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Exam 25: Capital Budgeting and Managerial Decisions

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Question 51

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After-tax net income divided by the annual average investment in an investment,is the:

A) Net present value rate.
B) Payback rate.
C) Accounting rate of return.
D) Earnings from investment.
E) Profit rate.

F) B) and E)
G) D) and E)

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Question 52

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A special order of goods or services should always be accepted when the incremental revenue exceeds the incremental costs.

A) True
B) False

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Question 53

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

A company is considering purchasing a machine for $75,000.The machine is expected to generate a net after-tax income of $11,250 per year.Depreciation expense would be $7,500.What is the payback period for this machine?

The minimum acceptable rate of return on an investment is called the _________________.

A company is evaluating the purchase of a machine for $900,000 with a six-year useful life and no salvage value.The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year.In calculating the accounting rate of return,what is the company's average investment?

A company must decide between scrapping or rebuilding units that do not pass inspection.The company has 15,000 such units that cost $6 per unit to manufacture.The units were built to satisfy a special order,which must still be satisfied if the defective units are scrapped.The units can be sold as scrap for $2.50 each or they can be reworked for $4.50 each and sold for the full price of $9.00 each.If the units are sold as scrap,the company will have to build 15,000 replacement units and sell them at the full price. Required: (1)What is the net return from selling the units as scrap? (2)What is the net return from reworking and selling the units? (3)Should the company sell the units as scrap or rework them?

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

When computing payback period,the year in which a capital investment is made is year 1.

Textel is thinking about having one of its products manufactured by a subcontractor. Currently,the cost of manufacturing 1,000 units follows: Direct materal..........................................545,000 Direct labor.................................................30,000 Factory overtead ( $30 \%$ is variable) ............98,000 If Textel can buy 1,000 units from a subcontractor for $100,000,it should:

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 break-even time (BET) period for this investment.(Round to two decimal places.) $\begin{array} { | l | r | r | } \hline & \begin{array} { c } \text { Annual Net } \\\text { Cash Flaws }\end{array} & \begin{array} { c } \text { Present Value } \\\text { of 1 at 10\% }\end{array} \\\hline \text { Year 0 } & & 1.0000 \\\hline \text { Year 1 } & \$ 40,000 & .9091 \\\hline \text { Year 2 } & \$ 40,000 & .8264 \\\hline \text { Year 3 } & \$ 35,000 & .7513 \\\hline \text { Year 4 } & \$ 35,000 & .6830 \\\hline \text { Year 5 } & \$ 30,000 & .6209 \\\hline\end{array}$

Marsden manufactures a cat food product called Special Export.Marsden currently has 10,000 bags of Special Export on hand.The variable production costs per bag are $1.80 and total fixed costs are $10,000.The cat food can be sold as it is for $9.00 per bag or be processed further into Prime Cat Food and Feline Surprise at an additional $2,000 cost.The additional processing will yield 10,000 bags of Prime Cat Food and 3,000 bags of Feline Surprise,which can be sold for $8 and $6 per bag,respectively.If Special Export is processed further into Prime Cat Food and Feline Surprise,the total gross profit would be:

Fleming Company had the following results of operations for the past year: $\begin{array} { l r } \text { sales } ( 10,000 \text { units at } \$ 6.80 ) & \$ 68,000 \\\text { Materials and direct labor } & ( 20,000 ) \\\text { Overhead (40\% variable) .......................... } & ( 10,000 ) \\\text { Selling and adruinistrative expenses (all fixed) } & ( 6,000 ) \\\text { Operating income } & \$ 32,000\end{array}$ A foreign company (whose sales will not affect Fleming's regular sales)offers to buy 2,000 units at $5.00 per unit.In addition to variable manufacturing costs,there would be shipping costs of $1,200 in total on these units.Should Fleming take this order? Explain.

Significant sunk costs are relevant to decisions about the future.

Presented below are terms preceded by letters a through f and followed by a list of definitions 1 through 6.Match the letter of the terms with the definitions.Use the space provided preceding each definition.

In using the internal rate of return method,management must consider a hurdle rate in making its decisions.What is a hurdle rate? What factors does management have to consider in selecting a hurdle rate?

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

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.

Part of the decision to accept additional business should be based on a comparison of the incremental (differential)costs of the added production with the additional revenues to be received.

Incremental costs should be considered in a make or buy decision.