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Exam 25: Capital Budgeting and Managerial Decisions

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Question 1

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Epsilon Co.can produce a unit of product for the following costs: 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 $72.
B) Make since the relevant cost to make it is $56.
C) Buy since the relevant cost to make it is $48.
D) Make since the relevant cost to make it is $48.
E) Buy since the relevant cost to make it is $56.

F) A) and B)
G) B) and E)

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B

Question 2

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Incremental costs should be considered in a make or buy decision.

A) True
B) False

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Question 3

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

The following data concerns a proposed equipment purchase: The annual average investment amount used to calculate the accounting rate of return is:

The net present value decision rule requires that when an asset's expected cash flows are discounted at the required rate and yield a positive net present value,the project should be ____________________. Either of these answers can be correct

Ahngram Corp.has 1,000 defective units of a product that cost $3 per unit in direct costs and $6.50 per unit in indirect cost when produced last year.The units can be sold as scrap for $4 per unit or reworked at an additional cost of $2.50 and sold at full price of $12.The incremental net income (loss) from the choice of reworking the units would be:

Bluebird Mfg.has received a special one-time order for 15,000 bird feeders at $3 per unit.Bluebird currently produces and sells 75,000 units at $7.00 each.This level represents 80% of its capacity.Production costs for these units are $3.50 per unit,which includes $2.25 variable cost and $1.25 fixed cost.If Bluebird accepts this additional business,the effect on net income will be:

Factor Co.can produce a unit of product for the following costs: An outside supplier offers to provide Factor with all the units it needs at $46 per unit.If Factor buys from the supplier,the company will still incur 60% of its overhead.Factor should choose to:

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:

The concept of incremental cost is the same as the concept of differential cost.

In evaluating capital budgeting alternatives,there are two primary methods that do not consider the time value of money.These methods are _______________ and __________________.There are also two primary methods that consider the time value of money;these are ___________________ and _______________________. The first two blanks should have answers of payback period and accounting rate of return and can be shown in any order.The last two blanks have the solutions of net present value and internal rate of return in any order.

For each of the capital budgeting methods listed below,place an X in the correct column,indicating the measurement basis of each,the ability to make comparison among projects,and whether each method reflects or ignores the time value of money.

A limitation of the internal rate of return method is that it:

Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials,$10;direct labor,$14,variable overhead,$3 and fixed overhead,$8.An outside supplier has offered to sell the product to Axle for $32.Compute the net incremental cost or savings of buying the component.

When making capital budgeting decisions,companies usually prefer shorter payback periods.Explain why shorter payback periods are desirable.

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

A company has just received a special,one-time order for 1,000 units.Producing the order will have no effect on the production and sales of other units.The buyer's name will be stamped on each unit,at a cost of $1.50 per unit.Normal cost data,excluding stamping,follows: Prepare an analysis that indicates the selling price per unit this company will require to earn $3,000 on the order.

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

Nestor Company is considering the purchase of an asset for $100,000.It is expected to produce the following net cash flows.The cash flows occur evenly throughout each year. Compute the payback period for this investment.(Round to two decimal places. )

The ___________ is computed by discounting the future net cash flows from the investment at the project's required rate of return and then subtracting the initial amount invested.