Title: Question 1
QA_Ori:
Capital budgeting decisions require careful analysis because they are generally the
Title: Question 2
QA_Ori:
Title: Question 3
QA_Ori:
QA_Ori:
Title: Question 5
QA_Ori:
A shorter payback period is desirable because management prefers to reduce the risk
Title: Question 6
QA_Ori:
If net income is earned evenly throughout each year and straight-line depreciation is
Title: Question 7
QA_Ori:
When the present value of expected net cash flows, discounted at 10%, exceeds the
Title: Question 8
QA_Ori:
Receiving $100 one year from today is worth less than $100 today because a return can
Title: Question 9
QA_Ori:
The return on an investment must cover the interest and provide an additional profit to
Title: Question 10
QA_Ori:
Accelerated depreciation produces larger tax deductions and lower tax payments in the
early years of an asset’s life compared with straight-line depreciation. This is because
Title: Question 11
QA_Ori:
An out-of-pocket cost requires a current outlay of cash. An opportunity cost is the
Title: Question 12
QA_Ori:
Title: Question 13
QA_Ori:
There are virtually no incremental costs associated with shipping the additional iPod.
Title: Question 14
QA_Ori:
Title: Question 15
QA_Ori:
Title: Quick Study 25-1
QA_Ori:
Title: Quick Study 25-2
QA_Ori:
If all else is equal, Investment A would be preferred over Investment B because of A’s
shorter payback period.
2. However, if the investments are different, then there are at least four
reasons why Investment B might be preferred over Investment A:
i. The present value of cash flows from Investment B might greatly exceed the
present value of cash flows from Investment A.
Investment A.
Title: Quick Study 25-3
QA_Ori:
Title: Quick Study 25-4
QA_Ori:
Net present value of investment*
Present value of seven $10,000 cash inflows (10,000 x 4.8684)
………………………………………………………………………………………
…………………………………………
$48,684
*Present value factors from tables at the end of Appendix B:
Title: Quick Study 25-5
QA_Ori:
Higher values of the profitability index indicate a better project, so on the basis of this
measure the company should select Project A.
Title: Quick Study 25-6
QA_Ori:
Title: Quick Study 25-7
QA_Ori:
Title: Quick Study 25-8
QA_Ori:
Incremental cost analysis
Costs of purchasing
Cost to purchase Product B $5.00
Analysis: Kando Co. should continue to manufacture and sell Product A.
Title: Quick Study 25-9
QA_Ori:
X Y
Contribution margin per unit $ 5.00 $ 4.00
Sales Mix Analysis: Since Excel Memory can sell all it can
produce of both products, it should allocate all of its production
capacity to Product Y. This is because Y yields a $12
contribution margin per production hour (versus $10 for X).
Title: Quick Study 25-10
QA_Ori:
INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING
Revenue if processed further (1,250 @ $375) $468,750
The company should process further as this increases income by $88,750.
Title: Quick Study 25-11
QA_Ori:
INCREMENTAL REVENUE AND COST OF REWORK
Revenue if processed further (10,000 @ $110) $1,100,000
The company should not rework the product as there is no increase in income by doing
so.
Title: Quick Study 25-12
QA_Ori:
INCREMENTAL INCOME FROM NEW BUSINESS
Sales (750 units @ $250) $ 187,500
$ 25,000
The company should accept the offer for new business as it increases income by
Title: Quick Study 25-13
QA_Ori:
Avoidable Unavoidable
Expenses Expenses
Cost of goods sold $56,000 —-
The division should not be eliminated because its sales of $72,000 are greater than its
avoidable expenses of $71,720.
Title: Quick Study 25-14
QA_Ori:
INCREMENTAL INCOME FROM REPLACING MACHINE
Cost to buy new machine $(112,500)
The company should replace the machine as this increases income by $7,500.
Title: Quick Study 25-15
QA_Ori:
Year Cash flows
Present value of
1 at 10%
Present value of
cash flows
Cumulative
present value of
cash flows
0 $(90,000) 1.0000 $(90,000) $(90,000)
1 35,000 0.9091 31,819 (58,181)
The break-even time point occurs in the 2nd month of the 4th year [computed as
Title: Quick Study 25-16
QA_Ori:
2.
Present value of cash inflows (€16,000,000 x 5.7466) €91,945,600
Title: Exercise 25-1
QA_Ori:
Annual Net Cumulative
Cash Flows Cash Flows
Year 1 $ 60,000 $ 60,000
Cost of investment $180,000
Part of year =
= 0.08
month)
Title: Exercise 25-2
QA_Ori:
COMPUTATION OF ANNUAL DEPRECIATION EXPENSE
Double-declining balance rate = (100% / 5) x 2 = 40%
Annual Depr.
Beginning (40% of Accum. Depr. Ending
Year Book Value Book Value) at Year-End Book Value
1 $150,000 $60,000 $ 60,000 $90,000
ANNUAL CASH FLOWS
Net
Income Depreciation
Net Cash
Flow
Cumulative
Cash Flow
Year 1 $ 10,000 $60,000 $ 70,000 $ 70,000
Cost of machine $150,000
Title: Exercise 25-3
QA_Ori:
a.
b.
where
Title: Exercise 25-4
QA_Ori:
*Average investment
Cost $360,000
Salvage 0
Sum $360,000
Average (Sum/2) $180,000
Title: Exercise 25-6
QA_Ori:
Annual
Net Cash
Flows
Present
Value of
Annuity
at 8%
Present
Value of
Net Cash
Flows
Based on this net present value analysis, the investment is not acceptable.