Ch.16 Cost for Decision Making Exam Questions 12th Edition - Accounting What Numbers Mean 12e Complete Test Bank by Marshall. DOCX document preview.
Accounting - What the Numbers Mean, 12e (Marshall)
Chapter 16 Cost for Decision Making
1) A(n) ________ cost is a cost that differs between the alternative activities that are being considered in a decision.
A) sunk
B) allocated
C) differential
D) opportunity
2) Braizen, Inc. produces a product with a $30 per-unit variable cost and an $80 per-unit sales price. Fixed manufacturing overhead costs are $100,000. The firm has a one-time opportunity to sell an additional 1,000 units at $60 each that would not affect its current sales. Assuming the company has sufficient capacity to produce the additional units, how would the acceptance of the special order affect net income?
A) Income would decrease by $30,000.
B) Income would increase by $30,000.
C) Income would increase by $140,000.
D) Income would increase by $40,000.
3) Opportunity costs are:
A) included in inventory.
B) foregone benefits.
C) sunk costs.
D) included in cost of goods sold.
4) A cost is sunk if it:
A) has been incurred and cannot be eliminated.
B) is relevant in decision-making.
C) is a differential cost.
D) All of the answers are correct.
5) ________ is a cost management technique in which the firm determines the required cost for a product or service in order to earn a desired profit when the marketplace establishes the product's selling price.
A) Relevant costing
B) Product costing
C) Differential costing
D) Target costing
6) ________ can be measured as the income that could have been earned on an asset, based on the potential rate of return that is lost or sacrificed when one alternative use of the asset is chosen over another.
A) Target cost
B) Sunk cost
C) Opportunity cost
D) Allocated cost
7) When considering alternative projects, ________ costs are those that would result from selecting one alternative instead of the other.
A) allocated
B) differential
C) sunk
D) None of the answers are correct.
8) Which of the following cost classifications would not be considered relevant in comparing decision alternatives?
A) opportunity cost.
B) differential cost.
C) sunk cost.
D) none of the answers are correct.
9) In considering whether to accept a special order at a price less than the normal selling price of the product and where the additional sales will make use of present idle capacity, which of the following costs will not be relevant?
A) direct labor.
B) direct materials.
C) variable manufacturing overhead.
D) fixed manufacturing overhead that cannot be avoided.
10) A(n) ________ cost is a cost that would be classified "for decision-making purposes."
A) period cost
B) opportunity cost
C) controllable cost
D) historical cost
11) Relevant costs in decision-making:
A) are future costs that represent differences between decision alternatives.
B) result from past decisions.
C) should not influence the decision.
D) None of the answers are correct.
12) A cost is considered relevant if:
A) it is positive.
B) it is sunk.
C) it makes a difference.
D) it can't be changed.
13) A cost that could not possibly be classified as irrelevant to a business decision is known as:
A) a fixed cost.
B) a sunk cost.
C) a differential cost.
D) a variable cost.
14) The potential rental value of space used in the manufacturing process:
A) is a variable production cost.
B) is an unavoidable production cost.
C) is a sunk production cost.
D) is an opportunity cost if production is not outsourced.
15) Greenland Sports, Inc. has been asked to submit a bid to the National Hockey League on supplying 1,000 pairs of professional quality skates. The cost per pair of skates has been determined as follows:
|
|
|
Direct materials | $ | 80 |
Direct labor |
| 60 |
Variable overhead |
| 30 |
Fixed overhead (allocated) |
| 20 |
Other non-manufacturing costs associated with each pair of skates are:
|
|
|
Variable selling cost (commission) | $ | 25 |
Fixed selling and administrative cost |
| 10 |
Assume the commission on the sale of skates to the National Hockey League would be reduced to $15 per pair and that available production capacity exists to produce the 1,000 pairs of skates, the lowest price the firm can bid is some price greater than:
A) $185.
B) $190.
C) $215.
D) $225.
16) When considering a sell as is or process further decision, the key decision factor is to determine that:
A) sunk costs exceed opportunity costs.
