PRELIM-MAS 2-KEY

1.The minimum selling price that should be acceptable in a special order situation is equal to total
a. production cost.
b. variable production cost.
c. variable costs.
d. production cost plus a normal profit margin.

2. Which of the following costs is irrelevant in making a decision about a special order price if some of the
company facilities are currently idle?
a. direct labor
b. equipment depreciation
c. variable cost of utilities
d. opportunity cost of production

3. The _______________ prohibits companies from pricing products at different amounts unless these
differences reflect differences in the cost to manufacture, sell, or distribute the products.
a. Internal Revenue Service
b. Governmental Accounting Office
c. Sherman Antitrust Act
d. Robinson-Patman Act

4. An ad hoc sales discount is

a. an allowance for an inferior quality of marketed goods.
b. a discount that an ad hoc committee must decide on.
c. brought about by competitive pressures.
d. none of the above.

5. A manager is attempting to determine whether a segment of the business should be eliminated. The focus
of attention for this decision should be on
a. the net income shown on the segment's income statement.
b. sales minus total expenses of the segment.
c. sales minus total direct expenses of the segment.
d. sales minus total variable expenses and avoidable fixed expenses of the segment.

6. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of each
product. Production capacity is unlimited. The company should produce the product (or products) that has
(have) the highest
a. contribution margin per hour of machine time.
b. gross margin per unit.
c. contribution margin per unit.
d. sales price per unit.

7. For a particular product in high demand, a company decreases the sales price and increases the sales
commission. These changes will not increase
a. sales volume.
b. total selling expenses for the product.
c. the product contribution margin.
d. the total variable cost per unit.

8. An increase in direct fixed costs could reduce all of the following except
a. product line contribution margin.
b. product line segment margin.
c. product line operating income.
d. corporate net income.

9. When a company discontinues a segment, total corporate costs may decrease in all of the following
categories except
a. variable production costs.
b. allocated common costs.
c. direct fixed costs.
d. variable period costs.

10. In evaluating the profitability of a specific organizational segment, all _______________ would be
ignored.
a. segment variable costs
b. segment fixed costs
 c. costs allocated to the segment
d. period costs

11. Knox Company uses 10,000 units of a part in its production process. The costs to make a part are:
direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead, $30. Knox has
received a quote of $55 from a potential supplier for this part. If Knox buys the part, 70 percent of the
applied fixed overhead would continue. Knox Company would be better off by
a. $50,000 to manufacture the part.
b. $150,000 to buy the part.
c. $40,000 to buy the part.
d. $160,000 to manufacture the part.

12. Paulson Company has only 25,000 hours of machine time each month to manufacture its two products.
Product X has a contribution margin of $50, and Product Y has a contribution margin of $64. Product X
requires 5 hours of machine time, and Product Y requires 8 hours of machine time. If Paulson Company
wants to dedicate 80 percent of its machine time to the product that will provide the most income, the
company will have a total contribution margin of
a. $250,000.
b. $240,000.
c. $210,000.
d. $200,000.

13. Doyle Company has 3 divisions: R, S, and T. Division R's income statement shows the following
for the year ended December 31:

Sales $1,000,000
Cost of goods sold (800,000)
Gross profit $ 200,000
Selling expenses $100,000
Administrative expenses 250,000 (350,000)
Net loss $ (150,000)

Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from
corporate costs. If Division R were eliminated, Doyle’s income would
a. increase by $150,000.
b. decrease by $ 75,000.
c. decrease by $155,000.
d. decrease by $215,000.

14. Thomas Company is currently operating at a loss of $15,000. The sales manager has received a
special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated with the
product are: direct material, $6; direct labor, $10; variable overhead, $3; applied fixed overhead, $4; and
variable selling expenses, $2. The special order would allow the use of a slightly lower grade
of direct material, thereby lowering the price per unit by $1.50 and selling expenses would be decreased
by $1. If Thomas wants this special order to increase the total net income for the firm to $10,000, what
sales price must be quoted for each of the 5,000 units?
a. $23.50
b. $24.50
c. $27.50
d. $34.00

15. Quest Company produces a part that has the following costs per unit:

Direct material $ 8
Direct labor 3
Variable overhead 1
Fixed overhead 5
Total $17

Zest Corporation can provide the part to Quest for $19 per unit. Quest Company has determined that 60
percent of its fixed overhead would continue if it purchased the part. However, if Quest no longer
produces the part, it can rent that portion of the plant facilities for $60,000 per year. Quest Company
currently produces 10,000 parts per year. Which alternative is preferable and by what margin?
a. Make-$20,000
b. Make-$50,000
 c. Buy-$10,000
d. Buy-$40,000

16. Browning Company has 15,000 units in inventory that had a production cost of $3 per unit. These units
cannot be sold through normal channels due to a significant technology change. These units could be
reworked at a total cost of $23,000 and sold for $28,000. Another alternative is to sell the units to a junk
dealer for $8,500. The relevant cost for Browning to consider in making its decision is
a. $45,000 of original product costs.
b. $23,000 for reworking the units.
c. $68,000 for reworking the units.
d. $28,000 for selling the units to the junk dealer.

