question 12

If an unprofitable segment is eliminated

Accepted Answer

A)  it is impossible for net income to decrease. 
B)  fixed expenses allocated to the eliminated segment will be eliminated. 
C)  variable expenses of the eliminated segment will be eliminated. 
D)  it is impossible for net income to increase.

Question 13

A decision whether to continue to make a product or buy it externally depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources.

Accepted Answer

A) True 
 B)False

Question 14

The annual rate of return method is based on

Accepted Answer

A)  accounting data. 
B)  time value of money data. 
C)  market values. 
D)  replacement values.

Question 15

Nonfinancial information that management might evaluate in making a decision would not include

Accepted Answer

A)  employee turnover. 
B)  contribution margin. 
C)  the environment. 
D)  the corporate profile in the community.

Question 16

Which one of the following is correct?

Accepted Answer

A)  Cash flows are used to calculate the internal rate of return. 
B)  Accrual income is used to calculate the payback period. 
C)  Cash flows are used to calculate the annual rate of return. 
D)  Accrual income is used to calculate the net present value.

Question 17

In a retain or replace equipment decision trade-in allowance available on old equipment

Accepted Answer

A)  increases the cost of the new equipment. 
B)  is relevant because it will not be realized if the old equipment is retained. 
C)  is not relevant to the decision. 
D)  reduces the cost of the old equipment.

Question 18

Sandra Everhart is trying to understand the term "cost of capital." Define the term and indicate its relevance to the decision rule under the annual rate of return technique.

Accepted Answer

The answer of Sandra Everhart is trying to understand the...

Question 19

The internal rate of return method differs from the net present value method in that it results in finding the ___________________ of the potential investment.

Accepted Answer

The answer of The internal rate of return method differs...

Question 20

Jonah Company is considering investing in a project that will cost $136520 and have no salvage value at the end of its 5-year life. It is estimated that the project will generate annual cash inflows of $36000 each year. The company has a hurdle or cutoff rate of return of 8% and uses the following compound interest table: $\text { Present Value of an Annuity of } 1$
$\begin{array}{llllll}
\text{Period}&6\%&8\%&10\%&12\%&15\%\
5 & 4.212 & 3.993 & 3.791 & 3.605 & 3.352
\end{array}$
 Instructions
Using the internal rate of return method determine if this project is acceptable by calculating an approximate interest yield for the project.

Accepted Answer

The answer of Jonah Company is considering investing in a...

Exam 26: Incremental Analysis and Capital Budgeting