B) incremental revenues exceed incremental costs.
C) no new differential costs exist.
D) all allocated costs are included in the decision.
17) In a make or buy decision, which of the following costs would be considered relevant?
A) avoidable costs.
B) unavoidable costs.
C) sunk costs.
D) allocated costs.
18) Which of the following qualitative factors favors the buy option in the make or buy decision?
A) production scheduling.
B) utilization of idle capacity.
C) ability to control quality.
D) technical expertise of supplier.
19) Product V72 sells for $20 per unit as is, but if enhanced it can be sold for $25 per unit. The enhancement process will cost $52,000 for 12,000 units. If the 12,000 units of Product V72 are sold as is without further processing, the company:
A) will incur an incremental profit of $8,000.
B) will incur an opportunity cost of $8,000.
C) will incur an incremental profit of $5 per unit.
D) will incur an incremental loss of $5 per unit.
20) A(n) ________ is the minimum cost that can be incurred, which when subtracted from the selling price, allows for a desired profit to be earned.
A) relevant cost
B) opportunity cost
C) incremental cost
D) target cost
21) Product X sells for $80 per unit in the marketplace and ABC Company requires a 35% minimum profit margin on all product lines. In order to compete in this market, the target cost for Product X must be equal to or lower than:
A) $28.
B) $45.
C) $52.
D) $80.
22) ________ costs are not relevant in a decision to continue or discontinue a segment of the organization.
A) Avoidable
B) Unavoidable
C) Opportunity
D) Differential
23) The decision to continue or discontinue a segment of the business should focus on:
A) sales minus total variable expenses and total fixed expenses.
B) sales minus total variable expenses and avoidable fixed expenses of the segment.
C) sales minus total variable expenses and allocated fixed expenses of the business.
D) None of the answers are correct.
24) The decision for solving production mix problems involving multiple products and scarce production resources should focus on:
A) gross profit of each product.
B) sales price of each product.
C) contribution margin per unit of scarce resource.
D) contribution margin of each product.
25) ABC Company produces three products: X, Y, and Z. Product X has a contribution margin of $40 and requires 2 hour of machine time. Product Y has a contribution margin of $60 and requires 4 hours of machine time. Product Z has a contribution margin of $72 and requires 3 hours of machine time. If machine hours are considered scarce, in what product mix order should ABC Company schedule the production of Products X, Y, and Z for the available machine hours?
A) first X, then Y, then Z.
B) first Z, then X, then Y.
C) first Z, then Y, then X.
D) first Y, then Z, then X.
26) A principal difference between operational budgeting and capital budgeting is the time frame of the budget. Because of this difference, capital budgeting:
A) is an activity that involves only the financial staff.
B) is done on a rolling budget period basis.
C) focuses on the present value of cash flows from investments.
D) is concerned with a long-term net income forecast.
27) Capital budgeting differs from operational budgeting because:
A) depreciation calculations are required.
B) it considers the time value of money.
C) operating expenses are not relevant.
D) capital budgets don't affect cash flow.
28) As part of the capital budgeting process, capital expenditure analysis attempts to determine the impact of a proposed capital expenditure on the organization's:
A) short-term decision making strategy.
B) contribution margin.
C) ROI.
D) cost of capital.
29) The cost of capital used in the capital budgeting analytical process is primarily a function of:
A) ROE.
B) ROI.
C) the cost of acquiring the funds that will be invested.
D) the discount rate.
30) For most firms, the cost of capital is probably in the range of:
A) the prime rate, plus or minus 2 percentage points.
B) less than 10%.
C) between 10% and 20%.
D) more than 20%.
31) When considering the results of a proposed investment determined by present value analysis which indicates that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:
A) the quantitative analysis indicates that it should not be made.
B) management's assessment of qualitative factors overrides the quantitative analysis.
C) the timing of the cash flows of the investment will not be as assumed in the present value calculation.
D) post-audits of prior investments have revealed that cash flow estimates were consistently higher than actual cash flows realized.
32) Which of the following is not an important qualitative factor to consider in the capital budgeting decision?
