Questions and Answers of Fundamental Managerial Accounting Concepts 10th

Define capital budgeting. Give two examples of long-term investment decisions that require capital budgeting. Appendix
Why do long-term capital investment decisions often have a significant effect on a company’s profitability? Appendix
Why is the time value of money so important in capital budgeting decisions? Appendix
If the time value of money is so important, why isn’t the timing of cash flows emphasized in the accounting cycle? Appendix
How is depreciation expense treated when the discounted cash flow methods are used? Why? Appendix
How are cost savings and increased revenues related in capital budgeting? Appendix
Identify four capital budgeting methods, and explain why some are considered better than others. Appendix
Why is the payback method inferior to the discounted cash flow methods? When is the payback method helpful? Appendix
What is the major weakness of the unadjusted rate of return method? Appendix
Does a net present value of zero indicate that a project should be rejected? Explain. Appendix
As the desired rate of return increases, does the net present value of a project increase? Explain. Appendix
Under what circumstances might a project with a negative net present value be accepted? Appendix
What discount rate yields a net present value of zero? How is it determined? Appendix
What is a company’s hurdle rate? How is it used? Appendix
How do quality and time considerations affect capital budgeting decisions? Appendix
Identify several qualitative factors, other than quality and time considerations, that may affect strategic and capital investment decisions. Why are qualitative factors important? Appendix
How can we deal with uncertainties involved in capital budgeting? Appendix
Distinguish between the screening and ranking functions of capital budgeting. Appendix
Of what value is a profitability index in capital budgeting? Appendix
How do income taxes influence capital budgeting decisions? Appendix
Capital Investment Decisions in Planning Which one of the following is not a reason why a company should carefully plan its capital investment decisions?a. Capital investments usually require a large
Screening, Ranking, and Discounting Which one of the following statements is correct?a. Screening is the process of finding the best among available acceptable alternatives.b. Ranking is the process
Discounting Cash Outflows The company is deciding whether to invest in a certain capital investment. The investment requires an initial outlay of $55,000 and annual payments of $12,000 made at the
Discounting Cash Inflows Refer to the data in PE 22-3. The company expects the new investment will generate revenues of $24,000 per year for the five years of the investment’s life. At the end of
Payback Method The company paid $50,000 cash for a capital investment. The company expects the investment to generate net cash inflows of $8,400 per year. What is the payback period of this
Unadjusted Rate of Return Method Refer to the data in PE 22-5. What is the unadjusted rate of return on the investment?Note: The investment is expected to have a useful life of 10 years, and the
Cost of Capital Forty percent of a company’s total capital is debt, 45% is from the issuance of stock, and 15% is equity from retained earnings. The company has determined that the cost of its debt
Net Present Value Method Which one of the following investment opportunities would be rejected by a company that accepts all projects with net present values greater than zero?a. Present value of
Least-Cost Decisions The company is required to install a new piece of safety equipment. The company has two alternatives for the equipment. One alternative would cost $260,000 immediately but would
Calculating Internal Rate of Return The company is considering an 8-year investment. The initial cost of the investment is$55,348. The investment will yield net cash inflows of $10,000 per year. What
Internal Rate of Return Interpolation The company is considering whether to invest in a project with an initial cost of $538,000 that will provide annual net cash inflows of $82,500 for 10 years. Use
Uneven Cash Flows and Internal Rate of Return The company is considering whether to invest in a piece of equipment that requires an investment of $250,000 today. The project will provide net cash
Qualitative Factors in Strategic and Capital Investment Decisions Which one of the following is an important qualitative factor to consider when making strategic and capital investment decisions?a.
Uncertain Expected Cash Flows The company is considering an investment that costs $785,000 today and has a salvage value in 10 years of $137,714, but the company is not sure how much net annual cash
Uncertain Useful Life The company is considering an investment that costs $500,000 today and will provide$90,000 each year in net cash inflow, but the company is not sure how long the investment will
Ranking by the Internal Rate of Return Method The company is considering eight capital investment projects. The company has a minimum required internal rate of return of 13%. Screen and rank the
Profitability Index The company is considering a project with a present value of net cash inflows of $1,340,000 and an initial investment cost of $973,000. What is the profitability index of this
Ranking Using the Profitability Index Screen and rank the following projects using the profitability index.Project J Project K Project L Project M Present value of net cash inflows . . . . . . . .