Robertson Corporation

Robertson Corporation sells a product for $18 per unit, and the standard cost card for the product shows
the following costs:

Direct material $ 1
Direct labor 2
Overhead (80% fixed) 7
Total $10

17. Refer to Robertson Corporation. Robertson received a special order for 1,000 units of the product. The
only additional cost to Robertson would be foreign import taxes of $1 per unit. If Robertson is able to sell
all of the current production domestically, what would be the minimum sales price that Robertson would
consider for this special order?
a. $18.00
b. $11.00
c. $5.40
d. $19.00

18. Refer to Robertson Corporation. Assume that Robertson has sufficient idle capacity to produce the 1,000
units. If Robertson wants to increase its operating profit by $5,600, what would it charge as a per-unit
selling price?
a. $18.00
b. $10.00
c. $11.00
d. $16.60

19. Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either product it
can make. The following data are pertinent to each respective product:

Brushes Combs
Units of output per machine hour 8 20
Selling price per unit $12.00 $4.00
Product cost per unit
Direct material $1.00 $1.20
Direct labor 2.00 0.10
Variable overhead 0.50 0.05

Total fixed overhead is $380,000.

The company has 40,000 machine hours available for production. What sales mix will maximize profits?
a. 320,000 brushes and 0 combs
b. 0 brushes and 800,000 combs
c. 160,000 brushes and 600,000 combs
d. 252,630 brushes and 252,630 combs

20. Houston Footwear Corporation has been asked to submit a bid on supplying 1,000 pairs of military
combat boots to the Armed Forces. The company's costs per pair of boots are as follows:

Direct material $8
Direct labor 6
Variable overhead 3
Variable selling cost (commission) 3
Fixed overhead (allocated) 2
Fixed selling and administrative cost 1
 Assuming that there would be no commission on this potential sale, the lowest price the firm can bid is
some price greater than
a. $23.
b. $20.
c. $17.
d. $14.

21. Holt Industries has two sales territories-East and West. Financial information for the two territories is
presented below:

East West
Sales $980,000 $750,000
Direct costs:
Variable (343,000) (225,000)
Fixed (450,000) (325,000)
Allocated common costs (275,000) (175,000)
Net income (loss) $(88,000) $ 25,000

Because the company is in a start-up stage, corporate management feels that the East sales territory is
creating too much of a cash drain on the company and it should be eliminated. If the East territory is
discontinued, one sales manager (whose salary is $40,000 per year) will be relocated to the West territory.
By how much would Holt's income change if the East territory is eliminated?
a. increase by $88,000
b. increase by $48,000
c. decrease by $267,000
d. decrease by $227,000

Woodville Motors

Woodville Motors is trying to decide whether it should keep its existing car washing machine or purchase
a new one that has technological advantages (which translate into cost savings) over the existing machine.
Information on each machine follows:

Old machine New machine

Original cost $9,000 $20,000
Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 4,000
Current salvage value of old machine 2,000
Salvage value in 10 years 500 1,000
Remaining life 10 yrs. 10 yrs.

22. Refer to Woodville Motors. The $4,000 of annual operating costs that are common to both the old and the
new machine are an example of a(n)
a. sunk cost.
b. irrelevant cost.
c. future avoidable cost.
d. opportunity cost.

23. Refer to Woodville Motors. The $9,000 cost of the original machine represents a(n)
a. sunk cost.
b. future relevant cost.
c. historical relevant cost.
d. opportunity cost.

24. Refer to Woodville Motors. The $20,000 cost of the new machine represents a(n)
a. sunk cost.
b. future relevant cost.
c. future irrelevant cost.
d. opportunity cost.

25. Refer to Woodville Motors. The estimated $500 salvage value of the existing machine in 10 years
represents a(n)
a. sunk cost.
b. opportunity cost of selling the existing machine now.
c. opportunity cost of keeping the existing machine for 10 years.
d. opportunity cost of keeping the existing machine and buying the new machine.
 26. Refer to Woodville Motors. The incremental cost to purchase the new machine is
a. $11,000.
b. $20,000.
c. $13,000.
d. $18,000.