A) regulations that mandate investment to meet safety, environmental, or access requirements.
B) technological developments within the industry may require new facilities to maintain customers or market share at the cost of lower ROI for a period of time.
C) commitment to a segment of the business that requires capital investments to achieve or regain competitiveness even though that segment does not have as great an ROI as others.
D) All of the answers are important qualitative factors to consider.
33) Which of the following is typically not important when calculating the net present value of a project?
A) timing of cash flows from the project.
B) income tax effect of cash flows from the project.
C) method of financing the project.
D) amount of cash flows from the project.
34) Which cash flow item calculation will be affected by depreciation expense even though depreciation expense is not a cash flow item itself?
A) initial investment.
B) income taxes.
C) salvage value.
D) release of working capital.
35) In order to calculate the net present value of a proposed investment, it is necessary to know:
A) the cash flows expected from the investment.
B) the net income expected from the investment.
C) the interest rate paid on funds borrowed to make the investment.
D) the cash dividends paid on the stock each year.
36) Discounting a future cash inflow at an 8% discount rate will result in a higher present value than discounting it at a:
A) 7% rate.
B) 8% rate.
C) 9% rate.
D) All of the answers are correct.
37) An investment project that provides a higher rate of return than the firm's cost of capital will likely:
A) increase ROI.
B) decrease residual income.
C) increase payback.
D) decrease accounting rate of return.
38) If the net present value of the investment is $8,510, then:
A) the rate of return is less than the cost of capital.
B) the present value of the cash flows is greater than the required investment.
C) the cost of capital is higher than the internal rate of return.
D) the present value of the cash flows is $8,510 less than the investment.
39) If the net present value of a proposed investment is positive:
A) the investment not will be made.
B) the cost of capital is higher than the internal rate of return.
C) the cost of capital is positive.
D) the cost of capital is less than the expected rate of return.
40) The profitability index of a proposed investment project will be:
A) equal to 1.0 if the net present value is positive.
B) negative if the proposed investment meets the cost of capital target.
C) less than 1.0 if the net present value is negative.
D) greater than 1.0 if the cost of capital exceeds the internal rate of return.
41) The principal weakness of the payback method for evaluating proposed investments is that it does not:
A) provide a way of ranking projects in order of desirability.
B) consider cash flows that continue after the investment has been recovered.
C) result in an easily understood "answer."
D) recognize the time value of money.
42) The accounting rate of return method for evaluating proposed investments:
A) is based on cash receipts and disbursements related to the investment.
B) uses accounting net income from the operating budget.
C) does not recognize the time value of money.
D) is easier to use than the net present value method.
43) The analytical method in capital budgeting that calculates the rate of return on an investment project based on the impact the investment project has on the organization's financial statements is known as the:
A) internal rate of return.
B) accounting rate of return.
C) payback period.
D) net present value.
44) An advantage of the net present value method for evaluating investment proposals over the internal rate of return method is that:
A) only one set of present value calculations using a required discount rate is made.
B) the actual rate of return on the project is calculated.
C) projects can be ranked in order of profitability using the net present value amount.
D) estimates of future cash flows do not have to be made.
45) If an asset costs $16,000, has an expected useful life of 8 years, is expected to have a $2,000 salvage value and generates net annual cash inflows of $2,000 a year, the cash payback period is
A) 8 years.
B) 7 years.
C) 6 years.
D) 5 years.
46) Which of the following statements is false regarding the payback period?
A) the time value of money is considered when calculating the payback.
B) the payback analysis is less accurate than the net present value analysis.
C) the payback period is less accurate than calculating the internal rate of return.
D) the time value of money is not considered when calculating the payback.
47) Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow:
Annual sales | $ | 88,000 |
|
Labor costs |
| (72,000 | ) |
Depreciation of equipment |
| (6,000 | ) |
Operating income | $ | 10,000 |
|
Income taxes |
| (4,000 | ) |
Net income | $ | 6,000 |
|
The estimated payback of the investment in the pasta equipment is:
A) 3.0 years.