Income Tax Considerations in Capital Budgeting Decisions The company has decided to invest in some equipment that costs $50,000 today and will generate cash inflows of $20,000 per year for the 5-year
Income Tax Considerations in Capital Budgeting The company has decided to invest in new factory machinery that will decrease labor costs by $50,000 per year. The new machinery will cost the company
Present Values Consider each part independently.1. Super-Fix Company would like to move its auto repair shop to a downtown location in order to attract more customers. What is the maximum Super-Fix
Time Value of Money Your late, rich uncle left you $250,000. The executor of the estate has asked if you would rather receive the full amount now or $30,000 a year for the next 40 years.Which of
Payback Method The manager of Simple Company must choose between two investments. Project A costs$75,000 and promises cash savings of $15,000 a year over a useful life of 10 years. Project B costs
Unadjusted Rate of Return Method Um Good, Inc., a candy maker, is thinking of purchasing a new machine. A marketing firm has estimated that the new machine could increase revenues by $30,000 a year
Net Present Value Method The Carroll Broom Company is thinking of purchasing a new automatic straw-binding machine. The company president, Joan Carroll, has determined that such a machine would save
Least-Cost Decision The local fire department has determined the Sleep-Eazy Mattress Company is not in full compliance with local fire regulations. To comply, Sleep-Eazy has two alternatives: It may
Internal Rate of Return Juan Gonzales, the president of Nogalis Corporation, is trying to decide whether he should buy a new machine that will improve production efficiency. The machine will increase
Cost of Capital Daphney Corporation has raised $200,000 in equity financing through the issuance of shares.Stockholders expect to earn an average of 20% per year on their equity investment in
Net Present Value and Internal Rate of Return A real estate investment requires an initial outlay of $200,000 in cash. The investment will return a single sum cash payment of $438,490 after five
Net Present Value and Internal Rate of Return A retired person has $700,000 in a retirement account. An insurance company is offering to give the retired person an annuity of $61,029 at the end of
Quality and Time Factors Tucker Yard Service Company is contemplating purchasing a new riding lawnmower for its business. One particular model has special features that enhance the cutting and the
Qualitative Considerations The Upscale Department Store has been plagued with shoplifting. The president, Hector Conrad, has suggested that the store hire a security force to “frisk” all
Sensitivity Analysis You have accumulated $35,000 in a mutual fund account that pays 10% interest. You are offered the opportunity to buy 100 ounces of gold at $350 per ounce. The price of gold is
Screening Function Your company’s cost of capital was determined to be 12%. Several investment alternatives are being considered, and the discounted cash flows have given the following results:Net
Ranking Projects Using net present value (NPV) analysis, a manager can select those projects that will maximize the present value of future cash flows. NPV analysis is a powerful tool; however,
Profitability Index California Company is trying to determine the relative profitability of two alternative color, laser printers. Printer A requires an initial cash outlay of $4,000 and has a net
Income Tax Effects Kade Corporation is considering purchasing a new piece of equipment. The equipment will cost $135,000 and is expected to have a useful life of five years. The gross cash flow
Net Present Value Method A fast-food establishment is thinking of buying a new cooking grill and refrigeration unit.The costs of these new machines are $12,500 and $9,000, respectively. The
Net Present Value Method—Uneven Cash Flows Southside Junk Yard needs to buy a car smasher. The machine would add the following revenues to the business over the next three years:Year 1 Cash savings
Internal Rate of Return You have been offered the opportunity to purchase a franchise of Sunshine Juice Stores.You will have to pay $258,635 for the initial investment in the store and its equipment,
Internal Rate of Return and Hurdle Rate Nina Roberts has the opportunity to invest in a timber forest. She would have to invest$100,000. Revenues of $20,000 per year are projected for 20 years.
Payback, Net Present Value, and Internal Rate of Return Methods Nucore Company is thinking of purchasing a new candy-wrapping machine at a cost of$370,000. The machine should save the company
Internal Rate of Return The manager of Soft & Creamy Ice Cream is thinking of buying a new soft ice cream machine. The machine will cost $13,500 and will last 10 years. Soft ice cream sales are
Choosing among Alternatives Tom Thurlow wants to buy a boat but is short of cash. Two alternatives are available: Tom can accept $7,500 per year from his brother for partial ownership in the boat, or
Lease-or-Buy Decision A small sales company is committed to supplying three sales representatives with new cars.The company has two alternatives. It can either buy the three cars and sell them after
Rent-or-Purchase Decision As one aspect of its business, New Lawn Company currently rents a ditch-digging machine for an average of $48 per job. A used machine is available for $995 but would cost
Sell-or-Rent Decision Clarence Gleason has inherited an apartment complex. He is now faced with the decision of whether to sell or to rent the property. A real estate adviser believes that Clarence
Unifying Concepts: Net Present Value and Internal Rate of Return Methods Julie Kowalis, an investment analyst, wants to know if her investments during the past four years have earned at least a 12%
Taglioni’s Pizza Company has to choose a new delivery car from among three alternatives.Assume that gasoline costs $3.00 per gallon and that the firm’s cost of capital is 12%. The car will be
Sunshine Corporation is considering several long-term investments. Management wants to accept the two best projects, given the following data:Project A B C D E Present value of net cash inflows . . .
