2009 B-3 Class Questions Preview

2009 B-3 Class Questions Preview - Business Environment &...

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Business Environment & Concepts 3 Class Questions 1 © 2009 DeVry/Becker Educational Development Corp. All rights reserved. 1. CPA-05605 During 1994, Deet Corp. experienced the following power outages: Number of outages Number of per month months 0 3 1 2 2 4 3 3 12 Each power outage results in out-of-pocket costs of $400. For $500 per month, Deet can lease an auxiliary generator to provide power during outages. If Deet leases an auxiliary generator in 1995, the estimated savings (or additional expenditures) for 1995 would be: a. ($3,600) b. ($1,200) c. $1,600 d. $1,900 CPA-05605 Choice "c" is correct. Savings: 0 outages x 3 mo = 0 1 outages x 2 mo = 2 2 outages x 4 mo = 8 3 outages x 3 mo = 9 19 Total Outages Out-of-pocket cost x $400 Cost to be saved $7,600 Cost of generator ($500 × 12 months) (6,000 ) Estimated net savings $1,600 Choice "a" is incorrect. The estimated savings is dependent on the number of outages and on the number of months, as there are two costs involved. A loss of $3,600 only assumes that there are 6 outages (the total in the column for "number of outages per month" without considering the number of months for each row) times $400, less the cost of $6,000 for the generator. Choice "b" is incorrect. The estimated savings is not the difference between the out-of-pocket costs times 12 outages and the cost of the generator times 12 months. Choice "d" is incorrect. The cost of the generator is a monthly cost, not dependent on the number of power outages. Do not multiply $500 by the 19 power outages to calculate the cost of the generator; multiply the cost of the generator by 12 months.
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Business Environment & Concepts 3 Class Questions 2 © 2009 DeVry/Becker Educational Development Corp. All rights reserved. 2. CPA-03283 In equipment-replacement decisions, which one of the following does not affect the decision-making process? a. Current disposal price of the old equipment. b. Original fair market value of the old equipment. c. Cost of the new equipment. d. Operating costs of the new equipment. CPA-03283 Choice "b" is correct. The original FMV of the old equipment is a sunk cost that does not affect equipment-replacement decisions. All of the following items affect the decision process: a. Current disposal price of the old equipment c. Cost of the new equipment d. Operating costs of the new equipment 3. CPA-03358 When the risks of the individual components of a project's cash flows are different, an acceptable procedure to evaluate these cash flows is to: a. Compute the net present value of each cash flow using the firm's cost of capital. b. Compare the internal rate of return from each cash flow to its risk. c. Utilize the accounting rate of return. d. Discount each cash flow using a discount rate that reflects the degree of risk. CPA-03358 Choice "d" is correct. Discount rates may be adjusted to factor differences in risk into cash flow analysis.
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This note was uploaded on 02/19/2011 for the course BMGT 360 taught by Professor Spina during the Spring '07 term at Maryland.

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2009 B-3 Class Questions Preview - Business Environment &...

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