B) 4.0 years.
C) 6.0 years.
D) 8.0 years.
48) Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow:
Annual sales | $ | 88,000 |
|
Labor costs |
| (72,000 | ) |
Depreciation of equipment |
| (6,000 | ) |
Operating income | $ | 10,000 |
|
Income taxes |
| (4,000 | ) |
Net income | $ | 6,000 |
|
The estimated accounting rate of return is:
A) 12.5%.
B) 18.0%.
C) 22.2%.
D) 25.0%.
49) When a firm uses the net present value method for capital budgeting decisions with a 10% discount rate, what does a negative net present value indicate?
A) the proposal's rate of return exceeds 10%.
B) the proposal's rate of return is less than the minimum rate required.
C) the proposal earns a rate of return between 9% and 10%.
D) None of the answers are correct.
50) A capital budgeting decision method that considers the time value of money is the:
A) accounting rate of return method.
B) return on stockholders' equity method.
C) cash payback method.
D) internal rate of return method.
51) Which of the following is a true statement regarding the internal rate of return in capital budgeting?
A) It provides the same basic information as the net present value method.
B) It calculates the net present value of future cash flows.
C) It calculates the proposal's rate of return.
D) It doesn't consider the time value of money.
52) Which of the following is not true regarding the net present value method in capital budgeting?
A) It uses a discount rate to perform present value calculations.
B) It calculates the present value of future cash flows.
C) It calculates the proposal's rate of return.
D) It considers the time value of money.
53) Sometimes when management decisions are reached, the investment project with the highest NPV or IRR is not selected. This occurs because:
A) a lower IRR is a less risky investment.
B) the highest NPV is not necessarily the highest IRR.
C) qualitative factors override quantitative analysis techniques.
D) sometimes management makes the wrong decision.
54) The capital budget provides an overall blueprint to help an organization meet its:
A) operating budget goals.
B) current period profitability.
C) relevant costing objectives.
D) long-term growth and profitability objectives.
55) A simple relevant cost analysis is not appropriate for which type of decisions?
A) sell or process further decisions.
B) make or buy decisions.
C) capital expenditure decisions.
D) short-term allocation of scarce resources decisions.
56) Capital budgeting techniques using present value techniques are useful in helping management:
A) decide which costs are most relevant in decision making.
B) identify investment alternatives that will contribute most to future profitability.
C) determine an accounting rate of return.
D) determine an investments payback period.
57) The discount rate used to determine the present value of an investment proposal being analyzed is also known as the:
A) present value ratio.
B) earnings growth rate.
C) payback rate.
D) hurdle rate.
58) When calculating the accounting rate of return, which of the following formula elements is not used?
A) operating income.
B) a present value factor.
C) depreciation expense.
D) average investment.
59) Which of the following statements is true about capital investment decisions:
A) The project with the highest net present value will always be selected.
B) The project with the highest internal rate of return will always be selected.
C) The project with the highest net present value may not always be selected.
D) The project with the highest accounting rate of return will always be selected.
60) For capital budgeting decisions, the use of present value analysis significantly improves management decision making, however:
A) other quantitative techniques may be even more insightful.
B) most decisions are significantly influenced by top management's values and experiences.
C) the accounting rate of return technique in usually more dependable.
D) a relevant cost analysis should always be used in close decisions.
61) As a final consideration for a capital investment opportunity after the results of a present value analysis has been obtained, overriding ________ should also be evaluated before a decision is made.
A) interest rates
B) historical costs
C) payback calculations
D) qualitative factors
62) Wayside, Inc., produces a product that currently sells for $72 per unit. Current production costs per unit include direct materials, $20; direct labor, $24; variable overhead, $10; and fixed overhead, $10. Product engineering has determined that a certain part of the product conversion process could be outsourced for $8 per unit. Raw material costs would not be affected, but direct labor and variable overhead costs would be reduced by 30%. No other opportunity is currently feasible for unused production capacity. How much product cost can Wayside avoid if it outsources part of the conversion process?