The management of Kitchen Shop is thinking of buying a new drill press to aid in adapting parts for different machines. The press is expected to save Kitchen Shop $8,000 per year in costs. However,
Unifying Concepts: Capital Rationing Using the Payback and Net Present Value Methods Dino Corporation is trying to decide which of five investment opportunities it should undertake.The company’s
Income Tax Effects Sylvania Manufacturing Company is considering the purchase of new equipment to perform operations currently being performed on less efficient equipment. The purchase price
Should We Purchase That New Copier?Campus Print Shop is thinking of purchasing a new, modern copier that automatically collates pages. The machine would cost $22,000 cash. A service contract on the
Cost and Qualitative Factors in Capital Investment Decisions Yoshika Landscaping is contemplating purchasing a new ditch-digging machine that promises savings of $5,600 per year for 10 years. The
Microsoft The section of Microsoft’s Form 10-K relating to management’s discussion and analysis provides detail as to factors that might affect Microsoft’s future and, as a result, the
The Boeing Company As you probably know, Boeing builds airplanes. While most famous for the big 747, Boeing is continually developing newer models. Over the past several years, Boeing has been
DaimlerChrysler DaimlerChrysler discloses the following information relating to its long-term debt in its 2002 annual report:• 6.3% notes/bonds• 2.6% commercial paper• 5.3% liabilities to
Lease versus Buy You are fresh out of college, have your first real job, and just received your first big paycheck. You decide you need some wheels. Off you go to the car dealer. You carefully review
How do companies go about managing directly their return on investment (ROI)?
The Cost of Capital Which one of the following statements is false?a. The costs of capital for an organization include the interest costs expected by long-term debt holders and the return expected by
Economic Value Added Which one of the following statements is false?a. Economic value added is a relatively new measure that is based on a traditional measure of residual income.b. Economic value
Calculating EVA®Which one of the following is the correct formula for EVA®?a. Net operating profit before tax – (Cost of capital Invested capital)b. Net operating profit after tax – (Cost of
Just-in-Time Inventory Which one of the following statements is false?a. Carrying large amounts of inventory can be very costly for a company.b. JIT environments are usually “push” systems.c. JIT
Total Quality Management Which one of the following statements is false?a. Total quality management is simply a general endorsement of quality in a company.b. W. Edward Deming was instrumental in the
Costs of Quality Which one of the following is not a type of costs of quality?a. Appraisal costsb. Adaptive costsc. Internal failure costsd. Prevention costse. External failure costs
The Balanced Scorecard Which one of the following statements is false?a. Companies that use the Balanced Scorecard do not need to focus on financial performance.b. The Balanced Scorecard is not an
Customer Satisfaction Which one of the following statements is false?a. Leading measures focus on fulfilling customer expectations.b. Outcome measures focus on whether improvements in leading
Internal Processes Which one of the following statements is false?a. One type of service-after-sale process is the organization’s commitment to warranty its product.b. Research and development
Learning and Growth Which one of the following statements is false?a. Developing employee productivity is an ultimate result of building learning and growth in an organization.b. Poorly run
Linking It All Together Which one of the following statements is false?a. All measures of a balanced scorecard should link together to eventually support the ultimate financial goals of a company.b.
Performance Measurement Linkages Which one of the following represents the correct cause-and-effect sequence of leading and lagging measures in an organization?a. Learning and Growth → Internal
Implementing a Balanced Scorecard Which one of the following statements is true?a. The same balanced scorecard can be implemented at all organizations for maximum success.b. Management accountants
Accounting for Tomorrow The accounting industry is currently facing pressure in each of the following areas except:a. The need to better emphasize relevant, rather than just reliable, data.b. The
Measuring Invested Capital Assets At the end of 2009, Hatch Industries had the following balance sheet:Hatch Industries would like to compute its EVA® for the year. Help the accountant at Hatch
Computing Economic Value Added Firefly Travel Services has recently shifted its performance measurement system to include Economic Value Added (EVA®). The Firefly accountant gathered the following
Computing Economic Value Added Jessica began a day care business three years ago and has worked hard to make it successful.She originally invested $4,000 of her own money and borrowed $5,000 from the
Value-Added and Non-Value-Added Activities Below is a list of activities performed by the Ibapah Bijou, a movie theater. Indicate whether each activity is a value-added activity (VA) or a
Costs of Quality Some of the costs in the list below are costs of quality. For each cost, indicate by the appropriate letter what type of cost it is: prevention cost (P), appraisal cost (A), internal
Costs of Quality Sara’s Stylish Suppers prepares food for wholesale to gourmet restaurants. Quality is very important to consumers of gourmet food. Following is a list of costs that Sara incurred

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