FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 25: Capital Budgeting and Managerial Decisions

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 21

Multiple Choice

Review LaterAdd Note

Review Later

A company is considering a 5-year project.The company 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: Interest rate Present value of an annuity of 1 factor 10% 3.7908 12% 3.6048 14% 3.4331

A) The project should be accepted.
B) The project should be rejected because it earns more than 10%.
C) The project earns more than 10% but less than 12%.If the hurdle rate is 12%, the project should be rejected.
D) Only 9% is acceptable.
E) Only 10% is acceptable.

F) A) and B)
G) C) and E)

Correct Answer

verified

Show Answer

Question 22

Essay

Review LaterAdd Note

Review Later

A company inadvertently produced 3,000 defective products.The product cost $15 each to be manufactured and normally sells for $35 each.A salvage company will purchase the defective units as they are for $12 each.The production manager reports that the defects can be corrected for $5 per unit,enabling the company to sell them at a discounted price of $22.00.The repair operations would not affect other production operations.Prepare an analysis that shows which action should be taken.

Correct Answer

verified

Because there is an...

View Answer

Show Answer

Question 23

Multiple Choice

Review LaterAdd Note

Product A requires 5 machine hours per unit to be produced,Product B requires only 3 machine hours per unit,and the company's productive capacity is limited to 240,000 machine hours.Product A sells for $16 per unit and has variable costs of $6 per unit.Product B sells for $12 per unit and has variable costs of $5 per unit.Assuming the company can sell as many units of either product as it produces,the company should:

Fields Company currently manufactures one of its parts at a cost of $3.25 per unit.This cost is based on a normal production rate of 50,000 units.Variable costs are $2.10 per unit,fixed costs related to making this part are $40,000 per year,and allocated fixed costs are $45,000 per year.Allocated fixed costs are unavoidable whether the company makes or buys the part.Fields is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period.Should the company continue to manufacture the part,or should it buy the part from the outside supplier? Support your answer with analyses.

An additional cost incurred only if a particular action is taken is a(n) :

Eagle Company is considering the purchase of an asset for $100,000.It is expected to produce the following net cash flows.The cash flows occur evenly throughout each year.Compute the payback period for this investment.(Round to two decimal places.) $\begin{array} { | l | r | l | } \hline & \begin{array} { l } \text { Annual Net } \\\text { Cash Flows }\end{array} \\\hline \text { Year 1 } & \$ 40,000 & \\\hline \text { Year 2 } & \$ 40,000 & \\\hline \text { Year 3 } & \$ 35,000 & \\\hline \text { Year 4 } & \$ 35,000 & \\\hline \text { Year 5 } & \$ 30,000 & \\\hline\end{array}$

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

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

Capital budgeting decisions are risky because the outcome is uncertain,large amounts are usually involved,the investment involves a long-term commitment,and the decision could be difficult or impossible to reverse.

An ________________________ requires a future outlay of cash and is relevant for current and future decision making.

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: Period Present value of an annuity of 1 at 12% 1……) 0.8929 2……) 1.6901 3……) 2.4018 What is the net present value of this machine assuming all cash flows occur at year-end?

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

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:

The hurdle rate is often set at:

A sunk cost will change with a future course of action.

A cost that cannot be avoided or changed because it arises from a past decision,and is irrelevant to future decisions,is called a(n) :

Axle Company can produce a product that incurs the following costs per unit: direct materials,$10; direct labor,$24,and overhead,$16.An outside supplier has offered to sell the product to Axle for $45.If Axle buys from the supplier,it will still incur 45% of its overhead cost.Compute the net incremental cost or savings of buying.

A company puts four products through a common production process.This process costs $100,000 each year.The four products can be sold when they emerge from this process at the "split-off point",or processed further and then sold.Data about the four products for the coming period are: Determine which products should be sold at the split-off point and which should be processed further.

A company is trying to decide which of two new product lines to introduce in the coming year.The predicted revenue and cost data for each product line follows: The company has a 30% tax rate,it uses the straight-line depreciation method,and it predicts that cash flows will be spread evenly throughout each year.Calculate each product's payback period.If the company requires a payback period of three years or less,which,if either,product should be chosen?

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.