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Exam 25: Capital Budgeting and Managerial Decisions

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Question 61

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A shorter payback period reduces the company's ability to respond to unanticipated changes and increases the risk of having to keep an unprofitable investment.

A) True
B) False

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Question 62

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A company produces three different products that all require processing on the same machines.There are only 27,000 machine hours available in each year.Production information for each product is: Required: (1)Determine the preferred sales mix if there are no market constraints on any of the products. (2)Determine the preferred sales mix if the demand is limited to 5,000 units for each product. (3)Determine the preferred sales mix if the demand is limited to 3,000 units for each product.

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In general,the company should produce P...

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Question 63

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The net present value decision rule is: When an asset's expected cash flows yield a positive net present value when discounted at the required rate of return,the asset should be acquired.

A company manufactures two products.Each unit of product X requires 10 machine hours and each unit of product Y requires 4 machine hours.The company's productive capacity is limited to 180,000 machine hours.Each unit of product X sells for $15 and has variable costs of $7.Each unit of product Y sells for $8 and has variable costs of $3.If the company can sell all that it produces of both products,what should the sales mix be?

The minimum acceptable rate of return on an investment,often the company's cost of capital,is called the _________________.

A company is planning to purchase a machine that will cost $24,000,have a six-year life,and 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?

An advantage of the break-even time (BET)method over the payback period method is that it recognizes the time value of money.

Granfield Company is considering eliminating its backpack division,which reported an operating loss for the recent year of $42,000.The division sales for the year were $960,000 and the variable costs were $475,000.The fixed costs of the division were $527,000.If the backpack division is dropped,40% of the fixed costs allocated to that division could be eliminated.The impact on Granfield's operating income for eliminating this business segment would be:

The time value of money is considered when calculating the payback period of an investment.

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

A(n)_____________________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.

A company buys a machine for $60,000 that has an expected life of 9 years and no salvage value.The company anticipates a yearly net income of $2,850 after taxes of 30%,with the cash flows to be received evenly throughout each year.What is the accounting rate of return?

The break-even time (BET) method is a variation of the:

A new manufacturing machine is expected to cost $278,000,have an eight-year life,and a $30,000 salvage value.The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation.Compute the payback period for the purchase.

Generalware,Inc.sells a single product and reports the following results from sales of 100,000 units: A foreign company wants to purchase 15,000 units.However,they are willing to pay only $36 per unit for this one-time order.They also agree to pay all freight costs.To fill the order,Generalware will incur normal production costs.Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance.No additional administrative costs (variable or fixed)will be incurred in association with this special order. Required: (1)Should Generalware accept the order if it does not affect regular sales? Explain. (2)Assume that Generalware can accept the special order only by giving up 5,000 units of its normal sales.Should the company accept the special order under these circumstances?

Bannister Co.is thinking about having one of its products manufactured by a subcontractor. Currently,the cost of manufacturing 1,000 units follows: If Bannister can buy 1,000 units from a subcontractor for $100,000,it should:

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit.Minor currently produces and sells 7,500 units at $6.00 each.This level represents 75% of its capacity.Production costs for these units are $4.50 per unit,which includes $3.00 variable cost and $1.50 fixed cost.To produce the special order,a new machine needs to be purchased at a cost of $1,000 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?

Part of the decision to accept additional business should be based on a comparison of the incremental (differential)costs of the added production with the additional revenues to be received.

Briefly describe the time value of money.Why is the time value of money important in capital budgeting?

The following present value factors are provided for use in this problem. Cliff Co.wants to purchase a machine for $40,000,but needs to earn an 8% return.The expected year-end net cash flows are $12,000 in each of the first three years,and $16,000 in the fourth year.What is the machine's net present value (round to the nearest whole dollar) ?