Accounting exam 4

A new investment project currently under consideration has a negative net present value of $85,000. The project has a life of 10 years, and the minimum required rate of return is 8%. The present value factor for an annuity at 8% for 10 periods is 6.71. What is the amount of annual additional cash flow required from the project for it to be acceptable?

$12,668

Axis Corporation's Division A has average operating assets of $500,000 and the division earned $100,000 as net operating income during a period. The company expects a minimum required rate of return of 15% on its investments. What is the residual income for Division A?

$25,000

Identify the simplifying assumptions usually made in net present value analysis: -All cash flows generated by the investment project are immediately reinvested at a rate of return greater than the discount rate. -All cash flows other than the initial investment occur at the end of periods. -All cash flows occur at the beginning of the periods. -All cash flows generated by the investment project are immediately reinvested at a rate of return equal to the discount rate. -The time value of money is ignored when evaluating investment proposals under the net present value analysis.

-All cash flows other than the initial investment occur at the end of periods. -All cash flows generated by the investment project are immediately reinvested at a rate of return equal to the discount rate.

For the year 2015, Systems Corporation earned a net operating income of $2 million on sales of $6 million. Assume that the company's average operating assets were $20 million. What is the company's ROI?

10%

An investment proposal with an initial investment of $100,000 generates annual net cash inflow of $20,000 for a period of 10 years. The project has a net present value of $10,000. What is this investment proposal's payback period?

5 years

A business segment whose manager has control over cost but has no control over revenue or investments in operating assets.

Cost center

relevant costs

Costs that differ between alternatives and impact the decisions that are made.

sunk costs

Costs that have already been incurred and cannot be eliminated regardless of the alternative chosen.

The elapsed time from receipt of a customer order to when the completed goods are shipped to the customer.

Delivery cycle time

(T/F) Joint costs already incurred up to the split-off point are relevant in decisions concerning what to do from the split-off point onward.

False

(T/F) When the cash flows associated with an investment project change from year to year, the payback period is determined by dividing the total investment required by the annual net cash inflow.

False

unavoidable costs

Future costs that do not vary based on the alternative chosen.

________ are made by selecting the cheapest alternative and do not involve any revenues.

Least-cost decisions

Process time as a percentage of throughput time.

Manufacturing cycle efficiency

Net operating income divided by sales.

Margin

Income before interest and income taxes have been deducted.

Net operating income

The amount of time work is actually done on the product.

Process time

A business segment whose manager has control over cost and revenue but has no control over investments in operating assets.

Profit center

The amount of time required to turn raw materials into completed products.

Throughput time

(T/F) If incremental revenue from further processing exceeds incremental costs from such processing incurred after the split-off point, it is profitable to continue processing such joint products after the split-off point.

True

Superware, Inc. produces multiple products out of a common input. Geratin is one such product, which has a sales value of $15,000 at the split-off point. Joint costs allocated to Geratin are $12,000. Sales value of Geratin increases to $25,000 after further processing, and this processing will cost $7,000. Should Geratin be processed further?

Yes, process further

The simple rate of return is obtained by dividing the ________ by the initial investment in the project. -annual incremental net cash flow -present value of net incremental cash flow -annual incremental cash inflow -annual incremental net operating income

annual incremental net operating income

A machine or a process that is a constraint is working _____.

at full capacity

Rent paid for the division's regional office

avoidable

Wages paid to the division's employees who will be downsized if the division is dropped

avoidable

The ________ of a service department should be charged to operating departments.

budgeted costs

The phenomenon of earning interest on both the interest and the amount invested is known as ________.

compound interest

If some products must be cut back because of a constraint, the key to maximizing profits is to favor the products that provide the highest.....

contribution margin per unit of the constrained resource

(T/F) Depreciation charges that result from making an investment should be ignored when determining the annual incremental net operating income for the simple rate of return calculation.

false

(T/F) If residual income is adopted as the performance measure to replace ROI, performance evaluation should be based on the absolute amount of the residual income.

false

(T/F) Managers who are evaluated using return on investment will pursue any project whose rate of return is above the minimum required rate of return.

false

The _______ of service departments should be charged in lump-sums to each operating department in proportion to their peak-period needs or long-run average needs.

fixed costs

An investment of $10,000 today is estimated to return $11,500 a year from now. The $11,500 is called the ________ of the investment.

future value

When using the total cost approach to decide whether to renovate or purchase a replacement for a machine, select the alternative with the _____________ net present value.

higher

Project C is a ten-year project. The project has a total cash inflow of $300,000. The present value of such inflows is $275,000. The project requires an initial investment of $250,000 and additional working capital of $30,000. (NPV)

negative

The project profitability index is calculated by dividing the ______ of the project by the investment required.

net present value

Project B is a five-year project. The project has a total cash inflow of $350,000. The present value of such inflows is $275,000. The project requires an initial investment of $200,000 and additional working capital of $25,000. (NPV)

positive

When ranking competing projects with different initial investments, the investment with a higher ________ is always more desirable.

project profitability index

Variable and fixed service department costs should be charged _______ to operating departments.

separately

The _______ allows for the comparison of an unlimited number of alternatives side by side to determine the best alternative.

total-cost approach

(T/F) A major disadvantage of the residual income approach is that it cannot be used to compare the performances of divisions of different sizes.

true

(T/F) A postaudit can help reduce the tendency to inflate the benefits or downplay the costs in a proposal because it involves checking whether or not expected results are actually realized.

true

(T/F) When the project does not have constant net incremental income over its useful life, the simple rate of return computed will fluctuate from year to year.

true

Cost of machinery purchased for the Orange County division

unavoidable

Cost of the private jet purchased for the company management's use

unavoidable

General management expenses allocated to the Orange County division

unavoidable

Project A is a six-year project. The project has a total cash inflow of $200,000. The present value of such inflows is $150,000. The project requires an initial investment of $150,000. (net present value)

zero