A) $7.20 per unit.
B) $10.20 per unit.
C) $16.20 per unit.
D) $19.20 per unit.
63) Superior Printing is considering a capital investment for a new printing press with a ten-year life. Superior's cost of capital is 10%. Relevant cash flows and related present value factors are as follows:
Investment in printing press = $240,000.
Investment in working capital items = $10,000
Annual net cash inflow from operating the press = $40,000.
Salvage value of the press = $18,000.
Present value of $1 (10 Years @ 10%) = 0.3855
Present value of an annuity of $1 (10 Years @ 10%) = 6.1446
The present value of the annual net cash inflows from operating the press is:
A) $5,378.
B) $15,420.
C) $40,000.
D) $245,784.
64) Superior Printing is considering a capital investment for a new printing press with a ten-year life. Superior's cost of capital is 10%. Relevant cash flows and related present value factors are as follows:
Investment in printing press = $240,000.
Investment in working capital items = $10,000
Annual net cash inflow from operating the press = $40,000.
Salvage value of the press = $18,000.
Present value of $1 (10 Years @ 10%) = 0.3855
Present value of an annuity of $1 (10 Years @ 10%) = 6.1446
The present value of the salvage value from the press is:
A) $5,378.
B) $6,939.
C) $15,420.
D) $244,584.
65) Advanced Digital Design is analyzing a capital investment project for using new computing technology to reduce current operating costs. The new computing technology will have a five-year life with no salvage value at the end of five years. Advanced Digital Design's cost of capital is 12%. Relevant cash flows and present value factors for 5 years @ 12% are as follows:
Investment in computer technology = $500,000.
Annual net cash savings from new computer technology = $135,000.
Salvage value of new computer technology = $0.
Present value of $1 = 0.5674
Present value of an annuity of $1 = 3.6048
The net present value of the investment in new computing technology is:
A) $(423,401).
B) $(13,352).
C) $76,599.
D) $175,000.
66) Advanced Digital Design is analyzing a capital investment project for using new computing technology to reduce current operating costs. The new computing technology will have a five-year life with no salvage value at the end of five years. Advanced Digital Design's cost of capital is 12%. Relevant cash flows and present value factors for 5 years @ 12% are as follows:
Investment in computer technology = $500,000.
Annual net cash savings from new computer technology = $135,000.
Salvage value of new computer technology = $0.
Present value of $1 = 0.5674
Present value of an annuity of $1 = 3.6048
The present value ratio of the investment in new computing technology is:
A) 0.94.
B) 0.97.
C) 1.00.
D) 1.03.
67) Advanced Digital Design is analyzing a capital investment project for using new computing technology to reduce current operating costs. The new computing technology will have a five-year life with no salvage value at the end of five years. Advanced Digital Design's cost of capital is 12%. Relevant cash flows and present value factors for 5 years @ 12% are as follows:
Investment in computer technology = $500,000.
Annual net cash savings from new computer technology = $135,000.
Salvage value of new computer technology = $0.
Present value of $1 = 0.5674
Present value of an annuity of $1 = 3.6048
When considering the net present value of the investment in new computing technology, which one of the following represents a possible internal rate of return on the investment?
A) 10%.
B) 12%.
C) 14%.
D) None of the answers are possible.
68) You have been asked to analyze a capital investment project for a new machine. The machine will cost $400,000, have an 8-year life and a salvage of $80,000. The new machine will generate annual net cash flows of $120,000. The payback period is:
A) 3.25 years.
B) 3.33 years.
C) 3.50 years.
D) 3.67 years.
69) You have been asked to analyze a capital investment project for a new machine. The machine will cost $400,000, have an 8-year life and a salvage of $80,000. The new machine will generate annual net cash flows of $120,000. The accounting rate of return for the first year of using the new machine is:
A) 20%.
B) 21%.
C) 22%.
D) 30%.
70) The following production costs are provided for AudioPro Co., a manufacturer of high quality headphones.
