acct 311 CHAPTER 12 & 13

Suppose that a project's net present value is negative, but the project would provide intangible benefits that have not yet been estimated. To estimate the annual value of intangible benefits needed to accept the project, ___________ the negative net present value excluding intangible benefits by the _________.

divid, present value factor for an annuity

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

higher

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

If a cost is traced to a segment using activity-based costing, it:

may or may not be an avoidable cost of the segment

The simple rate of return method focuses on ___________, rather than ___________.

net operating income cash flows

When a conflict between capital budgeting methods exists, the most reliable method to use for making preference decisions is:

net present value

When planning a trip and deciding whether to drive or fly, the _______ is a sunk cost and should be ignored.

original cost of the car

If the orignal investment in a capital project has been recovered, the net present value will be

positive or zero

The costs provided by a well-designed activity-based costing system are _________ relevant to a decision.

potentially

All cash flows are included, and a net present value is computed for each alternative when using the ____________-_____ approach.

total-cost

Which of the following statements are true?

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

Isolalting relevant costs is desirable because:

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

The payback method:

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

Select the capital budgeting approaches that use discounted cash flows

-net present value method -internal rate of return method

Choose whether each of the following would be acceptable or unacceptable: A project with a positive net present value would be __________ and a project with a negative net present value would be ________.

acceptable unacceptable

Which of the following are TRUE reguarding the time value of money?

-projects that provide earlier returns are preferable to those that promise later returns -by collecting a project's return quickly, the investor has the opportunity to err-invest that money to earn even more.

When discussing capital investments, the term out-of-pocket costs refers to:

cash outlays for salaries, advertising, and other operating expenses

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

constraint

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

highest contribution margin per unit of the constrained resource

one of the two broad categories of capital budgeting decisions, a _____________ decision relates to selecting from among several acceptable alternatives.

preference

cash outflows

working capital is tied up for project needs

cost of capital

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

To effectively deal with a constraint:

-improvements should focus on the constraint -effort should be focused on the weakest link

salvage value

the estimated value of a fixed asset at the end of its useful life

Managers may choose to retain an unprofitable product line because it:

-helps sell other products (if the product line helps sell other products) -attracts customers (acts as a "magnet" to attract)

Sander Technologies is considering a research project. If successful, the project is expected to lead sales totaling $60,000 annually. The initial cost of the research is expected to be $331,500. The factor of the internal rate of return is:

5.525 331,500/60,000 = 5.525

Spicer Dentistry is considering the purchase of a new x-ray machine. The machine costs $2,400 and has a useful life of 10 years. The new machine is expected to reduce operating costs by $400 per year. The payback period for the x-ray machine is ________________ years

6 2,400/400 = 6

Packaging Place is considering a new investment, but is unsure of the intangible benefits it will provide. The net present value excluding the intangible benefit is negative $380,990. If the present value factor is 6.145, then the minimum intangible benefit per year needed to make the investment acceptable is:

62,000 380,990/6.145 = 62,000

If the internal rate of return is:

-less than the hurdle rate the project should be rejected -greater than the hurdle rate the project is acceptable

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

9 using the Present Value of an Annuity of $1 in Arrears tablet, 5.033 for 7 periods = 9%

Which of the following statements are true?

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

Capital budgeting decisions include:

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

Conducting a postaudit:

-fllags any manager's attemps to inflate benefits or downplaycosts in a project proposal -provides an opportunity to reinforce and possibly expand successful projects -provides an opportunity to cut losses on floundering projects

A manager with a current ROI of 22% has been offered a project with a positive net present value and simple rate of return of 18%. Which of the following statements are true?

-the company will want the manager to accept the project do to the positive net present value -ifthe manager is evaluated based on ROI he will reject the project because the ROI will go down 4%

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 35,000 X 0.2 = 7,000

A new machine requires an investment of $630,000 and will generate $100,000 in cash inflows for 7 years, at which time the salvage value of the machine will be $130,000. using a discount rate of 10%, the net present value of the machine is $__________.

