A306 Healy Exam 2

When making a decision whether to keep an existing piece of equipment or replace it, which of the following is (are) considered a sunk cost?

Both the original purchase price and annual depreciation expense

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: Variable manufacturing cost cost per unit: $12 cost total: $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should ______.

Buy: $18 x 20,000= $360,000 Make: Relevant costs = Variable Manufacturing and supervisor salary $15 x 20,000= $300,000 $360,000-$300,000= $60,000 advantage to make

How managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called ______.

Capital Budgeting

Which term refers to a company that is involved in more than one activity in the value chain?

Vertical Integration

A postaudit is a valuable process because ______.

actual values can be used to determine if the project is performing as expected.

The simple rate of return equals the

annual incremental net operating income ÷ initial investment

When a project with a negative NPV has significant intangible benefits, the ______.

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

The net present value method assumes that all cash flow other than the initial investment occur ______ the period

at the end of

The cost of capital is the ______.

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

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost.

avoidable

When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) ______ cost.

avoidable and/or incremental

When computing the simple rate of return, the annual incremental net operating income in the numerator should ______ the investment's depreciation charges.

be reduced by

To screen out undesirable investments, _____ use(s) the cost of capital

both the net present value and internal rate of return methods

Another term for the minimum required rate of return is the cost of

capital

A postaudit involves

checking whether expected results are actually realized

Anything that prevents you from getting more of what you want is a(n) _______

constraint

When a capital investment decision is being made between two or more alternatives, the project with the shortest payback period is always the most desirable investment.

false

The basic premise of the payback method is the ______, the more desirable the investment.

faster the cost of the investment is recovered

A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin.

fixed

When making a volume-trade off decision, managers should ignore ______.

fixed costs

The rule used when comparing competing investments is the ______ the project profitability index, the more desirable the project.

higher

To maximize total contribution margin when a constrained resource exists, produce the products with the ______.

highest contribution margin per unit of the constrained resource

To determine if a project is acceptable compare the internal rate of return to the company's

hurdle rate

The payback method ______.

ignores all cash flows that occur after the payback period, does not consider the time value of money, and is not a true measure of investment profitability

Stephens, Inc. is considering dropping a product line. During the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $110,000. Of the fixed expenses, $95,000 are avoidable. If Stephens drops the product line, net operating income will ______.

increase by 11,000 - relevant costs : VC and avoidable FC 170,000-86,000 = contribution margin of $84,000 $95,000-$84,000= $11,000

Synonyms for differential costs include ______ cost.

incremental and avoidable

Investment required ÷ Annual net cash inflow is the formula to find the factor that needed to calculate the ______.

internal rate of return

In an equipment capital budgeting decision, recovering the original investment means that the ______

investment has generated enough cash inflows to completely cover the cost of the equipment

When net cash inflow is the same every year, the equation used to calculate the factor of the internal rate of return is _________

investment required / annual net cash inflow

When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are ______ costs.

irrelevant

When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a(n) ______ cost.

irrelevant

The internal rate of return

is the discount rate that makes NPV equal to zero for a project

In order to prevent confusion and keep attention focused on critical information, it is desirable to ________.

isolate relevant costs from irrelevant costs.

Typical capital budgeting decisions include _____ decisions.

lease or buy, cost reduction, and equipment selection

A capital investment project's payback period is the ______.

length of time it takes for the project to recover its initial cost from the net cash inflows generated

The Eye Clinic of Dr. Christensen is investing in some equipment to perform corrective eye surgery. It is expected that the equipment purchase will generate an internal rate of return of 24%. This equipment was chosen over equipment to perform cataract eye surgery. Thus, the internal rate of return of the cataract eye surgery equipment must have been ______.

less than the internal rate of return of the corrective eye surgery equipment

The term capital budgeting is used to describe how managers plan significant investments in projects that have ______ implications.

long-term

Differential costs and benefits that should be considered in a decision ______.

may be qualitative or quantitative

One dollar today is worth ______ a dollar a year from now

more than

Working capital ________

often increases when a company takes on a new project

When making a preference decision, comparing the net present value of one project to the net present value of another project can _____

only be done if the initial investments are equal

The potential benefit given up when selecting one alternative over another is a(n) ______ cost.

