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Exam 25: Capital Budgeting and Managerial Decisions

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Question 41

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The process of analyzing alternative long-term investments and deciding which assets to acquire or sell is known as:

A) Variance analysis.
B) Planning and control.
C) Capital budgeting.
D) Managerial accounting.
E) Master budgeting.

F) B) and C)
G) C) and D)

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Question 42

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A shorter payback period reduces the company's ability to respond to unanticipated changes and increases the risk of having to keep an unprofitable investment.

A) True
B) False

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Question 43

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A company purchases a machine for $800,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly after-tax net income of $60,000 to be received uniformly throughout each year. What is the accounting rate of return?

A company is considering purchasing a machine for $85,000. The machine is expected to generate a net after-tax income of $11,250 per year. Depreciation expense would be $8,500. What is the payback period for this machine?

Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

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

Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Gordon'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. Gordon should:

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. -Assuming Maxim further processes Green Health further into Premium Green and Green Deluxe, revenue from the two products would be:

A company is considering two projects, Project A and Project B. The following information is available for each project: $\begin{array} { l r r } &{ \text { Project A } } &{ \text { Project B } } \\\text { Investment } & \$ 2,500,000 & \$ 2,000,000 \\\text { Net present value of cash flows } &\$ 900,000 & \$ 800,000\end{array}$ Calculate the profitability index for each project. Based on the profitability index, which project should the company pursue and why?

An additional cost incurred, only if a company pursues a particular course of action, is a(n) :

Another name for relevant cost is unavoidable cost.

Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: End of _Year Machine $\begin{array}{llr} &\text { A } & \text { B } \\1&\$5,000 &2,000\\2&4,000&2,000\\3&2,000&11,000\end{array}$ Turk Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Turk purchase?

The following data concerns a proposed equipment purchase: $\begin{array} { | l | l | } \hline \text { Cost } & \$ 144,000 \\\hline \text { Salvage value } & \$ 4,000 \\\hline \text { Estimated useful life } & 4 \text { years } \\\hline \text { Annual net cash flows } & \$ 46,100 \\\hline \text { Depreciation method } & \text { Straight-line } \\\hline\end{array}$ - Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:

In this chapter, you examined several short-term managerial decision tasks. Identify (list) any three of these types of decision tasks: ________; ________; ________

Identify the five steps involved in managerial decision making.

The accounting rate of return is calculated as:

Butler Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Butler requires a 12% return on its investments. The present value of an annuity of 1 for different periods follows: $\begin{array} { c c } \text { Periods } & 12 \% \\1 & 0.8929 \\2 & 1.6901 \\3 & 2.4018 \\4 & 3.0373\end{array}$ What is the net present value of the machine?

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

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 $12,000 per year including depreciation of $3,000 per year. The company's tax rate is 40%. -What is the payback period for the new machine?

Poe Company is considering the purchase of new equipment costing $80,000. The projected annual cash inflows are $30,200, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of an annuity of $1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine. $\begin{array} { c c c } \text { Periods } & \begin{array} { r } \text { Present Value } \\\text { of } \$ 1 \text { at } 10 \%\end{array} & \begin{array} { c } \text { Present Value of an } \\\text { Annuity of } \$ 1 \text { at } 10 \%\end{array} \\1 & 0.9091 & 0.9091 \\2 & 0.8264 & 1.7355 \\3 & 0.7514 & 2.4869 \\4 & 0.6830 & 3.1699\end{array}$