76,510 cash inflows of $486,800(100,000 X 4.868(PV of annuiity for 7 periods @10%) plus 66,690(release of working capital of 130,000 X .513(PV of $1 in 7 periods @ 10%) - cash outflows of 630,000 (cost plus working capital) = 76,510 NPV

CHAPTER

13

Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time. If the company's constraint is machine hours, to maximize profit, they should first fill the demand for:

Product ABC they should fill the demand for the product with the highest CM per unit of the constrained resource. ABC is $2 per minute of machine time (CM of $10/5) while XYZ's is only $1.50 per minute of machine time (CM of $15/10)

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 is NOT considered part of the company's normal ongoing business is a _________ order.

special

When using the internal rate of return method to rank competing investment projects:

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

The required rate of return is:

the minimum rate of return a project must yield to be acceptable

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

the total cost approach only

future cash flows expected from investment projects:

uncertain for difficult to estimate

Preference decisions are also called __________ or ___________decision

rationing ranking

A screening decision:

relate to whether a proposed project is acceptable - whether it passes a preset hurdle

When using the simple rate of return, the initial investment should be reduced by the _________ value of old equipment.

salvage

When a company is involved in more than one activity inthe entire value chain, it is ___________ ____________.

vertically integrated

When demand for products exceeds the production capacity, a __________ _________-________ decision must be made.

volume trade-off

Current assets minus current liabilities is called _________ _________.

working capital

cash inflow

Working capital is released for use elsewhere within the company

the net present value of a project is:

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

Product DGH has a monthly demand of 5,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 4,000 units. It's contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 1,500 direct labor hours available, the company should produce _________ units of Product DGH and ______ units of Product RBG.

1,000 The remaining 500 hours can be used to make 1,000 units of DGH (36/18 = 2 units per hour X 500 hours left of the 1,500 4,000 RBG has the highest CM per hour and requires 1,000 hours to meet demand. (60/15 = 4) 4,000/4 = 1,000 1,500-1,000 = 500

True or False: Walmart makes an Investment when it opens a new store

True

Joint costs incurred prior to the split-off point _______ relevant in desions reguarding what to do from the split-off point forward.

are not Joint costs are sunk costs and always irrelevant from the split-off period forward

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

discounting

Typical capital budgeting decisions include:

equipment selection, lease or buy, equipment replacement, plant expansion, cost reduction decisions

One of the great dangers in allocating common __________ costs is that such allocations can make a product line look less profitable than it really is.

fixed

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

fixed costs

A joint product should be processed after split-off if the:

incremental value after the split-off exceeds the incremental processing cost after split-off

Committing funds today with the expectation of earning a return on those funds in the future in the form of additional cash flows is required when a company makes a(n) ________________.

investment

When the annual net cash inflow is the same each year, the payback period equals the __________ required divided by the annual net cash __________.

investment inflow

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

The internal rate of return:

is the discount rate that makes NPV (new present value) equal 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

Whenthe outcomes of the net present value method and the internal rate of return method do NOT agree:

it is best to rely on the net present value method

The split-off point is the point in the manufacturing process at which the ______ products can be recognized as separate products

joint

Two or more products produced from a common input are called

joint products

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

long-term

A dollar today is worth _______ than a dollar earned a year from now.

more

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 simple rate of return:

- flucuates from year to year along with flucuations in revenue and expense -ignores the time value of money

The capacity of a bottleneck can be effectively increased by:

- subcontracting some of the processing that would be done in that area -focusing business process improvementefforts on the bottleneck

WHich of the following are ways in which to calculate the benefit of selecting one alternative over another?

-an analysis that just looks at the relevant costs and benefits -the difference between the net operating income for the two alternatives -an analysis that looks at all costs and benefits and identifies those that are differential

Potentional advantages of dropping a product line or other segment include:

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

When making a capital budgeting decision, it is most useful to calculate the payback period:

-if a company is "cash poor" -as part of the screening process

synomymsfor differential cost include _____costs.

-avoidable -incremental

The first step to decision making is to:

define the alternatives

Studio Films is considering the purchase of some new film equipment that costs $150,000. It has a 5 year useful life with no salvage value. The new equipment is expected to increase revenues by $115,000 annually. Annual incremental cash operating expenses are expected to be $40,000. The simple rate of return of the equipment is ______________%.

30 115,000 - 40,000 - 30,000(150,000/5)depreciation = 45,000 net operating income. Simple rate of return = 45,000/150,000 initial investment = 30%

initial investment

Funds needed to purchase a capital asset or begin a capital investment project.

working capital

current assets - current liabilities

Focusing on future costs and benefits that are not the same between alternatives is:

differential analysis