Entertainment Solutions Corporation

Entertainment Solutions Corporation manufactures and sells FM radios. Information on the prior year's
operations (sales and production Model A1) is presented below:

Sales price per unit $30

Costs per unit:
Direct material 7
Direct labor 4
Overhead (50% variable) 6
Selling costs (40% variable) 10
Production in units 10,000
Sales in units 9,500

27. Refer to Entertainment Solutions Corporation. The Model B2 radio is currently in production and it
renders the Model A1 radio obsolete. If the remaining 500 units of the Model A1 radio are to be sold
through regular channels, what is the minimum price the company would accept for the radios?
a. $30
b. $27
c. $18
d. $4

28. Refer to Entertainment Solutions Corporation. Assume that the remaining Model A1 radios can be sold
through normal channels or to a foreign buyer for $6 per unit. If sold through regular channels, the
minimum acceptable price will be
a. $30.
b. $33.
c. $10.
d. $4.

Chip Division of Computer Solutions, Inc.

The Chip Division of Computer Solutions, Inc. produces a high-quality computer chip. Unit production
costs (based on capacity production of 100,000 units per year) follow:

Direct material $50

Direct labor 20
Overhead (20% variable) 10
Other information:
Sales price 100
SG&A costs (40% variable) 15

29. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip
Division is producing and selling at capacity. What is the minimum selling price that the division would
consider on a "special order" of 1,000 chips on which no variable period costs would be incurred?
a. $100
b. $72
c. $81
d. $94

30. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip Division
is operating at a level of 70,000 chips per year. What is the minimum price that the division would
consider on a "special order" of 1,000 chips to be distributed through normal channels?
a. $78
b. $95
c. $100
d. $81

31.The weighted average cost of capital approach to decision making is not directly affected by the
a. value of the common stock.
 b. current budget for capital expansion.
c. cost of debt outstanding.
d. proposed mix of debt, equity, and existing funds used to implement the project.

32. The ___________________ is the highest rate of return that can be earned from the most attractive,
alternative capital project available to the firm.
a. accounting rate of return
b. internal rate of return
c. hurdle rate
d. opportunity cost of capital

33. If an analyst desires a conservative net present value estimate, he/she will assume that all cash inflows
occur at
a. mid year.
b. the beginning of the year.
c. year end.
d. irregular intervals.

34. The salvage value of an old lathe is zero. If instead, the salvage value of the old lathe was $20,000, what
would be the impact on the net present value of the proposal to purchase a new lathe?
a. It would increase the net present value of the proposal.
b. It would decrease the net present value of the proposal.
c. It would not affect the net present value of the proposal.
d. Potentially it could increase or decrease the net present value of the new lathe.

35.The net present value method of evaluating proposed investments

a. measures a project's internal rate of return.
b. ignores cash flows beyond the payback period.
c. applies only to mutually exclusive investment proposals.
d. discounts cash flows at a minimum desired rate of return.

36. Which of the following statements is true regarding capital budgeting methods?
a. The Fisher rate can never exceed a company's cost of capital.
b. The internal rate of return measure used for capital project evaluation has more
conservative assumptions than the net present value method, especially for projects that
generate a positive net present value.
c. The net present value method of project evaluation will always provide the same ranking
of projects as the profitability index method.
d. The net present value method assumes that all cash inflows can be reinvested at the
project's cost of capital.

37. If a project generates a net present value of zero, the profitability index for the project will
a. equal zero.
b. equal 1.
c. equal -1.
d. be undefined.

38. If the profitability index for a project exceeds 1, then the project's
a. net present value is positive.
b. internal rate of return is less than the project's discount rate.
c. payback period is less than 5 years.
d. accounting rate of return is greater than the project's internal rate of return.

39. If a project's profitability index is less than 1, the project's

a. discount rate is above its cost of capital.
b. internal rate of return is less than zero.
c. payback period is infinite.
d. net present value is negative.

40. The profitability index is

a. the ratio of net cash flows to the original investment.
b. the ratio of the present value of cash flows to the original investment.
c. a capital budgeting evaluation technique that doesn't use discounted values.
d. a mandatory technique when capital rationing is used.
 41. Which method of evaluating capital projects assumes that cash inflows can be reinvested at the
discount rate?
a. internal rate of return
b. payback period
c. profitability index
d. accounting rate of return

42. If the total cash inflows associated with a project exceed the total cash outflows associated with the
project, the project's
a. net present value is greater than zero.
b. internal rate of return is greater than zero.
c. profitability index is greater than 1.
d. payback period is acceptable.

43. The net present value and internal rate of return methods of decision making in capital budgeting are
superior to the payback method in that they
a. are easier to implement.
b. consider the time value of money.
c. require less input.
d. reflect the effects of sensitivity analysis.

44. If an investment has a positive net present value, the

a. internal rate of return is higher than the discount rate.
b. discount rate is higher than the hurdle rate of return.
c. internal rate of return is lower than the discount rate of return.
d. hurdle rate of return is higher than the discount rate.