Manufacturing Costs:
Direct Materials | $ | 60 |
|
Direct Labor |
| 38 |
|
Variable Overhead |
| 22 |
|
Fixed Overhead |
| 50 |
|
Total | $ | 170 |
|
It has been determined that the headphones could be purchased from Integrated Labs at a cost of $135 plus $8 shipping costs. Considering the offer from Integrated Labs, show whether AudioPro should make or buy the product.
(a.) Assume 40% of fixed overhead allocated to making headphones relates to a production manager who would not be retained if the headphones were not produced by AudioPro.
(b.) How would your analysis change if AudioPro could use capacity resources for alternative activities that would produce a contribution of $35 per unit?
(c.) What is your understanding of the term outsourcing? Briefly explain.
71) Digger Company realizes three products from a single mining process: Products J1, A2, and V3. Each product may be sold as is in its raw form or processed further into a more refined state. The additional processing requires no expanded capacity and production costs are entirely variable. Sales values and cost information are presented below:
|
|
|
| If Processed Further | ||||||||
Product | Units Produced | Sales Value As Is |
| Sales Value | Additional Costs | |||||||
J1 | 14,000 | $ | 60,000 |
|
| $ | 100,000 |
| $ | 22,000 |
| |
A2 | 10,000 |
| 100,000 |
|
|
| 108,000 |
|
| 16,000 |
| |
V3 | 6,000 |
| 58,000 |
|
|
| 78,000 |
|
| 20,000 |
| |
(a.) Determine whether Digger Company should sell each product as is or after further processing.
72) The market price for low-end laser printers is well established at $400 per unit. ABC Technologies is considering entering this market and has enough available space in its plant to accommodate a new production line. However, several pieces of new manufacturing equipment would be required which are estimated to cost $28,000,000. ABC Technologies requires a minimum ROI of 15% on any product line investment and estimate that it can capture 100,000 units of the low-end laser printer market at the prevailing market price.
(a.) Calculate the target cost per unit for ABC Technologies if it is to enter the low-end laser printer market while earning the minimum 15% ROI.
73) The following product line information is for the Swiss Watch Company. The company is considering dropping its Children's product line due to poor operating income performance. Fixed expenses are allocated to each product line based on sales revenue.
| Watch Products | ||||||||||||||
| Men's |
| Women's |
| Children's | ||||||||||
Sales | $ | 30,000 |
|
| $ | 50,000 |
|
| $ | 40,000 |
| ||||
Variable expenses |
| 10,000 |
|
|
| 15,000 |
|
|
| 25,000 |
| ||||
Fixed expenses |
| 15,000 |
|
|
| 25,000 |
|
|
| 20,000 |
| ||||
Operating income | $ | 5,000 |
|
| $ | 10,000 |
|
| $ | (5,000 | ) | ||||
(a.) Calculate the effect on the Swiss Company's operating income if the Children's watch product line is discontinued. Comment on your analysis.
(b.) Assume that Swiss Company discontinues its Children's product line. Calculate the total operating income for the Swiss Company.
74) Marshall, Inc., produces three products but weekly demand for the three products exceed the available amount of machine time. Following is information about each product:
| Product A |
| Product B |
| Product C | |||||||||||
Contribution margin per unit | $ | 300 |
|
| $ | 400 |
|
| $ | 150 |
| |||||
Machine hours per unit |
| 3 |
|
|
| 2 |
|
|
| 0.50 |
| |||||
Weekly demand (units) |
| 100 |
|
|
| 300 |
|
|
| 800 |
| |||||
(a.) Determine how many units each of Product A, Product B, and Product C that Marshall, Inc., should produce each week assuming 1,000 hours of available machine time.
75) Use the appropriate factors from Chapter 6, Table 6-4 (Present Value of $1) or Table 6-5 (Present Value of an Annuity of $1), to answer the following questions.
(a.) What is the present value of $100,000 in ten years using a discount rate of 8%?
(b.) How much should be invested today at a return on investment of 16% compounded annually to have $60,000 in ten years?
76) Use the appropriate factors from Chapter 6, Table 6-4 (Present Value of $1) or Table 6-5 (Present Value of an Annuity of $1), to answer the following questions.
