EXAM 3 PRACTICE

EXAM 3 PRACTICE - This is not a comprehensive list of...

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This is not a comprehensive list of notes!!!! -relevant cost: a cost that differs between alternatives -sunk costs are not relevant costs -when you have a limited supply of a resource (a constrained resource), choose the alternative that generates the most profit per unit of the constrained resource -amt. of cash flow(s) x present value factor = present value of cash flow(s) -if NPV is positive or equal to 0, then the project is acceptable b/c it exceeds the required rate of return -IRR is equal to the discount rate that provides a NPV of 0 -PV factor of IRR = Investment required / Net Annual Cash Flows -Payback Period = Investment Required / Net Annual Cash Flows -payback period ignores the time value of money!!! Here is some hypothetical data that illustrates how you should setup a NPV problem: Item Years Amt. of Cash Flows 15% Factor PV of Cash Flows Investment Now (100,000) 1.000 (100,000) Annual Inflows (1-5) 33,000 3.352 110,616 Salvage 5 8,000 0.497 3,976 Net Present Value 14,592 Note: When doing NPV problems, use this table as a guideline. Fill in as much of the table as possible and work to solve for the missing parts. -know definitions of cost, profit, investment centers (all are responsibility centers) -know difference between common and traceable costs….. traceable costs would more likely disappear if the segment was removed (but not necessarily) ROI = Net Operating Income / Avg. Operating Assets Margin = Net Operating Income / Sales Turnover = Sales / Average Operating Assets Therefore……….. ROI = Margin x Turnover -Three ways to improve ROI – increase sales, reduce expenses, reduce assets Residual Income = Net Operating Income – Minimum required return on Investment MCE = Value added time / Manufacturing cycle time Note: Process time is the only value added time
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