45. The rate of interest that produces a zero net present value when a project's discounted cash operating
advantage is netted against its discounted net investment is the
a. cost of capital.
b. discount rate.
c. cutoff rate.
d. internal rate of return.

46. For a profitable company, an increase in the rate of depreciation on a specific project could
a. increase the project's profitability index.
b. increase the project's payback period.
c. decrease the project's net present value.
d. increase the project's internal rate of return.

47. Which of the following capital expenditure planning and control techniques has been criticized
because it might mistakenly imply that earnings are reinvested at the rate of return earned by the
investment?
a. payback method
b. accounting rate of return
c. net present value method
d. internal rate of return

48. If the discount rate that is used to evaluate a project is equal to the project's internal rate of return, the
project's _____________ is zero.
a. profitability index
b. internal rate of return
c. present value of the investment
d. net present value

49. As the marginal tax rate goes up, the benefit from the depreciation tax shield
a. decreases.
b. increases.
c. stays the same.
d. can move up or down depending on whether the firm's cost of capital is high or low.

50. When a profitable corporation sells an asset at a loss, the after-tax cash flow on the sale will
a. exceed the pre-tax cash flow on the sale.
b. be less than the pre-tax cash flow on the sale.
c. be the same as the pre-tax cash flow on the sale.
d. increase the corporation's overall tax liability.
51. In a typical (conservative assumptions) after-tax discounted cash flow analysis, depreciation expense is
assumed to accrue at
a. the beginning of the period.
b. the middle of the period.
c. the end of the period.
d. irregular intervals over the life of the investment.

52. The pre-tax and after-tax cash flows would be the same for all of the following items except
a. the liquidation of working capital at the end of a project's life.
b. the initial (outlay) cost of an investment.
c. the sale of an asset at its book value.
d. a cash payment for salaries and wages.

53. The after-tax net present value of a project is affected by

a. tax-deductible cash flows.
b. non-tax-deductible cash flows.
c. accounting accruals.
d. all of the above.

54. A project's after-tax net present value is increased by all of the following except
a. revenue accruals.
b. cash inflows.
c. depreciation deductions.
d. expense accruals.

55. Multiplying the depreciation deduction by the tax rate yields a measure of the depreciation tax
a. shield.
b. benefit.
c. payable.
d. loss.

56. Annual after-tax corporate net income can be converted to annual after-tax cash flow by
a. adding back the depreciation amount.
b. deducting the depreciation amount.
c. adding back the quantity (t ´ depreciation deduction), where t is the corporate tax rate.
d. deducting the quantity [(1- t) ´ depreciation deduction], where t is the corporate tax rate.

57. Income taxes are levied on

a. net cash flow.
b. income as measured by accounting rules.
c. net cash flow plus depreciation.
d. income as measured by tax rules.

58. Which of the following best represents a screening decision?

a. determining which project has the highest net present value
b. determining if a project's internal rate of return exceeds the firm's cost of capital
c. determining which projects are mutually exclusive
d. determining which are the best projects

59. Which of the following are tax deductible under U.S. tax law?
a. interest payments to bondholders
b. preferred stock dividends
c. common stock dividends
d. all of the above

60. Sensitivity analysis is

a. an appropriate response to uncertainty in cash flow projections.
b. useful in measuring the variance of the Fisher rate.
c. typically conducted in the post investment audit.
d. useful to compare projects requiring vastly different levels of initial investment.
 Fleming Company

Fleming Company is considering an investment in a machine that would reduce annual labor costs by
$30,000. The machine has an expected life of 10 years with no salvage value. The machine would be
depreciated according to the straight-line method over its useful life. The company's marginal tax rate is
30 percent.

61. Refer to Fleming Company. Assume that the company will invest in the machine if it generates
an internal rate of return of 16 percent. What is the maximum amount the company can pay for the
machine and still meet the internal rate of return criterion? Present value tables or a financial calculator
are required.

a. $180,000
b. $210,000
c. $187,500
d. $144,996

62. Refer to Fleming Company. Assume the company pays $250,000 for the machine. What is the expected
internal rate of return on the machine? Present value tables or a financial calculator are required.

a. between 8 and 9 percent

b. between 3 and 4 percent
c. between 17 and 18 percent
d. less than 1 percent

63. A project under consideration by Close Corporation would require a working capital investment of
$200,000. The working capital would be liquidated at the end of the project's 10-year life. If Close
Corporation has an after-tax cost of capital of 10 percent and a marginal tax rate of 30 percent, what is the
present value of the working capital cash flow expected to be received in year 10? Present value tables
or a financial calculator are required.

a. $36,868
b. $77,100
c. $53,970
d. $23,130

64. Biggs Industries is considering two alternative ways to depreciate a proposed investment. The investment
has an initial cost of $100,000 and an expected five-year life. The two alternative depreciation schedules
follow:

