Chapter 12 and 13 Managerial

Only those costs and benefits that differ in total between alternatives are ______________________ in a decision.

Relevant

When making decisions, managers should ignore __________________ costs.

Sunk

Match the following categories of capital budgeting decisions with their description. 1. Screening decisions 2. Preference decisions A. Relate to whether a proposed project is acceptable B. Relate to selecting from among several acceptable alternatives

1. A 2. B

Match the following internal rate of return and required rate of return comparisons with the appropriate conclusions about a proposed project. 1. The internal rate of return is equal to or greater than the required rate of return 2. The internal rate of return is less than the required rate of return A. The project is considered to be acceptable. B. The project should be rejected.

1. A 2. B

Match each capital investment cash flows with the appropriate category. 1. Salvage value 2. Initial investment 3. Working capital A. Inflow B. Outflow C. Inflow and outflow

1. A 2. B 3. C

Use the following items to create the equation used to calculate the payback period when annual net cash inflow is the same every year. A. Investment required B. Annual net cash inflow C. /

1. A 2. C 3. B

Identify each working capital situation with the appropriate treatment. 1. Cash inflow 2. Cash outflow A. Working capital is tied up for project needs B. Working capital is released for use elsewhere within the company.

1. B 2. A

Place the following steps used to calculate net present value in the correct order. A. Find the PV factors using the discount rate and timing of each cash flow B. Multiply all project cash flows by the present value factor C. Determine the discount rate using the minimum required return D. Find the difference between the PV of cash inflows and cash outflows

1. C 2. A 3. B 4. D

Place the following items in the appropriate order to create the equation used to calculate the simple rate of return. A. Initial investment B. / C. Annual incremental net operating income

1. C 2. B 3. A

Match each capital investment term with its meaning. 1. Cost of capital 2. Working capital 3. Initial investment 4. Salvage value A. Current assets minus current liabilities B. Funds gained from the sale of a capital asset C. Funds needed to purchase a capital asset or begin a capital investment project D. Average rate of return that must be paid to long-term creditors and shareholders for use of their funds

1. D 2. A 3. C 4. B

Match each capital investment term with its meaning. 1. Cost of capital 2. Working capital 3. Initial investment 4. Salvage value A. Funds needed to purchase a capital asset or begin a capital investment project B. Current assets minus current liabilities C. Funds gained from the sale of a capital asset D. Average rate of return that must be paid to long-term creditors and shareholders for use of their funds

1. D 2. B 3. A 4. C

Building Blocks Co. is considering the purchase of a new specialty saw. The saw has a useful life of 10 years, but the salvage value is unknown. The net present value excluding the salvage value of the saw is negative $13,950. If the present value factor is 0.558, then the salvage value must be $____________________ in order to make this investment acceptable.

25,000 (13950/0.5580

Tilly's Travels purchased a new tour bus at a cost of $320,000. The bus is expected to increase cash inflows over the next 5 years as follows: $98,000 in year 1; $87,500 in year 2; $74,500 in year 3; $60,000 in year 4; and $59,000 in year 5. The payback period for the new bus is ________________ years.

4 (98,000+87,500+74,500+60,000=320,000)

Which of the following are synonyms for avoidable cost? Choose all that apply. A. Differential cost B. Sunk cost C. Irrelevant cost D. Incremental cost

A. Differential cost D. Incremental cost

Which of the following should be included in the analysis when making a decision? Choose all that apply. A. Differential costs B. Opportunity costs C. Relevant costs D. Sunk costs E. Avoidable costs F. Future costs that do not differ between alternatives

A. Differential costs B. Opportunity costs C. Relevant costs E. Avoidable costs

Typical capital budgeting decisions include: Choose all that apply. A. Equipment selection decisions B. Product and service pricing decisions C. Lease of buy decisions D. Cost reduction E. Employee hiring and firing decisions

A. Equipment selection decisions C. Lease of buy decisions D. Cost reduction

Which of the following techniques describe how a bottleneck should be managed? Choose all that apply. A. Find ways to increase the capacity of the bottleneck. B. Focus business process improvement efforts on the bottleneck. C. Ensure there is minimal lost time at the bottleneck due to breakdowns and set-ups. D. Reduce the costs of the least profitable products.

