54. Marsden manufactures a cat food product called Special Export. Marsden currently has
10,000 bags of Special Export on hand. The variable production costs per bag are $1.80 and total
fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further
into Prime Cat Food and Feline Surprise at an additional $2,000 cost. The additional processing
will yield 10,000 bags of Prime Cat Food and 3,000 bags of Feline Surprise, which can be sold
for $8 and $6 per bag, respectively. If Special Export is processed further into Prime Cat Food
and Feline Surprise, the total gross profit would be:
A. $ 68,000.
B. $ 78,000.
C. $ 96,000.
D. $ 98,000.
E. $100,000.
55. Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per
unit. Parker currently produces and sells 7,500 units at $6.00 each. This level represents 75% of
its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable
cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at
a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a
result of the additional production. Should the company accept the special order?
A. No, because additional production would exceed capacity.
B. No, because incremental costs exceed incremental revenue.
C. Yes, because incremental revenue exceeds incremental costs.
D. Yes, because incremental costs exceed incremental revenues.
E. No, because the incremental revenue is too low.
56. Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per
unit. Parker currently produces and sells 7,500 units at $6.00 each. This level represents 75% of
its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable
cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at
a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a
result of the additional production. If Parker wishes to earn $1,250 on the special order, the size
of the order would need to be:
A. 4,500 units.
B. 2,250 units.
C. 1,125 units.
D. 625 units.
E. 300 units.
57. Textel is thinking about having one of its products manufactured by a subcontractor.
Currently, the cost of manufacturing 1,000 units follows:
Direct material $45,000
Direct labor 30,000
Factory overhead (30% is variable) 98,000
If Textel can buy 1,000 units from a subcontractor for $100,000, it should:
A. Make the product because current factory overhead is less than $100,000.
B. Make the product because the cost of direct material plus direct labor of manufacturing is less
than $100,000.
C. Buy the product because the total incremental costs of manufacturing are greater than
$100,000.
D. Buy the product because total fixed and variable manufacturing costs are greater than
$100,000.
E. Make the product because factory overhead is a sunk cost.
58. A company has the choice of either selling 1,000 defective units as scrap or rebuilding them.
The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could
rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and
$1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. What should the
company do?
A. Sell the units as scrap.
B. Rebuild the units.
C. It does not matter because both alternatives have the same result.
D. Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should
store the units permanently.
E. Throw the units away.
59. Thompson Company had the following results of operations for the past year:
Sales (16,000 units at $10) $160,000
Direct materials and direct labor $96,000
Overhead (20% variable) 16,000
Selling and administrative expenses (all fixed) 32,000 (144,000)
Operating income $ 16,000
A foreign company (whose sales will not affect Thompson’s market) offers to buy 4,000 units at
$7.50 per unit. In addition to variable manufacturing costs, selling these units would increase
fixed overhead by $600 and selling and administrative costs by $300. If Thompson accepts the
offer, its profits will:
A. Increase by $30,000.
B. Increase by $ 6,000.
C. Decrease by $ 6,000.
D. Increase by $ 5,200.
E. Increase by $ 4,300.
25–26
60. The break-even time (BET) method is a variation of the:
A. Payback method.
B. Internal rate of return method.
C. Accounting rate of return method.
D. Net present value method.
E. Present value method.
61. The calculation of the payback period for an investment when net cash flow is even (equal)
is:
A. Cost of investment/Annual net cash flow
B. Cost of investment/Total net cash flow
C. Annual net cash flow/Cost of investment
D. Total net cash flow/Cost of investment
E. Total net cash flow/Annual net cash flow
62. Coffer Co. is analyzing two projects for the future. Assume that only one project can be
selected.
Project X Project Y
Cost of machine $68,000 $60,000
Net cash flow:
Year 1 24,000 4,000
Year 2 24,000 26,000
Year 3 24,000 26,000
Year 4 0 20,000
If the company is using the payback period method and it requires a payback of three years or
less, which project should be selected?
A. Project Y.
B. Project X.
C. Both X and Y are acceptable projects.
D. Neither X nor Y is an acceptable project.
E. Project Y because it has a lower initial investment.
63. The time expected to pass before the net cash flows from an investment would return its
initial cost is called the:
A. Amortization period.
B. Payback period.
C. Interest period.
D. Budgeting period.
E. Discounted cash flow period.
64. A company is considering purchasing a machine for $21,000. The machine will generate an
after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. What is
the payback period for the new machine?