(a.) Yoko Co.'s common stock is expected to have a dividend of $3 per share for each of the next four years, and it is estimated that the market value per share will be $42 at the end of four years. If an investor requires a return on investment of 12%, what is the maximum price the investor would be willing to pay for a share of Yoko Co. common stock today?
(b.) Lashana bought a bond with a face amount of $1,000, a stated interest rate of 10%, and a maturity date 20 years in the future for $1,025. The bond pays interest on a semi-annual basis. Five years have gone by and the market interest rate is now 12%. What is the market value of the bond today?
77) Use the appropriate factors from Chapter 6, Table 6-4 (Present Value of $1) or Table 6-5 (Present Value of an Annuity of $1), to answer the following questions.
(a.) What is the present value of $90,000 to be received in six years using a discount rate of 12%?
(b.) How much should be invested today at a return on investment of 16% compounded annually to have $150,000 in eleven years?
78) Use the appropriate factors from Chapter 6, Table 6-4 (Present Value of $1) or Table 6-5 (Present Value of an Annuity of $1), to answer the following questions.
(a.) ABC Co.'s common stock is expected to have a dividend of $8 per share for each of the next six years, and it is estimated that the market value per share will be $78 at the end of six years. If an investor requires a return on investment of 10%, what is the maximum price the investor would be willing to pay for a share of ABC Co. common stock today?
(b.) Gregory bought a bond with a face amount of $1,000, a stated interest rate of 12%, and a maturity date 20 years in the future for $980. The bond pays interest on a semi-annual basis. Eight years have gone by and the market interest rate is now 8%. What is the market value of the bond today?
79) The following data have been collected by capital budgeting analysts at Condel Brothers Oil Co. concerning the drilling and production of known reserves at an off-shore location:
|
|
|
|
Investment in rigging equipment and related personnel costs required to pump the oil | $ | 5,300,000 |
|
Net increase in inventory and receivables associated with the drilling and production of the reserves. Assume this investment will be recovered at the end of the project |
| 1,200,000 |
|
Net cash inflow from operations for the expected life of the reserves for years: |
|
|
|
Year 1 |
| 2,000,000 |
|
Year 2 |
| 3,600,000 |
|
Year 3 |
| 1,700,000 |
|
Salvage value of machinery and equipment at the end of the well's productive life |
| 1,000,000 |
|
Cost of capital |
| 18 | % |
(a.) Calculate the net present value of the proposed investment in the drilling and production operation. Ignore income taxes, and round answers to the nearest $1.
(b.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
80) Griffin Co. is considering the investment of $136,000 in a new machine. The machine will generate cash flow of $22,500 per year for each year of its eight-year life and will have a salvage value of $8,000 at the end of its life. Griffin Co.'s cost of capital is 8 percent.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.
(b.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
81) The following data have been collected by capital budgeting analysts at Erica, Inc. concerning a new product line currently under consideration by management:
|
|
|
|
Investment in machinery and equipment required to produce the product | $ | 3,500,000 |
|
Net increase in working capital associated with the new product. Assume that this investment will be recovered at the end of the project |
| 500,000 |
|
Net cash inflow from operations for the expected life of the product line for: |
|
|
|
Year 1 |
| 550,000 |
|
Year 2 |
| 900,000 |
|
Year 3 |
| 1,400,000 |
|
Year 4 |
| 1,800,000 |
|
Salvage value of machinery and equipment at the end of the product line's life |
| 300,000 |
|
Cost of capital |
| 10 | % |
(a.) Calculate the net present value of the proposed investment in the new product line. Ignore income taxes, and round all answers to the nearest $1.
(b.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
82) Delta, Inc. is considering the investment of $75,000 in a new machine. The machine will generate cash flow of $16,800 per year for each year of its seven-year life and will have a salvage value of $12,000 at the end of its life. Delta Inc.'s cost of capital is 14% percent.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.
