42. The accounting rate of return method for evaluating proposed investments:
43. The capital budgeting analytical technique that calculates the rate of return on the
investment based on the impact of the investment on the financial statements is known as the:
44. An advantage of the net present value method for evaluating investment proposals over
the internal rate of return method is that:
45. If an asset costs $16,000, has an expected useful life of 8 years, is expected to have a
$2,000 salvage value and generates net annual cash inflows of $2,000 a year, the cash payback
period is
46. Which of the following statements are true regarding the payback period?
47. Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000.
The equipment has an estimated useful life of eight years. Estimated annual sales and operating
expenses related to the pasta equipment follow:
The estimated payback of the investment in the pasta equipment is:
48. Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000.
The equipment has an estimated useful life of eight years. Estimated annual sales and operating
expenses related to the pasta equipment follow:
The estimated accounting rate of return is:
49. In a capital budgeting decision, if a firm uses the net present value method and a 12%
discount rate, what does a negative net present value indicate?
50. A capital budgeting decision method that considers the time value of money is the
51. Which of the following is a true statement regarding the internal rate of return in capital
budgeting?
52. Which of the following is a true statement regarding the net present value method in
capital budgeting?
53. Sometimes when management decisions are reached, the investment project with the
highest NPV or IRR is not selected. This occurs because:
54. The following production costs are provided for Glenislay Co., a manufacturer of high
quality headphones.
Manufacturing Costs:
It has been determined that the headphones could be purchased from Integrated Labs at a cost
of $90 plus $5 shipping costs. Considering the offer from Integrated Labs, show whether
Glenislay should make or buy the product.
(a.) Assume 40% of fixed overhead allocated to making headphones relates to a production
manager who would not be retained if the headphones were not produced by Glenislay.
(b.) How would your analysis change if Glenislay could use capacity resources for alternative
activities that would produce a contribution of $27 per unit?
(c.) What is your understanding of the term outsourcing. Briefly explain.
55. Digger Company realizes three products from a single mining process: Products J1, A2,
and V3. Each product may be sold as is in its raw form or processed further into a more refined
state. The additional processing requires no expanded capacity and production costs are entirely
variable. Sales values and cost information are presented below:
(a.) Determine whether Digger Company should sell each product as is or after further
processing.
56. The market price for low-end laser printers is well established at $400 per unit. ABC
Technologies is considering entering this market and has enough available space in its plant to
accommodate a new production line. However, several pieces of new manufacturing equipment
would be required which are estimated to cost $28,000,000. ABC Technologies requires a
minimum ROI of 15% on any product line investment and estimate that it can capture 100,000
units of the low-end laser printer market at the prevailing market price.
(a.) Calculate the target cost per unit for ABC Technologies if it is to enter the low-end laser
printer market while earning the minimum 15% ROI.
57. The following product line information is for the Swiss Watch Company. The company is
considering dropping its Children’s product line due to poor operating income performance. Fixed
expenses are allocated to each product line based on sales revenue.
(a.) Calculate the effect on the Swiss Company’s operating income if the Children’s watch
product line is discontinued. Comment on your analysis.
(b.) Assume the Swiss Company’s discontinues its Children’s product line. Calculate the total
operating income for the Swiss Company.
58. Marshall, Inc., produces three products but weekly demand for the three products exceed
the available amount of machine time. Following is information about each product:
(a.) Determine how many units each of Product A, Product B, and Product C that Marshall, Inc.,
should produce each week assuming 1,000 hours of available machine time.
59. Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following
questions.
(a.) What is the present value of $100,000 in ten years using a discount rate of 8%?
(b.) How much should be invested today at a return on investment of 16% compounded annually
to have $60,000 in ten years?