A. Find ways to increase the capacity of the bottleneck. B. Focus business process improvement efforts on the bottleneck. C. Ensure there is minimal lost time at the bottleneck due to breakdowns and set-ups.

The factor of the internal rate of return for a capital investment project is 4.329. If the equal annual cash flows for the project are expected to last 5 years, which of the following tables can be used to find the internal rate of return? A. Present value of an annuity B. Present value of $1 C. Future value of an annuity D. Future value of $1

A. Present value of an annuity

When should a special order by accepted? A. When the incremental revenue from the special order exceeds the incremental costs of the order B. When the incremental costs from the special order exceeds the incremental revenue of the order C. Almost always, because it means more business and income, and will keep the employees productive

A. When the incremental revenue from the special order exceeds the incremental costs of the order

Which of the following statements are true? Choose all that apply. A. When using the internal rate of return method, the cost of capital is used as the hurdle rate. B. When the net present value method is used, the discount rate equals the hurdle rate. C. In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return. D. The cost of capital may be used to screen out undesirable projects.

A. When using the internal rate of return method, the cost of capital is used as the hurdle rate. B. When the net present value method is used, the discount rate equals the hurdle rate. D. The cost of capital may be used to screen out undesirable projects.

When making a capital budgeting decision, it is most useful to calculate the payback period: Choose all that apply. A. as part of the screening process B. when the company is concerned with the time value of money C. if a company is "cash poor" D. as part of the preference decision process

A. as part of the screening process C. if a company is "cash poor"

Managers may choose to retain an unprofitable product line because it: Choose all that apply. A. attracts customers B. is an alternative to a profitable one C. helps sell other products

A. attracts customers C. helps sell other products

Joint costs: Choose all that apply. A. cannot be avoided once a process is started. B. are economically attributable to all end products. C. are irrelevant in decisions regarding what to do with a product after split-off. D. are common costs that must be allocated to make decisions about the individual products.

A. cannot be avoided once a process is started. C. are irrelevant in decisions regarding what to do with a product after split-off.

The basic premise of the payback method is the _________________, the more desirable the investment. A. faster the cost of the investment is recovered B. lower the internal rate of return C. higher the net present value D. slower the cost of the investment is recovered

A. faster the cost of the investment is recovered

The capacity of a bottleneck can be effectively increased by: Choose all that apply. A. focusing business process improvements efforts on the bottleneck B. increasing defective units that are processed through the bottleneck C. subcontracting some of the processing that would be done in that area

A. focusing business process improvement efforts on the bottleneck C. subcontracting some of the processing that would be done in that area

Bad decisions can easily result from erroneously including ______________ costs and benefits when analyzing alternatives. A. irrelevant B. avoidable C. differential D. relevant

A. irrelevant

The payback method: Choose all that apply. A. is not a true measure of investment profitability B. ignores all cash flows that occur after the payback period. C. cannot evaluate projects with uneven cash flows D. does not consider the time value of money E. does not consider how quickly an investment is recovered.

A. is not a true measure of investment profitability B. ignores all cash flows that occur after the payback period. D. does not consider the time value of money

The costs incurred up to the split-off point in a process in which two or more products are produced from a common input are known as _________________ costs. A. joint B. intermediate C. opportunity D. relevant

A. joint

Costs that are relevant in one decision situation: A. may not be relevant in another. B. will be relevant in all decision situations. C. will never be relevant in another decision situation.

A. may not be relevant in another.

Water World is planning to build a new attraction at its water park. A new wave pool has a project profitability index of 0.09, and a new water slide has a profitability index of 0.14. The best choice for Water World is the: A. water slide B. wave pool

A. water slide

One of the benefits of dropping a product line is that a company can eliminate the product line's ______________________ fixed costs.

Avoidable

When identifying costs that are differential, a manager would eliminate costs and benefits that do not differ between alternatives and use the remaining costs and benefits that do differ between alternatives in making the decision. The costs that remain are the differential or ___________________ costs.

Avoidable

Which of the following are true regarding the time value of money? Choose all that apply. A. Given the same overall dollar return, a project that lasts 20 years is preferable to a project that lasts 5 years. B. By collecting a project's return quickly, the investor has the opportunity to re-invest that money to earn even more. C. Projects that provide earlier returns are preferable to those that promise later returns. D. One dollar today is worth less than one dollar a year from now.

B. By collecting a project's return quickly, the investor has the opportunity to re-invest that money to earn even more. C. Projects that provide earlier returns are preferable to those that promise later returns.

Which of the following statements are true? Choose all that apply. A. Allocation of joint product costs is needed for decision making. B. Improper allocation of joint costs can lead to incorrect decisions. C. Allocation of joint costs is needed for inventory valuation. D. Joint costs are common costs that are incurred to produce two ore more products.

B. Improper allocation of joint costs can lead to incorrect decisions. C. Allocation of joint costs is needed for inventory valuation. D. Joint costs are common costs that are incurred to produce two ore more products.

Which of the following are ways to increase the capacity of a bottleneck? Choose all that apply. A. Selling some of the machines at the bottleneck B. Shifting workers from processes that are not bottlenecks to the process that is the bottleneck C. Investing in additional machines at the bottleneck D. Not spending any overtime hours on the bottleneck

B. Shifting workers from processes that are not bottlenecks to the process that is the bottleneck C. Investing in additional machines at the bottleneck

A manager with a current ROI of 22% has been offered a project with a positive net present value and a simple rate of return of 18%. Which of the following statements are true? Choose all that apply. A. The company will want the manager to reject the project. B. The company will want the manager to accept the project. C. If the manager is evaluated based on ROI he will probably reject the project. D. If the manager is evaluated based on ROI he will probably accept the project.

B. The company will want the manager to accept the project. C. If the manager is evaluated based on ROI he will probably reject the project.

Which of the following statements are true? Choose all that apply. A. The net present value method does not provide for return of the original investment. B. The net present value method automatically provides for return of the original investment. C. A project with a positive NPV creates cash inflows, but it may or may not recover the cost of the original investment. D. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.

B. The net present value method automatically provides for return of the original investment. D. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.

Advantages of dropping a product line or other segment include: Choose all that apply. A. increasing relevant costs that the company occurs B. an overall increase in net operating income C. avoiding more fixed costs than the company loses in contribution margin D. an overall decrease in other product line sales

B. an overall increase in net operating income C. avoiding more fixed costs than the company loses in contribution margin

To maximize total contribution margin when a constrained resource exists, produce the products with the: A. highest unit contribution margin B. highest contribution margin per unit of the constrained resource C. lowest unit contribution margin D. lowest contribution margin per unit of the constrained resource

B. highest contribution margin per unit of the constrained resource

When the outcomes of the net present value method and the internal rate of return method do not agree,: A. a decision can not be made about the capital investment project. B. it is best to rely on the net present value method. C. it is best to rely on the internal rate of return method. D. it is always best not to make the capital investment.

B. it is best to rely on the net present value method.

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are _______________ costs. A. avoidable B. sunk C. irrelevant D. relevant

B. sunk

The net present value of a project is: Choose all that apply. A. the present value of the project's projected annual tax savings. B. the difference between the present value of cash inflows and present value of cash outflows for a project. C. used in determining whether or not a project is an acceptable capital investment. D. the present value of the project's salvage value.

B. the difference between the present value of cash inflows and present value of cash outflows for a project. C. used in determining whether or not a project is an acceptable capital investment.

The machine or process that is limiting overall output is called a(n) __________________.

