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Exam 25: Capital Budgeting and Managerial Decisions

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Question 41

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An opportunity cost is the potential benefit that is lost by taking a specific action when two or more alternative choices are available.

A) True
B) False

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Question 42

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An out-of-pocket cost requires a current and/or future outlay of cash.

A) True
B) False

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Question 43

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A company is considering the purchase of a new machine for $48,000.Management predicts that the machine can produce sales of $16,000 each year for the next 10 years.Expenses are expected to include direct materials,direct labor,and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year.The company's tax rate is 40%.What is the payback period for the new machine?

In ranking choices with the break-even time (BET)method,the investment with the highest BET measure gets the highest rank.

Barnes manufactures a specialty food product that can currently be sold for $22 per unit and has 20,000 units on hand.Alternatively,it can be further processed at a cost of $12,000 and converted into 12,000 units of Exceptional and 6,000 units of Premium.The selling price of Exceptional and Premium are $30 and $20,respectively.The incremental net income of processing further would be:

Alpha Co.can produce a unit of Beta for the following costs: Direct material........................................$ 8 Direct lab or:........................................24 Overhead ............................................40 Total costs per unit..........................$ 72 An outside supplier offers to provide Alpha with all the Beta units it needs at $60 per unit.If Alpha buys from the supplier,Alpha will still incur 40% of its overhead.Alpha should:

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?

The net present value decision rule requires that when an asset's expected cash flows are discounted at the required rate and yield a positive net present value,the project should be ____________________.

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: Direct materials…………………………… $ 10 per unit Direct labor……………………………….. 16 per unit Variable overhead………………………… 4 per unit Allocated fixed overhead…………………. 12 per unit Allocated fixed selling expense…………… 8 per unit What selling price per unit will this company require to earn $3,000 on the order?

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?

The concept of incremental cost is the same as the concept of differential cost.

An advantage of the break-even time (BET)method over the payback period method is that it recognizes the time value of money.

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

The following data concerns a proposed equipment purchase: Cost……….. $144,000 Salvage value ……….. $ 4,000 Estimated useful life ……….. 4 years Annual net cash flows ………..$ 46,100 Depreciation method ……….. Straight-line Assuming that net cash flows are received evenly throughout the year,the accounting rate of return is:

A company is considering the purchase of a new piece of equipment for $90,000.Predicted annual cash inflows from this investment are $36,000 (year 1) ,$30,000 (year 2) ,$18,000 (year 3) ,$12,000 (year 4) and $6,000 (year 5) .The payback period is:

The break-even time (BET) method is a variation of the:

The internal rate of return equals the rate that yields a net present value of zero for an investment.

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.

Use of the internal rate of return method cannot be used with uneven cash flows.

Trescott Company had the following results of operations for the past year: A foreign company (whose sales will not affect Trescott's market) offers to buy 3,000 units at $17.00 per unit.In addition to variable manufacturing costs,selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000.If Trescott accepts the offer,its profits will: