1. The process of analyzing alternative investments and deciding which assets to acquire or sell is known as:

a. Planning and Control

b. Capital budgeting

c. Variance analysis

d. Master budgeting

e. Managerial accounting

2.The calculation of annual net cash flow from a particular investment project should include all of the following except:

A. Income taxes.

B. Revenues generated by the investment.

C. Cost of products generated by the investment.

D. Depreciation expense.

E. General and administrative expenses.

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

A.The outcome is uncertain.

B.Large amounts of money are usually involved.

C.The investment involves a long-term commitment.

D.The decision could be difficult or impossible to reverse.

E.They rarely produce net cash flows.

4.A the company's required rate of return, typically its cost of capital is called the:

A.Internal rate of return.

B.Average rate of return.

C.Hurdle rate.

D.Maximum rate.

E.Payback rate.

5.In business decision making, managers typically examine the two fundamental factors of:

A. Risk & capital investment.

B. Risk & return.

C. Capital investment & rate of return.

D. Risk & payback.

E. Payback & rate of return.

6.An opportunity cost:

A.Is an unavoidable cost because it remains the same regardless of the alternative chosen.

B.Requires a current outlay of cash.

C.Results from past managerial decisions.

D.Is the potential benefit lost by choosing a specific alternative course of action among two or more.

E.Is irrelevant in decision making because it occurred in the past.

7.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. Uncontrollable cost.

b. Incremental cost.

c. Opportunity cost.

d. Out-of-pocket cost.

e. Sunk cost.

8.An additional cost incurred only if a company pursues a particular course of action is a(n):

A. sunk cost.

B. pocket cost.

C.period cost.

D.incremental cost.

E. discount cost

9.Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Gordon's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Gordon should: Sell the watches for $3 per unit. Sell 5,000 watches to the salvage company and repair the remainder. Throw the watches away. Sell the watches as they are because repairing them will cause their total cost to exceed their selling price. Correct the defects and sell the watches at the regular price.

A.Sell the watches for $3 per unit.

B.Correct the defects and sell the watches at the regular price.

C.Sell the watches as they are because repairing them will cause their total cost to exceed their selling price.

D.Sell 5,000 watches to the salvage company and repair the remainder.

E. Scrap the watches.

10.Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should:

A. Produce only Product A.

B. Produce only Product B.

C. Produce equal amounts of A and B.

D. Produce A and B in the ratio of 62.5% A to 37.5% B.

E. Produce A and B in the ratio of 40% A and 60% B.

11.Epsilon Co. can produce a unit of product for the following costs:

Direct material $7.90

Direct labor $23.90

Overhead $39.50

Total costs per unit $71.30

An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to:

A.Buy since the relevant cost to make it is $71.30.

B.Make since the relevant cost to make it is $59.45.

C.Buy since the relevant cost to make it is $43.65.

D.Make since the relevant cost to make it is $43.65.

E.Buy since the relevant cost to make it is $59.45.

12.Maxim manufactures a hamster food product called Green Health. Maxim currently has 11,000 bags of Green Health on hand. The variable production costs per bag are $2 and total fixed costs are $12,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 11,000 bags of Premium Green and 3,200 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be:

A. $107,200.

B. $105,400.

C. $8,200.

D. $6,400.

E. $1,800.

13.Minor Electric has received a special one-time order for 900 light fixtures (units) at $7 per unit. Minor currently produces and sells 8,500 units at $9 each. This level represents 85% of its capacity. Production costs for these units are $5 per unit, which includes $4.50 variable cost and $0.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,200 with a zero salvage value. Management expects no other changes in costs as a result of the additional production.Should the company accept the special order?

A. No, because net income would decrease by $900.

B. No, because net income would decrease by $900.

C. Yes, because because net income would increase by $6,300.

D. Yes, because because net income would increase by $1,050.

E. No, because because net income would decrease by $4,050

14.Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $2.40 per unit. Bluebird currently produces and sells 75,000 units at $6.40 each. This level represents 80% of its capacity. Production costs for these units are $3.60 per unit, which includes $1.95 variable cost and $1.65 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:

A. $36,000 increase.

B. $6,750 increase.

C. $29,350 increase.

D. $18,000 decrease.

E. $29,250 decrease.

15.Ahngram Corp. has 1,000 defective units of a product that cost $2.60 per unit in direct costs and $6.10 per unit in indirect cost when produced last year. The units can be sold as scrap for $3.60 per unit or reworked at an additional cost of $2.10 and sold at full price of $10.80. The incremental net income (loss) from the choice of reworking the units would be:

A. $3,600 higher if the units are reworked.

B. $10,800 higher if the units are reworked.

C. $2,100 lower if the units are reworked.

D. $5,100 higher if the units are reworked.

E. $2,100 higher if the units are reworked.

16.Porter Co. is analyzing two projects for the future. Assume that only one project can be selected.

Cost of machine Project X Project Y

Net cash flow: $68,000 $60,000

Year 1 24,000 4,000

Year 2 24,000 26,000

Year 3 24,000 26,000

Year 4 0 20,000

If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

A. Both X and Y are acceptable projects.

B. Project X.

C. Project Y.

D. Neither X nor Y is an acceptable project.

E. Project Y because it has a lower initial investment.

17.A company is considering the purchase of a new piece of equipment for $120,400. Predicted annual cash inflows from this investment are $55,000 (year 1), $20,500 (year 2), $27,500 (year 3), $21,500 (year 4) and $25,000 (year 5). The payback period is:

A. 4.19 years.

B. 4.02 years.

C. 3 years

D. 3.81 years.

E. 2.81 years.

18.A disadvantage of using the payback period to compare investment alternatives is that:

A. It ignores cash flows beyond the payback period.

B. It icludes the time value of money.

C.It cannot be used when cash flows are not uniform.

D. It cannot be used if a company records depreciation.

E. It cannot be used to compare investments with different initial investments.

19.A company is planning to purchase a machine that will cost $26,400, has a six-year life, and would be depreciated over a three-year period with no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the payback period for this machine?

Sales $129,000

Cost:

Manufacturing $53,300

Depreciation on machine 5,300

Selling and administrative expenses 43,000 (101,600)

Income before taxes $27,400

Income tax (35%) (9,590)

Net income $17,810

A. 1.79 years

B. 1.38 years

C. 3.62 years

D. 3.57 years

E. 6 years.

20.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?

A. 2.85%

B. 4.75%

C. 6.65%

D. 9.50%

E. 42.75%

21.Watson Corporation is considering buying a machine for $20,000. Its estimated useful life is 5 years, with no salvage value. Watson anticipates annual net income after taxes of $2,100 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?

A. 10.5%

B. 14%

C. 13.1%

D. 17.5%

E. 21%

22.Which of the following cash flows is *not* considered when using the net present value method?

A. Future cash inflows.

B. Future cash outflows.

C. Past cash outflows.

D. Non-uniform cash inflows.

E. Future year-end cash flows.

23.Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

A. Accounting rate of return.

B. Net present value.

C. Payback period.

D. Cash flow method.

E. Return on average investment.

24.The hurdle rate is often set at:

A. The rate at which the company is taxed on income.

B. 10% above the IRR of current projects.

C. The rate the company could earn if the investment were placed in the bank.

D. The company's cost of capital.

E. 10% above the ARR of current projects.

25.The following present value factors are provided for use in this problem.

Periods Present Value of $1 at 8% Present Value of an Annuity of $1 at 8%

1 0.9259 0.9259

2 0.8573 1.7833

3 0.7938 2.5771

4 0.7350 3.3121

Xavier Co. wants to purchase a machine for $36,000 with a four year life and a $1,200 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $11,300 in each of the four years. What is the machine's net present value? (round to the nearest whole dollar)

A. $2,009

B. $1,127

C. S38,309

D. ($2,009)

E. ($1,127)

26.Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $14,800 and will produce cash flows as follows:

End of Investment

Year A B

1 $9,200 $0

2 9,200 0

3 9,200 27,600

The present value factors of $1 each year at 15% are:

1 0.8696

2 0.7561

3 0.6575

The present value of an annuity of $1 for 3 years at 15% is 2.2832

The net present value of Investment A is:

A. $18,147

B. ($14,800)

C. $12,800

D. ($21,006)

E. $6,205

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

A. Zero rate of return.

B. Internal rate of return.

C. Accounting rate of return.

D. Payback rate of return.

E. Net present value rate of return.

28.A company is considering a 5-year project. The company plans to invest $60,000 now and it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project. Selected factors for a present value of an annuity of 1 for five years are shown below:

Interest rate Present value of an annuity of $1 factor for year 5

10% 3.7908

12% 3.6048

14% 3.4331

a. The project should be accepted.

b. The project should be rejected because it earns less than 10%.

c. The project earns more than 10% but less than 12%. At a hurdle rate of 12%, the project should be rejected.

d. Only 9% is acceptable.

e. Only 10% is acceptable.

29.Walters manufactures a specialty food product that can currently be sold for $21.80 per unit and has 19,800 units on hand. Alternatively, it can be further processed at a cost of $11,800 and converted into 11,800 units of Deluxe and 5,800 units of Super. The selling price of Deluxe and Super are $31.20 and $19.80, respectively. The incremental net income of processing further would be:

A. $51,360.

B. $39,560.

C. $17,800.

D. $43,800.

E. $11,800.

30. A machine costs $184,000 and will have an eight-year life, a $33,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $16,500 each year. Compute the accounting rate of return for the investment.

A. 15.2%

B. 32.6%

C. 16.5%

D. 17.9%

E. 35.9%

31.Poe Company is considering the purchase of new equipment costing $88,500. The projected annual cash inflows are $38,700, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine.

Periods Present value of $1 at 10% Present value of an annuity of $1 at 10%

1 0.9091 0.9091

2 0.8264 1.7355

3 0.7513 2.4869

4 0.6830 3.1699

A. ($34,175).

B. ($20,290).

C. $52,541.

D. $20,290.

E. $34,175

32.Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $2,100. The division sales for the year were $1,041,000 and the variable costs were $851,000. The fixed costs of the division were $184,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

A. $55,200 decrease

B. $134,800 decrease

C. $53,100 decrease

D. $190,000 increase

E. $190,000 decrease

33.Granfield Company has a piece of manufacturing equipment with a book value of $39,500 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 $21,900. Granfield can purchase a new machine for $119,000 and receive $21,900 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,900 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:

A. $21,500 increase

B. $75,600 decrease

C. $17,600 decrease

D. $51,650 increase

E. $21,500 decrease