Study4smart Quality review Materials

__

98. Presented below are terms preceded by letters a through g and followed by a list of definitions 1 through 7. Match the letter of the term with the definition. Use the space provided preceding each definition. 1. Internal Rate A discount rate that results in a net present value of of Return zero. 2. Hurdle Rate 3. Net Cash Flow 4. Capital Budgeting 5. Net Present Value 6. Payback Period 7. Accounting Rate of Return Cash inflows minus cash outflows for the period. __ __ __ __ A minimum acceptable rate of return. __ The time expected to pass before the net cash flows __ from an investment equals its initial cost. Annual after-tax net income divided by annual __ average investment. A process of analyzing alternative long-term __ investments. __ Initialfuture cost of an investment subtracted from discounted cash flows from the investment. __ __

__

99. 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. 1. Sunk A cost that requires a current outlay of cash. cost _ _ _ _ 2. Opp A rate used to evaluate the acceptability of an investment; ortunity equals the after-tax periodic income divided by the average cost investment in the asset. _ 4. Outof-pocket cost _ _ 3. Accou nting rate of return An estimate of an asset's value to the company; calculated by discounting the future cash flows from the investment at _ a satisfactory rate and then subtracting the initial cost of the _ investment. _ _ A cost that cannot be avoided or changed in any way because it arises from past decision; irrelevant to current and future _ decisions. _ _ _ An additional cost incurred only if a particular action is taken. _

5.Net present value

_ _ 6. Incre _ mental The potential benefits of one alternative that are lost by cost choosing an alternative course of action. _ _ _ _ 100.What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

__

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

__

102.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?

103.Identify the five steps involved in managerial decision making.

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

105.How does the calculation of break-even time (BET) differ from the calculation of payback period (PBP)?

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

107.When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

108.What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

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

110. Identify at least three reasons for managers to favor the internal rate of return (IRR) over other capital budgeting approaches.

11 1.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.

1 12.A company inadvertently produced 6,000 defective portable CD players. The CD players cost $20 each to be manufactured. A salvage company will purchase the defective units as they are for $16 each. The production manager reports that the defects can be corrected for $9 per unit, enabling the company to sell them at the regular price of $30.00. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.

113 .A company manufactures two products. Each unit of product X requires 10 machine hours and each unit of product Y requires 4 machine hours. The company's productive capacity is limited to 180,000 machine hours. Each unit of product X sells for $15 and has variable costs of $7. Each unit of product Y sells for $8 and has variable costs of $3. If the company can sell all that it produces of both products, what should the sales mix be?

1 14.Fleming Company had the following results of operations for the past

year: A forei gn 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.

1 15.A company produces three different products that all require processing on the same machines. There are only 27,000 machine hours available in each year. Production information for each product

is: R eq uired: (1) Determine the preferred sales mix if there are no market constraints on any of the products. (2) Determine the preferred sales mix if the demand is limited to 5,000 units for each product. (3) Determine the preferred sales mix if the demand is limited to 3,000 units for each product.

1 16.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 "splitoff 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.

1 17.A company has just received a special, one-time order for 1,000 units. Producing the order will have no effect on the production and sales of other units. The buyer's name will be stamped on each unit, at a total cost of $2,000. Normal cost data, excluding stamping,

follows: What selling price per unit will this company require to earn $3,000 on the order?

11 8.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?

11 9.Peters, Inc. sells a single product and reports the following results from sales of 100,000

units: A forei gn company wants to purchase 15,000 units. However, they are willing to pay only $36 per unit for this one-time order. They also agree to pay all freight costs. To fill the order, Peters will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance. No additional administrative costs (variable or fixed) will be incurred in association with this special order. Required: (1) Should Peters accept the order if it does not affect regular sales? Explain. (2) Assume that Peters can accept the special order only by giving up 5,000 units of its normal sales. Should Peters accept the special order under these circumstances?

120.A company is planning to introduce a new portable TV to its existing product line. Management must decide whether to make the TV case or buy it from an outside supplier. The lowest outside price is $100. If the case is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the

following: Required: (1) Deter mine whether the company should make the cases or buy them from the outside supplier. (2) What decision should be made if only 15,000 cases are needed? (3) What other factors, besides cost, should the company consider?

121.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?

122.Bower Co. is reviewing a capital investment of $50,000. This project's projected cash flows over a fiveyear period are estimated at $20,000 each year. Required: (a) Calculate the payback period. (b) Calculate the break-even time. Assume a 12% hurdle rate and use the table

below: (c) U sing the results in (a) and (b), make a recommendation for the project.

123.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?

124.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?

125.A company is considering a proposal to invest $30,000 in a project that would provide the following net

cash flows: Compute the project's payback period.

126.A company produces two boat models, Montauk and Orient. Both products are being considered for major investment projects next year. Relevant data

follow: Required: Use the payback period to evaluate these two investment projects.

127.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?

128.A company purchases a machine for $1,000,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year. What is the accounting rate of return?

129.A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of 1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%?

130.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?

131.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?

132.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 compan y 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?

133.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%:

134.A company has a decision to make between two investment alternatives. The company requires a 10% return on investment. Predicted data is provided

below: The present value of an annuity for 6 years at 10% is 4.3553. This company uses straight-line depreciation. Required: (a) Calculate the net present value for each investment. (b) Which investment should this company select? Explain.

135.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:

136.Casco Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $280,000 with a 7-year life, no salvage value, and will be depreciated using straight-line depreciation. The expected annual income related to this equipment follows. Compute the (a) payback period and (b) accounting rate of return for this equipment.

137.Braybar Company is deciding between two projects. Each project requires an initial investment of $350,000. The projected net cash flows for the two projects are listed below. The revenue is to be received at the end of each year. Braybar requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below. Use net present value to determine which project should be pursued and explain why.

138.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.

139.Sherman Company can sell all of product A that it produces but only 160,000 units of Z and it has limited production capacity. It can produce 6 units of A per hour or 10 units of Z per hour, and it has 30,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for this company?

140.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.