Bottleneck

Which of the following should not be included in the analysis when making a decision? Choose all that apply. A. Avoidable costs B. Opportunity costs C. Non-differential future costs D. Sunk costs

C. Non-differential costs D. Sunk costs

Which of the following are ways to increase the capacity of a bottleneck? Choose all that apply. A. Selling some of the machines at the bottleneck B. Not spending any overtime hours on the bottleneck C. Shifting workers from processes that are not bottlenecks to the process that is the bottleneck D. Investing in additional machines at the bottleneck

C. Shifting workers from processes that are not bottlenecks to the process that is the bottleneck D. Investing in additional machines at the bottleneck

When a project with a negative NPV has significant intangible benefits, the: A. intangible benefits should not be considered since the NPV is negative B. total present value of the project's cash outflows should be compared to the estimated intangible benefits C. annual intangible benefit necessary to make the investment worthwhile should be calculated

C. annual intangible benefit necessary to make the investment worthwhile should be calculated

The internal rate of return: A. is the rate of return required for all investments made by a company B. is also known as the simple rate of return method C. is the discount rate that makes NPV equal for a project D. does not consider the time value of money

C. is the discount rate that makes NPV equal for a project

In order to prevent confusion and keep attention focused on critical information, it is desirable to: A. combine relevant and irrelevant costs to obtain a total cost B. ignore relevant costs and focus on irrelevant one C. isolate relevant costs from irrelevant costs

C. isolate relevant costs from irrelevant costs

Two or more products produced from a common input are: A. intermediate products B. opportunity costs C. joint products D. joint costs

C. joint products

The simple rate of return method focuses on ______________, rather than _____________. A. salvage value, the initial investment B. cash flows, net operating income C. net operating income, cash flows D. the initial investment, salvage value

C. net operating income, cash flows

The net present value of a project is: Choose all that apply. A. the present value of the project's projected annual tax savings. B. the present value of the project's salvage value. C. used in determining whether or not a project is an acceptable capital investment. D. the difference between the present value of cash inflows and present value of cash outflows for a project.

C. used in determining whether or not a project is an acceptable capital investment. D. the difference between the present value of cash inflows and present value of cash outflows for a project.

Which is the point in the manufacturing process at which joint products can be recognized as separate products? A. Opportunity point B. Intermediate point C. Make or buy point D. Split-off point

D. Split-off point

The cost of capital is the: A. initial cash required for a capital investment net of the salvage value realized from the sale of the investment B. cost of state and local permits that are required to undertake a project C. sum of all cash outflows required for a capital investment D. average rate of return a company must pay its long-term creditors and shareholders for the use of their funds

D. average rate of return a company must pay its long-term creditors and shareholders for the use of their funds

How managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called: A. directing funds B. investment initiative C. controlling costs D. capital budgeting

D. capital budgeting

When using the internal rate of return method to rank competing investment projects: A. the higher the internal rate of return, the less desirable the project B. any internal rate of return greater than zero is preferable C. any internal rate of return greater than the required rate is preferable D. the higher the internal rate of return, the more desirable the project

D. the higher the internal rate of return, the more desirable the project

Calculating the present value of money is referred to as __________________ cash flows.

Discounting

If dropping a product line enables a company to avoid more in ___________________ costs than it loses in contribution margin, then its overall net operating income would improve by eliminating the product line.

Fixed

The concept of the time value of money is based on the notion that a dollar today is worth (more/less) __________________ than a dollar a year from now.

More

Two capital budgeting approaches that use discounted cash flows are the __________________ __________________ value method and the _________________ _________________ of return method.

Net Present; Internal Rate

Any final decision to drop or add a business segment is going to hinge primarily on the impact the decision will have on net _________________ ________________.

Operating; Income

Space being used that would otherwise be idle has a(n) ___________________ cost of zero.

Opportunity

The discount rate can also be referred to as the minimum required ___________________ of ________________.

Rate; Return

It is profitable to continue processing a joint product after the split-off point, so long as the incremental _________________ from such processing exceeds the incremental processing cost incurred after the split-off point.

Revenue

Joint costs are traditionally allocated among the different products at the split-off point. A typical approach is to allocate the joint costs according to the relative ________________ value of the end products.

Sales

One of the two broad categories of capital budgeting decisions, a __________________ decision, relates to whether a proposed project is acceptable based on a preset criterion.

Screening

The two broad categories into which capital budgeting decisions fall are ________________ decisions and ________________ decisions.

Screening; Preference

Deciding what to do with a joint product at the split-off point is a(n) _________________ or _________________ __________________ decision.

Sell; Process; Further

A one-time order that is not considered part of the company's normal ongoing business is referred to as a(n) _________________ ________________ decision.

