Final Exam XXX Question Score

1 10
2 10
3 10
4 15
Write Your Name here: 5 10
6 10
7 10
8 15
9 10
Tot 100
Question 1 Score 0
Which of the four projects listed blow would you choose if you only want to invest in one project if the
criteria is a) Present Worth, b) Future Worth or c) Annual Worth? All projects are for five years and the
risk-free interest rate is 10%.

Project

X1 Invest $14,000 today and receive $25,000 in five years.

X2 Invest $10,000 today, receive annual payments of $3,000.

X3 Invest $15,000 today, receive annual payments of $4,000, and also receive a final payment of $2,000.

X4 Invest $9,000 today, receive annual payments of $1,000, $2,000, $3,000, $4,000 and $5,000

MARR = 10%
EOY CF Cum(PW)
0 (9,000.00) (9,000.00)
1 1,000.00 (8,090.91) NPV(K5,K8)+K7
2 2,000.00 (6,438.02) NPV(K5,K8:K9)+K7
3 3,000.00 (4,184.07) NPV(K5,K8:K10)+K7
4 4,000.00 (1,452.02) NPV(K5,K8:K11)+K7
5 5,000.00 1,652.59
 PW FW

1,523.03 $25,000.00

1,372.36 $34,420.40

,000.
2,163.15

1,652.59
Question 2. Score

Do an Internet search on Activity Based Costing (ABC). Give the URL of any Web site you visit and tell briefly (30 t

http://www.accountingcoach.com/online-accounting-course/35Xpg01.html

Activity Based Costing is a more accurate method of assigning overhead cost assigned to a specific product.
Older methods simply looked at measures such as "machine time" which may or may not be entirely accurate.
Some products may require little "machine time" but needed a great deal of R&D which is expensive and other
products may require many machine hours and little or no R&D. Activity Based Costing examines all activities
associated with the production of a product, and is a far more accurate measure of overhead cost because
you can't compare apples to oranges.
 0

u visit and tell briefly (30 to 50 words) what you learned or found interesting.

a specific product.
be entirely accurate.
expensive and other
xamines all activities
ead cost because
Question 3 Score

Using the following list of accounts, prepare a simple income statements. (The $000,000 ind
Accounts $000,000

Depreciation 25
New Product Development 20
Product Revenues 345
Marketing Expenses 18
Production Materials & Labor 255
Corporate IT expense 10
Interest Expense 3

XYZ Manufacturing Company

Income Statement
For Year Ended December 31, 2010

Net Sales 345

Less Cost of Goods Manufactured
New Product Development 20
Production Material & Labor 255
Depreciation 25 300
Gross Profit 45
Less Expenses
Corporate IT Expense 10
Interest Expense 3
Marketing Expense 18 31
Net Income Before Taxes 14
Less Income Taxes 4.8
Net Income 9.2
 0

come statements. (The $000,000 indicates all numbers are millions.)

are millions.)

tax for 14 million

3400000+0.35(14000000-10000000)
$4,800,000.00
Question 4 Score 0

 The following projects are being considered by the Corporate Investment Committee who has an investment budget of $1,00
a.      Which  ones  should  be  funded 
based  on  NPV  assuming  a  6% 
interest  rate? Your Budget is Only
$1,000,000.
b.      Which  ones  should  be  funded 
using a 3 year or less payback period 
criterion?
Project Years Up Front (Y 0) Cost each  Benefits 
year after  each year 
first after first
V 6 $500,000 0 $110,000
W 6 $250,000 $40,000 $100,000
X 5 $400,000 $100,000 $200,000
Y 3 $300,000 $25,000 $150,000
Z 4 $150,000 $200,000 $250,000

A) Projects V, W, Z stay below the 
$1,000,000 budget and yeild the 
highest combined NPV W+Y+Z
W+X+Y
B) Project Y is the only one that 
satisfies the 3 yr payback. V+W+Z
o has an investment budget of $1,000,000.

NPV

40,905.68 463,360.02 paid off in yr 6

45,039.46 252,741.83 paid off in yr 5
21,236.38 346,510.56 paid off in yr 5
34,126.49 229,174.08 paid off in yr 3
23,255.28 133,650.60 paid off in yr 4

102,421.23
100,402.33

109,200.42
Question 5 Score 0
Solve problem 11 of chapter 13 at page 664
Portable generator is ….. This problem
is about BEA.
See section
13.2.
Question 6 Score 0
 The Signal Company is planning on investing in a new project.  This will involve the purchase of some new
detailed below:

Year Year Year Year

 One  Two Three Four
$200,000 $225,000 $275,000 $200,000

The appropriate discount rate for this project is 16%. Show calculations.

a) What is the payback period for this project?
Payback is achieved in year three
b) What is the NPV for this project?
$176,264.53
c) What is the profitability index for this project?
NPV/initial investment 0.3916989556
d) What is the IRR for this project? 
IRR(I7:I11)= 34.12%
the purchase of some new machinery costing $450,000.  The Signal Company expects cash inflows from this project a

16%
EOY CF PW
0 ($450,000.00) ($450,000.00)
1 $200,000.00 ($277,586.21)
2 $225,000.00 ($110,374.55)
3 $275,000.00 $65,806.31
4 $200,000.00 $176,264.53

IRR= 34%
cash inflows from this project as
Question 7 Score 0

Opportunity OR Sunk.