A. 4 years.
B. 6 years.
C. 10.5 years.
D. 14 years.
E. 42 years.
65. A company is considering the purchase of a new piece of equipment for $90,000. Predicted
annual cash inflows from this investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year
3), $12,000 (year 4) and $6,000 (year 5). The payback period is:
A. 4.50 years.
B. 4.25 years.
C. 3.50 years.
D. 3.00 years.
E. 2.50 years.
66. A disadvantage of using the payback period to compare investment alternatives is that:
A. It ignores cash flows beyond the payback period.
B. It includes the time value of money.
C. It cannot be used when cash flows are not uniform.
D. It cannot be used if a company records depreciation.
E. It cannot be used to compare investments with different initial investments.
67. A company is considering the purchase of a new machine for $48,000. Management predicts
that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are
expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year
plus depreciation of $4,000 per year. The company’s tax rate is 40%. What is the payback period
for the new machine?
A. 3.0 years.
B. 6.0 years.
C. 7.5 years.
D. 12.0 years.
E. 20.0 years.
68. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and
be depreciated over a three-year period with no salvage value. The company expects to sell the
machine’s output of 3,000 units evenly throughout each year. A projected income statement for
each year of the asset’s life appears below. What is the payback period for this machine?
Sales………………………………………… $90,000
Costs:
Manufacturing……………………………… $52,000
Depreciation on machine…………………… 4,000
Selling and administrative expenses……….. 30,000 (86,000)
Income before taxes………………………… $ 4,000
Income tax (50%)…………………………… ( 2,000 )
Net income…………………………………. $ 2,000
A. 24 years.
B. 12 years.
C. 6 years.
D. 4 years.
E. 1 year.
69. A company is planning to purchase a machine that will cost $24,000, have a six-year life,
and be depreciated over a three-year period with no salvage value. The company expects to sell
the machine’s output of 3,000 units evenly throughout each year. A projected income statement
for each year of the asset’s life appears below. What is the accounting rate of return for this
machine?
Sales………………………………………… $90,000
Costs:
Manufacturing……………………………… $52,000
Depreciation on machine…………………… 4,000
Selling and administrative expenses……….. 30,000 (86,000)
Income before taxes………………………… $ 4,000
Income tax (50%)…………………………… (2,000)
Net income…………………………………. $ 2,000
A. 33.3%.
B. 16.7%.
C. 50.0%.
D. 8.3%.
E. 4%.
70. After-tax net income divided by the annual average investment in an investment, is the:
A. Net present value rate.
B. Payback rate.
C. Accounting rate of return.
D. Earnings from investment.
E. Profit rate.
71. A company buys a machine for $60,000 that has an expected life of 9 years and no salvage
value. The company anticipates a yearly net income of $2,850 after taxes of 30%, with the cash
flows to be received evenly throughout each year. What is the accounting rate of return?
A. 2.85%.
B. 4.75%.
C. 6.65%.
D. 9.50%.
E. 42.75%.
72. Monterey Corporation is considering the purchase of a machine costing $36,000 with a 6–
year useful life and no salvage value. Monterey uses straight-line depreciation and assumes that
the annual cash inflow from the machine will be received uniformly throughout each year. In
calculating the accounting rate of return, what is Monterey’s average investment?
A. $ 6,000.
B. $ 7,000.
C. $18,000.
D. $21,000.
E. $36,000.
25–33
73. Beyer Corporation is considering buying a machine for $25,000. Its estimated useful life is 5
years, with no salvage value. Beyer anticipates annual net income after taxes of $1,500 from the
new machine. What is the accounting rate of return assuming that Beyer uses straight-line
depreciation and that income is earned uniformly throughout each year?