Special; Order

When choosing between two alternatives, such as replacing or not replacing the machine, do not include ______________________ costs in the analysis because these costs will be the same under each alternative.

Unavoidable

Being less dependent on suppliers and making profits on both parts and the final product are advantages of ___________________ ___________________.

Vertical; Integration

State Bank is implementing a new marketing campaign that requires an initial investment of $35,000. If the project profitability index is 0.2, the net present value of the campaign's future cash flows is $____________________.

7,000

View Perfect is considering an investment is a new line of windows. The project is expected to last 10 years. If the factor of the internal rate of return is 5.889, the internal rate of return is: A. 11% B. 5% C. 14% D. 10%

A. 11%

Which of the following are ways in which to calculate the benefit of selecting one alternative over another? Choose all that apply? A. An analysis that just looks at the relevant costs and benefits. B. An analysis that looks at just the sunk costs of each of the two alternatives. C. An analysis that looks at all the costs and benefits and identifies those that are differential. D. The difference between the net operating income for the two alternatives.

A. An analysis that just looks at the relevant costs and benefits. C. An analysis that looks at all the costs and benefits and identifies those that are differential. D. The difference between the net operating income for the two alternatives.

Typical capital budgeting cash outflows include: Choose all that apply. A. Installation costs B. Cost reductions C. Initial equipment investments D. Salvage value of old equipment E. Working capital invested

A. Installation costs C. Initial equipment investments E. Working capital invested

The required rate of return is the ____________ rate of return must yield to be acceptable. A. minimum B. exact C. maximum

A. minimum

Which of the following can make a product line look less profitable than it really is? A. Common variable costs B. Allocated common fixed costs

B. Allocated common fixed costs

Select the capital budgeting approaches the use discounted cash flow. Choose all that apply. A. Simple rate of return method B. Net present value method C. Cost-volume-profit method D. Internal rate of return method E. Payback method

B. Net present value method D. Internal rate of return method

When making a decision to drive or take the train on a trip, the cost of the train ticket is a: A. unavoidable cost B. relevant cost C. irrelevant cost D. sunk cost

B. relevant

When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n) ______________________.

Constraint

When making a preference decision, the net present value of one project cannot be directly compared to the net present value of another project unless the initial investments are ____________________.

Equal

A business segment should only be dropped if a company can save more in _________________ costs than it loses in contribution margin. A. mixed B. product C. fixed D. variable

Fixed

When a product is past the split-off point, but is not yet a finished product, it is called a(n) _________________ product.

Intermediate

When the project creates a net cash inflow that is the same every year, the equation to determine the factor used to find the internal rate of return can be calculated by dividing the initial ___________________ in the project by the expected annual net cash inflow.

Investment

When considering a purchase of equipment, discounting is necessary because future cost savings are worth _______________ today than when they actually occur in the future.

Less

A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier, is called a(n) ___________________ or ________________ decision.

Make; Buy

The length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates is the ____________________ ___________________.

Payback Period

One advantage of using external suppliers instead of ______________________ integration is that suppliers can pool demand from a number of companies and enjoy economies of scale, which can result in higher quality and lower costs than a company could obtain if it made the parts on its own.

Vertical

The best way to handle a constrained resource is to _________________ the capacity of the bottleneck.

Relax

Match the following net present value ranges with the acceptability of the proposed project. 1. Positive of zero 2. Negative A. Acceptable B. Unacceptable

1. A 2. B

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n): A. avoidable cost B. irrelevant cost C. sunk cost D. variable cost

A. avoidable cost

Comparing a project's rate of return to its cost of capital is a _______________ decision. A. preference B. screening

B. screening

Assume you are considering visiting your grandmother for a month this summer. In deciding whether to drive or fly, the _________________ is a sunk cost and should be ignored. A. cost of car repairs and maintenance B. monthly parking fee that must be paid at your apartment while you are gone C. original cost of the car D. cost of gasoline for the trip

C. original cost of the car

Effective managing an organization's constraints is a key to increased: A. products B. employees C. profits D. costs

C. profits

A set of activities ranging from development to production to after-sales service is called: A. vertical integration. B. a marketing strategy. C. the value chain.

C. the value chain.