opportunity

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

The term discounting cash flows refers to the process of calculating the ______ value of those cash flows.

present

Differential revenue is an example of a(n) ______ benefit. Multiple choice question.

relevant

When planning a trip and deciding to drive your car or take the train, gasoline is a(n) ______ cost.

relevant

When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n) ______ cost.

relevant

Capital budgeting decisions ______.

require a great deal of analysis prior to acceptance and involve an immediate cash outlay in order to obtain a future return

When computing the simple rate of return, the initial investment should be reduced by any ______ value realized from the sale of the old equipment.

salvage

The cost of capital serves as a _____ tool

screening

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

screening, preference

Little Tots Gym has a required rate of return of 13%. The gym is considering the purchase of $12,500 of new equipment. The internal rate of return on the project has been calculated to be 11%. This project ______.

should be rejected

When making a decision, qualitative differences between alternatives ______ be ignored.

should not

Determining whether to carry out an activity in the value chain internally or use a supplier is a ______ decision.

sourcing

A one-time order that is not considered part of the company's normal ongoing business is called a ______ order.

special

The internal rate of return is ______

the rate of return of an investment project over its useful life

A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include ______.

the salvage value and alternative uses for the equipment

When making a decision, irrelevant items are included in the analysis of both alternatives when using ______.

the total cost approach ONLY.

A set of activities ranging from development to production to after-sales service is called ______.

the value chain

When a constraint exists, companies need to focus on maximizing _____

total contribution margin

When using the simple rate of return method, a project that does not have constant incremental revenues and expenses may look desirable in some years and undesirable in others.

true

Every decision has at least ______ alternative(s)

two (every decision has at least 2 alternatives, even if the choices are yes and no)

The net present value of a project is ______.

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

When demand for products exceeds the production capacity, a ______ decision must be made.

volume trade-off

A special order should be accepted ______.

when the incremental revenue from the order exceeds the incremental costs of the order.

Current Assets less current liabilities

working capital

Typical capital budgeting cash outflows include ______.

working capital invested, initial equipment investments, and installation costs

When a resource, such as space in the factory, has no alternative use, its opportunity cost is ______.

zero

A project has an acceptable rate of return, if the net present value is ______.

zero or above

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

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

Conducting a postaudit

- flags any manager's attempts to inflate benefits or downplay costs in a project proposal - provides an opportunity to cut losses on floundering projects - provides an opportunity to reinforce and possibly expand successful projects

The factor of the internal rate of return is 5.033 for a project lasting 7 years. The internal rate of return is ______ %

9% (annuity table)

Synonyms for the simple rate of return are the ______ rate of return and the ______ rate of return.

Accounting, unadjusted

What assumption underlies net present value analysis?

All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate

The first step in decision making is to ______

Define the alternatives (2: identify relevant costs and benefits, 3: perform a differential analysis)

The key to effective decision making is ______.

Differential analysis

Opportunity costs are not found in accounting records because they are not relevant to decisions.

False

Select the capital budgeting approaches that use discounted cash flows.

Internal rate of return and NPV

Which of the following should not be included in the analysis when making a decision?

Non-differential future costs and sunk costs

Costs and benefits that always differ between alternatives are ______ costs and benefits

Relevant

The capital budgeting methods that focus on incremental operating income rather than cash flows is ______.

Simple rate of return (accounting rate of return)

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is ______

The profit from the best alternative use of the resource

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in ______.

contribution margin

Isolating relevant costs is desirable because ______.

critical information may be overlooked with the total cost approach, all information needed for the total cost approach is rarely available, and irrelevant costs may be used incorrectly in the analysis

Capital budgeting decisions include ______.

determining which equipment to purchase among available alternatives, purchasing new equipment to reduce cost, acquiring a new facility to increase capacity, choosing to lease or buy new equipment, and deciding to replace old equipment

NPV is the _______

difference between the present value of a project's cash inflows and the present value of the project's cash outflows

When considering decision alternatives, only relevant costs are included when using the _______ cost approach

differential

Focusing on future costs and benefits that are not the same between the choices is ______

differential analysis

Suppose a project with a negative net present value would provide intangible benefits. To estimate the annual value of intangible benefits needed to accept the project, ______ the negative net present value excluding intangible benefits by the ______.

divide, present value factor for an annuity