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Exam 25: Capital Budgeting and Managerial Decisions

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Question 21

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Mays 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?

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Because Product Z yields the higher con...

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Question 22

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If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B;assuming fixed costs are the same,production restrictions are the same for both products,and the markets for both products are unlimited;the company should commit 100% of its capacity to the product that has the higher contribution margin.

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Question 23

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The process of restating future cash flows in today's dollars is known as:

If net present values are used to evaluate two investments that have equal costs and equal total cash flows,the one with more cash flows in the early years has the higher net present value.

A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows: Compute the project's payback period.

A cost that cannot be avoided or changed because it arises from a past decision,and is irrelevant to future decisions,is called a(n) :

A company buys a machine for $76,000 that has an expected life of 6 years and no salvage value.The company anticipates a yearly after tax net income of $1,805.What is the accounting rate of return?

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

Variations Company had the following results of operations for the past year: A foreign company (whose sales will not affect Variations' regular sales)offers to buy 700 units at $4.00 per unit.In addition to variable manufacturing costs,there would be an export cost of $0.30 per unit.Prepare an analysis of this additional business to show whether Variations should take this order.

If the internal rate of return (IRR)of an investment is lower than the hurdle rate,the project should be accepted.

An estimate of an asset's value to the company,calculated by discounting the future cash flows from the investment at the project's required rate of return and then subtracting the initial amount of the investment,is known as:

Capital budgeting decisions are generally based on:

The calculation of the payback period for an investment when net cash flow is even (equal) is:

Tressor Company is considering a 5-year project.The company plans to invest $90,000 now and it forecasts cash flows for each year of $27,000.The company requires that investments yield a discount rate of at least 14%.Selected factors for a present value of an annuity of 1 for five years are shown below: Calculate the internal rate of return to determine whether it should accept this project.

Granfield Company has a piece of manufacturing equipment with a book value of $40,000 and a remaining useful life of four years.At the end of the four years the equipment will have a zero salvage value.The market value of the equipment is currently $22,000.Granfield can purchase a new machine for $120,000 and receive $22,000 in return for trading in its old machine.The new machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the new machine.The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

A machine costs $180,000 and will have an eight-year life,a $20,000 salvage value,and straight-line depreciation is used.Management estimates the machine will yield an after-tax net income of $12,500 each year.Compute the accounting rate of return for the investment.

Watson Corporation is considering buying a machine for $25,000.Its estimated useful life is 5 years,with no salvage value.Watson anticipates annual net income after taxes of $1,500 from the new machine.What is the accounting rate of return assuming that Watson uses straight-line depreciation and that income is earned uniformly throughout each year?

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce.A salvage company will purchase the defective units as they are for $5 each.Chang's production manager reports that the defects can be corrected for $6 per unit,enabling them to be sold at their regular market price of $21.Chang should:

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