Method 1 Method 2
Year 1 depreciation $20,000 $40,000
Year 2 depreciation $20,000 $30,000
Year 3 depreciation $20,000 $20,000
Year 4 depreciation $20,000 $10,000
Year 5 depreciation $20,000 $0

Assuming that the company faces a marginal tax rate of 40 percent and has a cost of capital of 10 percent,
what is the difference between the two methods in the present value of the depreciation tax benefit?
Present value tables or a financial calculator are required.

a. $7,196
b. $0
c. $2,878
d. $6,342

Seabreeze Creations

Seabreeze Creations is considering an investment in a computer that is capable of producing various

images that are useful in the production of commercial art. The computer would cost $20,000 and have an
expected life of eight years. The computer is expected to generate additional annual net cash receipts
(before-tax) of $6,000 per year. The computer will be depreciated according to the straight-line method
and the firm's marginal tax rate is 25 percent.

65. Refer to Seabreeze Creations. What is the after-tax payback period for the computer project?
a. 7.62 years
b. 3.90 years
 c. 4.44 years
d. 3.11 years

66. Refer to Seabreeze Creations. What is the after-tax net present value of the proposed project (using a 16
percent discount rate)? Present value tables or a financial calculator are required.
a. $2,261
b. $(454)
c. $6,062
d. $(4,797)

Webber Corporation

Webber Corporation is considering an investment in a labor-saving machine. Information on this machine

follows:

Cost $30,000
Salvage value in five years $0
Estimated life 5 years
Annual depreciation $6,000
Annual reduction in existing costs $8,000

67. Refer to Webber Corporation. What is the internal rate of return on this project (round to the nearest
1/2%)? Present value tables or a financial calculator are required.
a. 37.5%
b. 25.0%
c. 10.5%
d. 13.5%

68. Refer to Hefty Investment. Assume for this question only that Hefty Co. uses a discount rate of 16 percent
to evaluate projects of this type. What is the project's net present value? Present value tables or a
financial calculator are required.
a. $(6,283)
b. $(3,806)
c. $(23,451)
d. $(22,000)

69. Refer to Hefty Investment. What is the payback period on this investment?
a. 4 years
b. 2.14 years
c. 3.75 years
d. 5 years

Ruston Ironworks

Ruston Ironworks is considering a proposal to sell an existing lathe and purchase a new computer-
operated lathe. Information on the existing lathe and the computer-operated lathe follow:

Existing Computer-operated
lathe lathe
Cost $100,000 $300,000
Accumulated depreciation 60,000 0
Salvage value now 20,000
Salvage value in 4 years 0 60,000
Annual depreciation 10,000 75,000
Annual cash operating costs 200,000 50,000
Remaining useful life 4 years 4 years
70. Refer to Ruston Ironworks. What is the payback period for the computer-operated lathe?
a. 1.87 years
b. 2.00 years
c. 3.53 years
d. 3.29 years

71. Refer to Ruston Ironworks. If the company uses 10 percent as its discount rate, what is the net present
value of the proposed new lathe purchase? Present value tables or a financial calculator are required.
a. $236,465
b. $256,465
c. $195,485
 d. $30,422

Wortham Corporation

The Wortham Corporation has recently evaluated a proposal to invest in cost-reducing production
technology. According to the evaluation, the project would require an initial investment of $17,166 and
would provide equal annual cost savings for five years. Based on a 10 percent discount rate, the project
generates a net present value of $1,788. The project is not expected to have any salvage value at the end
of its five-year life.

72. Refer to Wortham Corporation. What are the expected annual cost savings of the project?
Present value tables or a financial calculator are required.
a. $3,500
b. $4,000
c. $4,500
d. $5,000

73. Refer to Wortham Corporation. What is the project's expected internal rate of return? Present value
tables or a financial calculator are required.
a. 10%
b. 11%
c. 13%
d. 14%

Rhodes Corporation

Rhodes Corporation is involved in the evaluation of a new computer-integrated manufacturing system.

The system has a projected initial cost of $1,000,000. It has an expected life of six years, with no salvage
value, and is expected to generate annual cost savings of $250,000. Based on Rhodes Corporation's
analysis, the project has a net present value of $57,625.