A. 6.0%.
B. 8.0%.
C. 8.5%.
D. 10.0%.
E. 12.0%.
74. The accounting rate of return is calculated as:
A. The after-tax income divided by the total investment.
B. The after-tax income divided by the annual average investment.
C. The cash flows divided by the annual average investment.
D. The cash flows divided by the total investment.
E. The annual average investment divided by the after-tax income.
75. The following data concerns a proposed equipment purchase:
Cost ……………………………………………………….………………….. $144,000
Salvage value ……………………………………………………………… $ 4,000
Estimated useful life …………………………………………………… 4 years
Annual net cash flows …………………………………………………. $ 46,100
Depreciation method ……………………………………………………… Straight-line
Assuming that net cash flows are received evenly throughout the year, the accounting rate of
return is:
A. 62.3%.
B. 32.0%.
C. 15.0%.
D. 7.7%.
E. 5.0%.
76. An estimate of an asset’s value to the company, calculated by discounting the future cash
flows from the investment at an appropriate rate and then subtracting the initial cost of the
investment, is known as:
A. Annual net cash flows.
B. Rate of return on investment.
C. Net present value.
D. Payback period.
E. Unamortized carrying value.
77. Which of the following cash flows is not considered when using the net present value
method?
A. Future cash inflows.
B. Future cash outflows.
C. Past cash outflows.
D. Non-uniform cash inflows.
E. Future cash flows.
78. Which one of the following methods considers the time value of money in evaluating
alternative capital expenditures?
A. Accounting rate of return.
B. Net present value.
C. Payback period.
D. Cash flow method.
E. Return on average investment.
79. The hurdle rate is often set at:
A. The rate the company could earn if the investment were placed in the bank.
B. The company’s cost of capital.
C. 10% above the IRR of current projects.
D. 10% above the ARR of current projects.
E. The rate at which the company is taxed on income.
80. Daniels Corporation is considering the purchase of new equipment costing $30,000. The
projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for
depreciation. The revenue is to be received at the end of each year. The machine has a useful life
of 3 years and no salvage value. Daniels requires a 12% return on its investments. The present
value of an annuity of 1 for different periods follows:
Periods 12 Percent
1 0.8929
2 1.6901
3 2.4018
4 3.0373
What is the net present value of the machine?
A. $24,018.
B. $(3,100).
C. $30,000.
D. $26,900.
E. $(29,520).
25–37
81. The following present value factors are provided for use in this problem.
Periods Present Value Present Value of an
of 1 at 8% Annuity of 1 at 8%
1 0.9259 0.9259
2 0.8573 1.7833
3 0.7938 2.5771
4 0.7350 3.3121
Norman Co. wants to purchase a machine for $40,000, but needs to earn an 8% return. The
expected year-end net cash flows are $12,000 in each of the first three years, and $16,000 in the
fourth year. What is the machine’s net present value (round to the nearest whole dollar)?
A. $(9,075).
B. $2,685.
C. $42,685.
D. $(28,240).
E. $52,000.
82. Saxon Manufacturing is considering purchasing two machines. Each machine costs $9,000
and will produce cash flows as follows:
End of Machine
Year A B
1 $5,000 $1,000
2 4,000 2,000
3 2,000 11,000
Saxon Manufacturing uses the net present value method to make the decision, and it requires a
15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696;
2 years, 0.7561; 3 years, 0.6575. Which machine should Saxon purchase?
A. Only Machine A is acceptable.
B. Only Machine B is acceptable.
C. Both machines are acceptable, but A should be selected because it has the greater net present
value.
D. Both machines are acceptable, but B should be selected because it has the greater net present
value.
E. Neither machine is acceptable.
83. A company is considering the purchase of new equipment for $45,000. The projected after-
tax net income is $3,000 after deducting $15,000 of depreciation. The machine has a useful life
of 3 years and no salvage value. Management of the company requires a 12% return on
investment. The present value of an annuity of 1 for various periods follows:
Period Present value of an annuity of 1 at 12%
1……. 0.8929
2……. 1.6901
3……. 2.4018
What is the net present value of this machine assuming all cash flows occur at year-end?
A. $(1,768)
B. $3,000
C. $15,000
D. $18,000
E. $43,232
84. A company can buy a machine that is expected to have a three-year life and a $30,000
salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax
net income to be received at the end of each year. If a table of present values of 1 at 12% shows
values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net
present value of the cash flows from the investment, discounted at 12%?
A. $ 118,855
B. $ 583,676
C. $ 629,788
D. $ 705,391
E. $1,918,855
85. The rate that yields a net present value of zero for an investment is the:
A. Internal rate of return.
B. Accounting rate of return.
C. Net present value rate of return.
D. Zero rate of return.
E. Payback rate of return.