Covol Industries is developing the relevant cash flows associated with the proposed replacem
technologically advanced one. Given the following costs related to the proposed project,
, explain whether each would be treated as a sunk cost or an opportunity cost in develop

a.     Covol would be able to use the same tooling, which had a book value of
b.    Covol would be able to use its existing computer system to develop program
c.     Covol would have to obtain additional floor space to accommodate the
d.     Covol would use a small storage facility to store the increased output of t

Explain your answer in a sentence or 2.

sunk
opportunity
opportunity
sunk
 with the proposed replacement of an existing machine tool with a new,
o the proposed project,
n opportunity cost in developing the relevant cash flows associated with the proposed replacement dec

hich had a book value of $40,000, on the new machine tool as it had used on the old one.
r system to develop programs for operating the new machine tool. The old machine tool did not require
e to accommodate the larger new machine tool. The space that would be used is currently being
e the increased output of the new machine tool. The storage facility was built by Covol 3 years earlie
e proposed replacement decision.

on the old one.

machine tool did not require these programs. Although the firm's computer has excess capacity availa
sed is currently being leased to another company for $10,000 per year.
built by Covol 3 years earlier at a cost of $120,000. Because of its unique configuration and location,
r has excess capacity available, the capacity could be leased to another firm for an annual fee of $1

e configuration and location, it is currently of no use to either Covol or any other firm.
rm for an annual fee of $17,000.

y other firm.
Question 8 Score
LATHE

Strong Tool Company has been considering purchasing a new lathe as a replacement for a fully depr
The firm estimates the revenues and expenses (excluding depreciation and interest) for the new and th
The firm is subject to a 40% tax rate. Should the new lathe be purchased? The price of the new lath
Year New lathe Old lathe

Expenses Expenses
(excl. (excl.
depr. depr.
  Revenue and int.) Revenue and int.)
1 $40,000 $30,000 $35,000 $25,000
2 $41,000 $30,000 $35,000 $25,000
3 $42,000 $30,000 $35,000 $25,000
4 $43,000 $30,000 $35,000 $25,000
5 $44,000 $30,000 $35,000 $25,000
MARR = 10%

New Lathe BTCF DW TI Tax ATCF npv cf1-cf2

0 0 0 0 0 0 $0.00 10000
1 10000 0 10000 4000 6000 $4,958.68 1200
2 11000 0 11000 4400 6600 $9,917.36 2520
3 12000 0 12000 4800 7200 $14,835.05 2340
4 13000 0 13000 5200 7800 $19,678.24 2520
5 14000 0 14000 5600 8400 $24,419.82 3120

Old Lathe BTCF DW TI Tax ATCF

0 -10000 0 0 0 -10000 ($9,090.91)
1 10000 2000 8000 3200 4800 ($5,123.97)
2 10000 3200 6800 2720 4080 ($2,058.60)
3 10000 1900 8100 3240 4860 $1,260.84
4 10000 1200 8800 3520 5280 $4,539.31
5 10000 1200 8800 3520 5280 $7,519.73
500 -500 -200 -300 $7,365.78
 0

a replacement for a fully depreciated lathe that can last 5 more years. The new lathe is expected to have a 5-y
d interest) for the new and the old lathes to be as shown in the following table.
sed? The price of the new lathe is $ 10,000 and the cost of capital is 10%, annually.

PW*(A/P, I, n)
24419.82 0.2638

7365.78
e is expected to have a 5-year life and depreciation charges of $2,000 in year 1; $3,200 in year 2; $1,900 in
in year 2; $1,900 in year 3; $1,200 in both year 4 and year 5; and $500 in year 6.
Question 9

Your grandmother bought an annuity from Rock

Solid Life Insurance Company for $ 200,000 when
she retired. In exchange for the $ 200,000, Rock
Solid will pay her $ 25,000 per year until she dies.
The interest rate is 5%. How long must she live after
the day she retired to come out ahead (that is to get
more in value than she paid in)?
You may mathemetically check your answer.

200000

NPER(5%, 25000, -200000, 0)= 10.46984843

Score 0
 Score 0

 You are thinking of making an investment in a new plant. The plant will generate re $1 million pe
nt will generate re $1 million per year for as long as you maintain it. You expect that the maintenance start at $50,000 
e maintenance start at $50,000 per year and will increase 5% per year thereafter. Assume that all revenue and mainte
me that all revenue and maintenance costs occur at the end of the year. You intend to run the plant as long as it con tin
run the plant as long as it con tinues to make a positive cash flow (as long as the cash generated by the plant exceeds th
enerated by the plant exceeds the maintenance costs). The plant can be built and become operational immediately. If t
me operational immediately. If the plant costs $ 10 million to build, and the interest rate is 6% per year, should you inv
e is 6% per year, should you invest in the plant?