74. Refer to Rhodes Corporation. What discount rate did the company use to compute the net present value?
Present value tables or a financial calculator are required.
a. 10%
b. 11%
c. 12%
d. 13%

75. Refer to Rhodes Corporation. What is the project's profitability index?

a. 1.058
b. .058
c. .945
d. 1.000

76. Refer to Rhodes Corporation. What is the project's internal rate of return? Present value tables or a
financial calculator are required.
a. between 12.5 and 13.0 percent
b. between 11.0 and 11.5 percent
c. between 11.5 and 12.0 percent
d. between 13.0 and 13.5 percent

77. Carol Jones recently invested in a project that promised an internal rate of return of 15 percent. If the
project has an expected annual cash inflow of $12,000 for six years, with no salvage value, how much did
Carol pay for the project?
Present value tables or a financial calculator are required.
a. $35,000
b. $45,414
c. $72,000
d. $31,708

78. John Browning recently invested in a project that has an expected annual cash inflow of $7,000 for 10
years, and an expected payback period of 3.6 years. How much did John invest in the project?
a. $19,444
b. $36,000
c. $25,200
d. $40,000
79. The Rand Corporation is considering an investment in a project that generates a profitability index of 1.3.
The present value of the cash inflows on the project is $44,000. What is the net present value of this
project?
a. $10,154
b. $13,200
c. $57,200
d. $33,846

80. If r is the discount rate, the formula [1/(1 + r)] refers to the
a. future value interest factor associated with r for one period.
b. present value of some future cash flow.
c. present value interest factor associated with r for one period.
d. future value interest factor for an annuity with a duration of r periods.

81. Future value is the

a. sum of dollars-in discounted to time zero.
b. sum of dollars-out discounted to time zero.
c. difference of dollars-in and dollars-out.
d. value of dollars-in minus dollars-out for future periods adjusted for any interest-
compounding factor.

82. All other things being equal, as the time period for receiving an annuity lengthens,
a. the related present value factors increase.
b. the related present value factors decrease.
c. the related present value factors remain constant.
d. it is impossible to tell what happens to present value factors from the information given.

83. Which of the following indicates that the first cash flow is at the end of a period?

Ordinary annuity Annuity due

a. yes no
b. yes yes
c. no yes
d. no no

84. Assume that X represents a sum of money that Bill has available to invest in a project that will yield a
return of r. In the formula Y = X(1 + r), Y represents the
a. future value of X in one period.
b. future value interest factor associated with r.
c. present value of X.
d. present value interest factor associated with r.

85. The capital budgeting technique known as accounting rate of return uses

salvage value time value of money

a. no no
b. no yes
c. yes yes
d. yes no

86. In computing the accounting rate of return, the __________ level of investment should be used as the
denominator.
a. average
b. initial
c. residual
d. cumulative

Cody’s Retail

Cody’s Retail is considering an investment in a delivery truck. Cody has found a used truck that he can
purchase for $8,000. He estimates the truck would last six years and increase his store's net cash revenues
by $2,000 per year. At the end of six years, the truck would have no salvage value and would be
discarded. Cody will depreciate the truck using the straight-line method.
87. Refer to Cody's Retail. What is the accounting rate of return on the truck investment (based on average
profit and average investment)?
a. 25.0%
b. 50.0%
c. 16.7%
d. 8.3%

88. Refer to Cody's Retail. What is the payback period on the investment in the new truck?
a. 12 years
b. 6 years
c. 4 years
d. 2 years

89. Linda Smith borrows $50,000 from her bank on January 1. She is to repay the loan in equal annual
installments over 30 years. How much is her annual repayment if the bank charges 10 percent interest?
Present value tables or a financial calculator are required.

a. $1,667
b. $4,200
c. $2,865
d. $5,304

90. Willard Boone has just turned 65. He has $100,000 to invest in a retirement annuity. One investment
company has offered to pay Willard $10,000 per year for 15 years (payments to begin in one year) in
exchange for an immediate $100,000 payment. If Willard accepts the offer from the investment company,
what is his expected return on the $100,000 investment (assume a return that is compounded annually)?
Present value tables or a financial calculator are required.
a. between 5 and 6 percent
b. between 6 and 7 percent
c. between 7 and 8 percent
d. between 8 and 9 percent

91. Gleason Armored Car Co. is considering the acquisition of a new armored truck. The truck is expected to
cost $300,000. The company's discount rate is 12 percent. The firm has determined that the truck
generates a positive net present value of $17,022. However, the firm is uncertain as to whether its has
determined a reasonable estimate of the salvage value of the truck. In computing the net present value, the
company assumed that the truck would be salvaged at the end of the fifth year for $60,000. What
expected salvage value for the truck would cause the investment to generate a net present value of $0?
Ignore taxes. Present value tables or a financial calculator are required.

a. $30,000
b. $0
c. $55,278
d. $42,978

92. Steele Publishers is considering an investment that would require an initial cash outlay of $400,000 and
would have no salvage value. The project would generate annual cash inflows of $75,000. The firm's
discount rate is 8 percent. How many years must the annual cash flows be generated for the project to
generate a net present value of $0? Present value tables or a financial calculator are required.
a. between 5 and 6 years
b. between 6 and 7 years
c. between 7 and 8 years
d. between 8 and 9 years

93. A capital budget is used by management to determine

in what to invest how much to invest

a. no no
b. no yes
c. yes no
d. yes yes

94. The weighted average cost of capital represents the

a. cost of bonds, preferred stock, and common stock divided by the three sources.
b. equivalent units of capital used by the organization.
c. overall cost of capital from all organization financing sources.
d. overall cost of dividends plus interest paid by the organization.

95. Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning
machine. The existing machine is operable for three more years and will have a zero
disposal price. If the machine is disposed of now, it may be sold for $60,000. The new
machine will cost $200,000 and an additional cash investment in working capital of
$60,000 will be required. The new machine will reduce the average amount of time
required to wash clothing and will decrease labor costs. The investment is expected to net
$50,000 in additional cash inflows during the year of acquisition and $150,000 each
additional year of use. The new machine has a three-year life. These cash flows will
generally occur throughout the year and are recognized at the end of each year. Income
taxes are not considered in this problem. The working capital investment will not be
recovered at the end of the asset's life.

What is the net present value of the investment, assuming the required rate of return is
24%? Would the company want to purchase the new machine?
a. $(32,800); yes
b. $(16,400); no
c. $16,400; yes
d. $32,800; no

96. In using the net present value method, only projects with a zero or positive net present
value are acceptable because
a. the return from these projects equals or exceeds the cost of capital.
b. a positive net present value on a particular project guarantees company profitability.
c. the company will be able to pay the necessary payments on any loans secured to
finance the project.
d. of both (a) and (b).

97. Which of the following is NOT an appropriate term for the required rate of return?
a. Discount rate
b. Hurdle rate
c. Cost of capital
d. All of the above are appropriate terms

98. Which of the following results of the net present value method in capital budgeting is the
LEAST acceptable?
a. $(10,000)
b. $(7,000)
c. $(18,000)
d. $0

99. The definition of an annuity is

a. similar to the definition of a life insurance policy.
b. a series of equal cash flows at intervals.
c. an investment product whose funds are invested in the stock market.
d. both (a) and (b) are correct.

100. The net present value method focuses on

a. cash inflows.
b. accrual-accounting net income.
c. cash outflows.
d. both (a) and (c).

101. If the net present value for a project is zero or positive, this means
a. the project should be accepted.
b. the project should not be accepted.
c. the expected rate of return is below the required rate of return.
d. both (a) and (c).

102. Shirt Company wants to purchase a new cutting machine for its sewing plant. The
investment is expected to generate annual cash inflows of $300,000. The required rate of
 return is 12% and the current machine is expected to last for four years. What is the
maximum dollar amount Shirt Company would be willing to spend for the machine,
assuming its life is also four years? Income taxes are not considered.
a. $507,000
b. $720,600
c. $791,740
d. $911,100

103. The Zeron Corporation wants to purchase a new machine for its factory operations at a cost
of $950,000. The investment is expected to generate $350,000 in annual cash flows for a period
of four years. The required rate of return is 14%. The old machine can be sold for $50,000. The
machine is expected to have zero value at the end of the four-year period. What is the net present
value of the investment? Would the company want to purchase the new machine? Income taxes
are not considered.
a. $119,550; yes
b. $69,550; no
c. $1,019,550; yes
d. $326,750; no

104. Wet and Wild Water Company drills small commercial water wells. The company is in the
process of analyzing the purchase of a new drill. Information on the proposal is provided
below.
Initial investment:
Asset $160,000
Working capital $ 32,000
Operations (per year for four years):
Cash receipts $160,000
Cash expenditures $ 88,000
Disinvestment:
Salvage value of drill (existing) $ 16,000
Discount rate 20%

What is the net present value of the investment? Assume there is no recovery of working
capital.
a. $(62,140)
b. $10,336
c. $42,362
d. $186,336

105. The capital budgeting method that calculates the discount rate at which the present value of
expected cash inflows from a project equals the present value of expected cash outflows is the
a. net present value method.
b. accrual accounting rate-of-return method.
c. payback method.
d. internal rate of return.

106. In capital budgeting, a project is accepted only if the internal rate of return
a. equals or exceeds the required rate of return.
b. equals or is less than the required rate of return.
c. equals or exceeds the net present value.
d. equals or exceeds the accrual accounting rate of return.

