units
Less incremental fixed costs:
123) Elliot Company can sell all of its products A and Z that it can produce, but it has limited
production capacity. It can produce 8 units of A per hour or 10 units of Z per hour, and it has
20,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What
is the most profitable sales mix for Elliot Company?
A) 84,000 units of A and 60,000 units of Z.
B) 0 units of A and 200,000 units of Z.
C) 48,000 units of A and 80,000 units of Z.
D) 120,000 units of A and 0 units of Z.
E) 60,000 units of A and 100,000 units of Z.
123
124) A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000
salvage value. The machine will yield an annual incremental after-tax income of $35,000 after
deducting the straight-line depreciation. Compute the payback period for the purchase.
A) 7.3 years. B) 8.7 years. C) 4.2 years. D) 3.8 years. E) 5.4 years.
124
Year 1
$ 40,000
Year 2
$ 40,000
Year 3
$ 35,000
Year 4
$ 35,000
Year 5
$ 30,000
125) A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000
salvage value. The machine will yield an annual incremental after-tax income of $35,000 after
deducting the straight-line depreciation. Compute the accounting rate of return for the investment.
A) 22.7%. B) 24.5%. C) 12.2%. D) 46.9%. E) 23.4%.
126) Nestor Company is considering the purchase of an asset for $100,000. It is expected to produce the
following net cash flows. The cash flows occur evenly throughout each year.
Annual Net
Cash Flows
Compute the payback period for this investment.
A) 3.00 years. B) 2.50 years. C) 3.62 years. D) 2.57 years. E) 2.85 years.
127) A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and
straight-line depreciation is used. Management estimates the machine will yield an after-tax net
income of $12,500 each year. Compute the accounting rate of return for the investment.
A) 10.8%. B) 12.5%. C) 26.8%. D) 22.5%. E) 11.8%.
128) Poe Company is considering the purchase of new equipment costing $80,000. The projected annual
cash inflows are $30,200, to be received at the end of each year. The machine has a useful life of 4
years and no salvage value. Poe requires a 10% return on its investments. The present value of an
annuity of $1 and present value of an annuity for different periods is presented below. Compute the
net present value of the machine.
Period
Present Value
of $1 at 10%
Present Value of an
Annuity of $1 at 10%
1 0.9091 0.9091
2 0.8264 1.7355
3 0.7513 2.4869
4 0.6830 3.1699
A) $4,896. B) $(4,896). C) $15,731. D) $32,334. E) $(15,731).
127
129) Poe Company is considering the purchase of new equipment costing $80,000. The projected net
cash flows are $35,000 for the first two years and $30,000 for years three and four. The revenue is
to be received at the end of each year. The machine has a useful life of 4 years and no salvage
value. Poe requires a 10% return on its investments. The present value of an annuity of $1 and
present value of an annuity for different periods is presented below. Compute the net present value of
the machine.
Period
Present Value
of $1 at 10%
Present Value of an
Annuity of $1 at 10%
1 0.9091 0.9091
2 0.8264 1.7355
3 0.7513 2.4869
4 0.6830 3.1699
A) $15,731. B) $(4,896). C) $(15,731). D) $4,896. E) $23,775.
129
130
130) Nestor Company is considering the purchase of an asset for $100,000. It is expected to produce the
following net cash flows. The cash flows occur evenly throughout each year. Compute the
break-even time (BET) period for this investment.
Annual Net
Cash Flows
Present Value
of $1 at 10%
Year 0
1.0000
Year 1
$ 40,000
.9091
Year 2
$ 40,000
.8264
Year 3
$ 35,000
.7513
Year 4
$ 35,000
.6830
Year 5
$ 30,000
.6209
A) 2.98 years. B) 3.18 years. C) 3.62 years. D) 2.85 years. E) 2.57 years.
132
131) Soar Incorporated is considering eliminating its mountain bike division, which reported an
operating loss for the recent year of $3,000. The division sales for the year were $1,050,000 and
the variable costs were $860,000. The fixed costs of the division were $193,000. If the mountain
bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The
impact on operating income for eliminating this business segment would be:
A) $132,100 decrease
B) $54,900 decrease
C) $190,000 increase
D) $57,900 decrease
E) $190,000 decrease
133
132) Granfield Company is considering eliminating its backpack division, which reported an operating
loss for the recent year of $42,000. The division sales for the year were $960,000 and the variable
costs were $475,000. The fixed costs of the division were $527,000. If the backpack division is
dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on
Granfield’s operating income for eliminating this business segment would be:
A) $274,200 decrease
B) $274,200 increase
C) $485,000 increase
D) $485,000 decrease
E) $210,800 increase
135
133) Granfield Company has a piece of manufacturing equipment with a book value of $40,000 and a
remaining useful life of four years. At the end of the four years the equipment will have a zero
salvage value. The market value of the equipment is currently $22,000. Granfield can purchase a
new machine for $120,000 and receive $22,000 in return for trading in its old machine. The new
machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the
new machine. The total increase or decrease in net income by replacing the current machine with
the new machine (ignoring the time value of money) is:
A) $22,000 increase
B) $52,000 increase
C) $22,000 decrease
D) $76,000 increase
E) $18,000 decrease
136
137
SHORT ANSWER QUESTIONS
134) Presented below are terms preceded by letters a through g and followed by a list of definitions 1
through 7. Match the letter of the term with the definition. Use the space provided preceding each
definition.
(a) Internal Rate of Return
(b) Hurdle Rate
(c) Accounting Rate of Return
(d) Net Cash Flow
(e) Capital Budgeting
(f) Payback Period
(g) Net Present Value
________ (1) Equals the discount rate that results in a net present value of zero.
________ (2) Cash inflows minus cash outflows for the period.
________ (3) A minimum acceptable rate of return.
(4) The time expected to pass before the net cash flows from an investment equals its
initial cost.
________ (5) Annual after-tax net income divided by annual average investment.
________ (6) A process of analyzing alternative long-term investments and deciding which assets to
acquire or sell.
________ (7) Initial cost of an investment subtracted from discounted future cash flows from the
investment.