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Exam 25: Capital Budgeting and Managerial Decisions

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Question 81

True/False

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The payback period method of evaluating an investment fails to consider cash inflows after the point where an investment's costs are fully recovered.

A) True
B) False

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Question 82

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A company is considering the purchase of new equipment for $45,000.The projected annual net cash flows are $19,000.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?

A) $(1,768)
B) $3,000
C) $634
D) $19,000
E) $45,634

F) D) and E)
G) B) and D)

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Question 83

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A company is considering a new project that will cost $19,000.This project would result in additional annual revenues of $6,000 for the next 5 years.The $19,000 cost is an example of a(n) :

The payback period method,unlike the net present value method,does not ignore cash flows after the point of cost recovery.

Markson Company had the following results of operations for the past year: A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $14 per unit.In addition to variable manufacturing costs,selling these units would increase fixed overhead by $1,600 for the purchase of special tools.If Markson accepts this additional business,its profits will:

Capital budgeting decisions are risky because the outcome is uncertain,large amounts of money are usually involved,the investment involves a long-term commitment,and the decision could be difficult or impossible to reverse.

Luxury Linens has three departments: Bath,Kitchen,and Bedding.The most recent income statement,showing the total operating profit and departmental results is shown below: Based on this income statement,management is considering eliminating the Kitchen department.If the Kitchen department is eliminated,the other departments will expand to fill the space but sales are not expected to change.Twenty percent of Kitchen's allocated expenses will be avoided due to restructuring and the remainder reallocated equally to Bath and Bedding.Show an analysis indicating whether the Kitchen department should be eliminated.

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?

Capital budgeting decisions are risky because all of the following are true except:

The discount rate that yields a net present value of zero for an investment is the:

Carmel Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value.Carmel uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year.In calculating the accounting rate of return,what is Carmel's average investment?

After-tax net income divided by the average amount invested in a project,is the:

In a make or buy decision,management should focus on costs that are the same under the two alternatives.

A company inadvertently produced 6,000 defective portable radios.The radios cost $10 each to be manufactured.A salvage company will purchase the defective units as they are for $8 each.The production manager reports that the defects can be corrected for $4.50 per unit,enabling the company to sell them at the regular price of $15.00.The repair operations would not affect other production operations.Prepare an analysis that shows which action should be taken.

If two projects have the same risks,the same payback periods,and the same initial investments,they are equally attractive.

An opportunity cost:

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

A company is considering purchasing a machine for $21,000.The machine will generate an after-tax net income of $2,000 per year.Annual depreciation expense would be $1,500.What is the payback period for the new machine?