(b.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
83) Springfield Manufacturing Co. is considering the investment of $60,000 in a new machine. The machine will generate cash flow of $7,500 per year for each year of its 15 year life and will have a salvage value of $4,000 at the end of its life. Springfield's cost of capital is 10%.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.
(b.) Calculate the present value ratio of the investment.
(c.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
(d.) Calculate the payback period of the investment.
84) The following data have been collected by capital budgeting analysts at Halda, Inc. concerning an investment in an expansion of the company's product line. Analysts estimate that an investment of $210,000 will be required to initiate the project at the beginning of 2016. Estimated cash returns from the new product line are summarized in the following table; assume that the returns will be received in lump sum at the end of each year.
Year | Amount of Cash Return | ||
2019 | $ | 90,000 |
|
2020 |
| 80,000 |
|
2021 |
| 70,000 |
|
2022 |
| 60,000 |
|
The new product line will also require an investment in working capital of $30,000; this investment will become available for other purposes at the end of the project. Salvage value of machinery and equipment at the end of the product line's life is expected to be $20,000. The cost of capital used in Hilda, Inc.'s capital budgeting analysis is 10%.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.
(b.) Calculate the present value ratio of the investment.
(c.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
(d.) Calculate the payback period of the investment.
85) Digital Devices, Inc. has received a special order to manufacture 10,000 CD ROM drives for an Italian computer manufacturer. Digital determines that the order will not affect its current domestic sales of CD ROM drives and because of the special nature of the order no sales commission would be paid. However, to process the order for export, an additional handling cost of $10 per unit is estimated. The order indicates that the price of the drives cannot exceed $200.
The company has the capacity to produce 100,000 units annually but is currently operating at 75% of available capacity. Unit selling price and costs, based on estimated actual capacity being utilized, are as follows:
|
|
|
|
Selling price | $ | 260 |
|
Expenses: |
|
|
|
Direct materials | $ | 80 |
|
Direct labor |
| 40 |
|
Variable manufacturing overhead |
| 50 |
|
Fixed manufacturing overhead |
| 30 |
|
Sales commission |
| 26 |
|
Fixed administrative expenses |
| 8 |
|
Total | $ | 234 |
|
(a.) Prepare a relevant cost analysis showing the effect on profit if the company accepts the special order.
(b.) How would your analysis change if Digital Devices, Inc., was producing and selling 100,000 units annually?
86) SOFT Micro Co., sells part #1973 for $240 per unit and the standard cost of producing each unit of part #1973 is determined as follows:
Direct material (5 lbs. × $4 per lb.) | $ | 20 |
|
Direct labor (2 hrs. @ $20 per hr.) |
| 40 |
|
Overhead (2 hrs. @ $70 per hr. |
| 140 |
|
Total | $ | 200 |
|
SOFT received a special order for 1,000 units of part #1973. The only additional cost to SOFT is a special packaging requirement that would cost $10 per unit.
(a.) If SOFT were currently able to sell all of its production of part #1973, what would be the minimum sales price that SOFT should consider for this special order?
(b.) Assume that SOFT has enough idle capacity to produce 1,000 units of part #1973 and that overhead is 20% variable. If SOFT wants to increase its operating profit by $110,000, what price per unit would SOFT charge for the special order?
87) Acme Company is considering replacing outdated production equipment that will allow for production cost savings of $20,000 per month. The new equipment will have a five-year life and cost $800,000, with an estimated salvage value of $50,000. Acme's cost of capital is 10%.
Calculate the payback period and the accounting rate of return for the new production equipment.
88) OldSchool Corp. is reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $200,000 investment in a machine that had an estimated useful life of five years and an estimated salvage value of $20,000. The cash flow from the new machine was expected to increase net income before depreciation expense by $56,000 per year. OldSchool's current policy for approving a new investment is that it have a rate of return of 12% and a payback period of three years or less.
(a) Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. Based on this analysis, would the investment be made? Explain.
(b) Calculate the payback period for this investment. Based on this analysis, would the investment be made? Explain.
(c) Comment on OldSchool's current policy for capital expenditure proposals.