107. The Zeron Corporation recently purchased a new machine for its factory operations at a
cost of $921,250. The investment is expected to generate $250,000 in annual cash flows for
a period of six years. The required rate of return is 14%. The old machine has a remaining
life of six years. The new machine is expected to have zero value at the end of the six-year
period. The disposal value of the old machine at the time of replacement is zero. What is
the internal rate of return?
a. 15%
b. 16%
c. 17%
d. 18%
108. Brown Corporation recently purchased a new machine for $339,013.20 with a ten-year life.
The old equipment has a remaining life of ten years and no disposal value at the time of
replacement. Net cash flows will be $60,000 per year. What is the internal rate of return?
a. 12%
b. 16%
c. 20%
d. 24%

109. Soda Manufacturing Company provides vending machines for soft-drink manufacturers.
The company has been investigating a new piece of machinery for its production department.
The old equipment has a remaining life of three years and the new equipment has a value of
$52,650 with a three-year life. The expected additional cash inflows are $25,000 per year. What
is the internal rate of return?
a. 20%
b. 16%
c. 10%
d. 8%

110. An important advantage of the net present value method of capital budgeting over the
internal rate-of-return method is
a. the net present value method is expressed as a percentage.
b. the net present values of individual projects can be added to determine the effects of
accepting a combination of projects.
c. no advantage.
d. both (a) and (b).

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 111 THROUGH 115.

Braun’s Brakes manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:
Model X Model Y Model Z
Selling price $50 $60 $70
Direct materials 6 6 6
Direct labor ($12 per hour) 12 12 24
Variable support costs ($4 per machine-hour) 4 8 8
Fixed support costs 10 10 10

111. Which model has the greatest contribution margin per unit?
a. Model X
b. Model Y
c. Model Z
d. Both Models X and Y

112. Which model, has the greatest contribution margin per machine-hour?
a. Model X
b. Model Y
c. Model Z
d. Both Models Y and Z

113. If there is excess capacity, which model is the most profitable to produce?
a. Model X
b. Model Y
c. Model Z
d. Both Models X and Y

114. If there is a machine breakdown, which model is the most profitable to produce?
a. Model X
b. Model Y
c. Model Z
d. Both Models Y and Z

115. How can Lisa Braun encourage her salespeople to promote the more profitable model?
 a. Put all sales persons on salary
b. Provide higher sales commissions for higher priced items
c. Provide higher sales commissions for items with the greatest contribution margin per
constrained resource
d. Both (b) and (c)

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 116 THROUGH 118.

Helmer’s Rockers manufactures two models, Standard and Premium. Weekly demand is
estimated to be 100 units of the Standard Model and 70 units of the Premium Model. The
following per unit data apply:

Standard Premium
Contribution margin per unit $18 $20
Number of machine-hours required 3 4

116. The contribution per machine-hour is

a. $18 for Standard, $20 for Premium.
b. $54 for Standard, $80 for Premium.
c. $15 for Standard, $16 for Premium.
d. $6 for Standard, $5 for Premium.

117. If there are 496 machine-hours available per week, how many rockers of each model
should Jim Helmer produce to maximize profits?
a. 100 units of Standard and 49 units of Premium
b. 72 units of Standard and 70 units of Premium
c. 100 units of Standard and 70 units of Premium
d. 85 units of Standard and 60 units of Premium

118. If there are 600 machine-hours available per week, how many rockers of each model
should Jim Helmer produce to maximize profits?
a. 100 units of Standard and 49 units of Premium
b. 72 units of Standard and 70 units of Premium
c. 100 units of Standard and 70 units of Premium
d. 85 units of Standard and 60 units of Premium

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 119 THROUGH 121.

Raines Company manufactures three sizes of kitchen appliances: small, medium, and large.
Product information is provided below.
Small Medium Large
Unit selling price $150 $250 $500
Unit costs:
Variable manufacturing (60) (120) (200)
Fixed manufacturing (40) (50) (120)
Variable selling and administrative (30) (30) (30)
Unit profit $ 20 $ 50 $150
Demand in units 100 120 100
Machine-hours per unit 20 40 100
The maximum machine-hours available are 6,000 per week.

119. What is the contribution margin per machine-hour for a large chair?
a. $5.00
b. $3.00
c. $2.70
d. $1.80

120. Which of the three product models should be produced first if management incorporates a
short-run profit maximizing strategy?
a. Small chairs
b. Medium chairs
c. Large chairs
d. Either medium or large chairs
121. How many of each product should be produced per month using the short-run profit
maximizing strategy?
Small Medium Large
a. 0 120 12
b. 100 0 40
c. 100 100 0
d. 100 20 40

122. When deciding whether to discontinue a segment of a business, managers should focus on
a. equipment used by that segment that could become idle.
b. reallocation of corporate costs.
c. how total costs differ among alternatives.
d. operating income per unit of the discontinued segment.

123. When deciding whether to discontinue a segment of a business, relevant costs include all
EXCEPT
a. fixed supervision costs that can be eliminated.
b. variable marketing costs per unit of product sold.
c. cost of goods sold.
d. future administrative costs that will continue.