Question 1

Use the following table $\text { Present Value of an Annuity of } 1$$\begin{array}{rrrr}
\text { Period } & 8 \% & 9 \% & 10 \%\
1 & .926 & .917 & .909 \
2 & 1.783 & 1.759 & 1.736 \
3 & 2.577 & 2.531 & 2.487
\end{array}$   A company has a minimum required rate of return of 9%. It is considering investing in a project that requires an investment of $210000 and is expected to generate cash inflows of $90000 at the end of each year for three years. The present value of future cash inflows for this project is

Accepted Answer

The present value of future cash inflows is calculated by multiplying the annual cash inflow by the present value factor for 3 years at 9%, which is $90,000 * 2.531 = $227,790.

Question 2

Use the following table $\text { Present Value of an Annuity of } 1$$\begin{array}{rrrr}
\text { Period } & 8 \% & 9 \% & 10 \%\
1 & .926 & .917 & .909 \
2 & 1.783 & 1.759 & 1.736 \
3 & 2.577 & 2.531 & 2.487
\end{array}$  A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $231930 and is expected to generate cash inflows of $90000 each year for three years. The approximate internal rate of return on this project is

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. To find the IRR, we look for the rate at which the present value of the annuity (the annual cash inflows) equals the initial investment. Using the given table, at 8%, the present value of an annuity of $1 for 3 periods is 2.577. Multiplying this by the annual cash inflow of $90,000 gives $231,930 (approximately), which matches the project cost. This indicates that the IRR is approximately 8%.

Question 3

It costs Galiente Company $46 per unit ($27 variable and $19 fixed) to produce its product which normally sells for $58 per unit. A Brazilian wholesaler offers to purchase 5000 units at $36 each. Galiente would incur special shipping costs of $5 per unit if the order were accepted. Galiente has sufficient unused capacity to produce the 5000 units. If the special order is accepted what will be the effect on net income?

Accepted Answer

The special order's unit price is $36, and the variable cost is $27. The special shipping cost adds $5 per unit, making the total variable cost $32 per unit. The difference between the selling price and the total variable cost ($36 - $32) is $4. For 5000 units, the increase in net income is 5000 units * $4/unit = $20,000. Fixed costs do not change with this order, as there is unused capacity.

Question 4

The cash payback formula is

Accepted Answer

The cash payback formula is the cost of capital investment divided by the annual cash inflow. This formula calculates the number of years it will take for the investment to generate enough cash to pay for itself. Option B correctly represents the cash payback formula.

Question 5

A negative net present value means that the

Accepted Answer

A negative net present value indicates that the project's cash outflows (i.e. costs) exceed its cash inflows (i.e. benefits) discounted to present value using the required rate of return. This means the project is not generating enough returns to compensate for the required rate of return, making it not viable. Therefore, the project's rate of return is less than the required rate of return.

Question 6

In using the internal rate of return method the internal rate of return factor was 5.0 and the equal annual cash inflows were $40000. The initial investment in the project must have been

Accepted Answer

The formula for calculating initial investment using the internal rate of return method is:

Initial Investment = (Equal Annual Cash Inflows) / Internal Rate of Return Factor

Plugging in the given values:

Initial Investment = $40,000 / 5.0 = $8,000

Therefore, the correct answer is B.

Question 7

The conceptually superior approach to capital budgeting is

Accepted Answer

A discounted cash flow method is considered conceptually superior because it takes into account the time value of money and provides a more accurate assessment of the profitability of a project. It also considers cash flows over the entire life of the project, rather than just in the short term, as with the payback method. The annual rate of return method is also flawed because it ignores the time value of money and can lead to incorrect investment decisions.

Question 8

Use the following table $\text { Present Value of an Annuity of } 1$$\begin{array}{rrrr}
\text { Period } & 8 \% & 9 \% & 10 \%\
1 & .926 & .917 & .909 \
2 & 1.783 & 1.759 & 1.736 \
3 & 2.577 & 2.531 & 2.487
\end{array}$  A company has a minimum required rate of return of 9%. It is considering investing in a project which costs $420000 and is expected to generate cash inflows of $168000 at the end of each year for three years. The net present value of this project is

Accepted Answer

The net present value (NPV) is calculated by subtracting the initial investment from the present value of the cash inflows. Using the 9% column for 3 periods, the present value factor is 2.531. Multiplying this by the annual cash inflow of $168,000 gives a present value of cash inflows of $425,208. Subtracting the initial investment of $420,000 gives an NPV of $5,208.

Question 9

The appropriate table to use when an investment promises to return unequal cash flows is the

Accepted Answer

The appropriate table for investments with unequal cash flows is the "present value of 1 table" because it allows for the calculation of the present value of each individual cash flow, which can vary in amount, unlike annuities which assume equal cash flows.

Question 10

Accounting's contribution to the decision-making process occurs in all of the following steps except to

Accepted Answer

The answer of Accounting's contribution to the decision-making process occurs...

Question 11

If an unprofitable segment is eliminated

Accepted Answer

Variable expenses of the eliminated segment will indeed be eliminated. This is because variable expenses are directly tied to the production or sales volume of a segment. If the segment is no longer operating, these expenses cease.

Question 12

The rate of return that management expects to pay on all borrowed and equity funds is the

Accepted Answer

The cost of capital is the rate of return that a company must earn on its investment projects to maintain its market value and to attract funds. It represents the company's cost of financing and is used as a benchmark for evaluating the profitability of investment opportunities.

Question 13

Net present value is the difference between the

Accepted Answer

Net present value (NPV) is the present value of future cash inflows minus the capital investment. Option C accurately describes this calculation. Option A is incorrect because it does not account for the time value of money. Option B is incorrect because it uses the present value of the capital investment instead of its initial value. Option D is incorrect because it does not subtract the initial investment from the present value of future income.

Question 14

To determine annual cash inflow depreciation is

Accepted Answer

Depreciation is a non-cash expense that is added back to net income because it is not an outflow of cash. Therefore, it is included in the calculation of annual cash inflow.

Question 15

Bayonette Inc. is considering Plan 1 which is estimated to have sales of $60000 and costs of $22500. The company currently has sales of $57000 and costs of $21500.
Instructions
Compare plans using incremental analysis.

Accepted Answer

The answer of Bayonette Inc. is considering Plan 1 which...

Question 16

A cost that cannot be changed by any present or future decision is a(n)

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered or changed, regardless of any future decisions made. Therefore, it is the only option that fits the description given in the question. Incremental cost, opportunity cost, and variable cost are all costs that may be affected by present or future decisions.

Question 17

In a make-or-buy decision opportunity costs are

Accepted Answer

Opportunity costs are added to the make total cost because they represent the benefits foregone by choosing to make the product instead of buying it.

Question 18

All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment's

Accepted Answer

Fixed expenses are not directly affected by the elimination of a segment, as they may not change or may be reallocated to other segments.

Question 19

Which of the following would generally not affect a make-or-buy decision?

Accepted Answer

Selling expenses are not directly related to the production process and therefore would generally not affect the decision to make or buy a product. The other options listed are all factors that would typically be considered when making a make-or-buy decision.

Question 20

Valerta Company used the net present value method and determined that project 34 had a zero net present value. What does this tell management about the project?

Accepted Answer

The answer of Valerta Company used the net present value...

Quiz 26: Incremental Analysis and Capital Budgeting