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introduction to managerial accounting

Questions and Answers of Introduction To Managerial Accounting

John Bassey, a sales representative for a machine tool company, used the following phrase over and over with his customers: "Buy this thing; depreciate it; and watch the cash come rolling in from
Explain the difference between the internal rate of return method and the net present value method.
The net present value of a certain investment is zero. Does this mean the investment earns no profit? Explain the significance of a zero net present value.
How can project rankings using the internal rate of return and the profitability index differ?
Why can the terms cutoff rate, hurdle rate, minimum acceptable rate of return, target rate of return, and desired rate of return be used interchangeably?
Explain the tax shield. Tie this explanation to the comment: "Depreciation is a source of cash."
How would you estimate the internal rate of return if you know the life of the project? How would you estimate the project's life if you know its internal rate of return?
Are the definitions of relevant costs and revenues different for capital investment analysis than the definitions used in Chapter 11? Explain.
Doris Myers is buying a car for \(\$ 12,000\). After a downpayment of \(\$ 3,000\), she finances the remainder at 12 percent annual interest with monthly payments. If she signs a 50 -month financing
What is the advantage of accelerated depreciation over straight-line depreciation in a capital investment decision?
Cash, accounts receivable, and inventory are classified as current assets. How can they be considered part of a long-term capital investment?
Knowing the cost of capital is a necessary part of present value analysis. What does it represent? Explain one way to measure it.
The formula used to derive the numbers in Table 1 is:Explain the math in words. 1 P (1+ (1 + i)^ Where: P = Present value factor i = Interest rate n = Number of periods
. Time Value of Money. Walt Zarnoch has won second prize in THE BIG Lottery. Friends who he never knew have offered him several "opportunities of a lifetime." He would like a 14 percent annual
. Determining the Life of an Investment. Edward's Electronics is considering expanding its business by adding one more store in Amsterdam. The building and its operating contents will cost F1 million
. Four Methods. Crandall Company purchased a farm tractor for \(\$ 100,000\). The cash inflow from using the tractor is expected to be \(\$ 25,000\) per year for eight years. Crandall uses a 15
. Payback Method. Hanley Company purchased a machine for \(\$ 125,000\) and will depreciate it on a straight-line basis over a 5 -year period with an aftertax salvage value of \(\$ 15,000\). The
. Different Capital Investment Methods. Miko Center Company plans to acquire equipment costing \(\$ 600,000\). Depreciation on the new equipment would be \(\$ 120,000\) each year for five years. The
. Determining the Required Investment. The Wheeler Company would like to initiate an advertising campaign to increase its annual sales volume. Data show that the proposed advertising will add \(\$
. Investments With Uneven Cash Flows. Icon Consolidated has data on two \(\$ 100,000\) investment opportunities. With only \(\$ 100,000\) in cash available, the owners must decide which is the better
. Comparing Alternatives. The Mohr Company is considering a new popper for one of its portable caramel popcorn stands. The analysis is narrowed to the "Bang" or the "Pow." Information on the two
. Equipment Replacement. By replacing an old refrigeration unit, Ann Bacon of Bacon's Produce in Liverpool, U. K., thinks that sales from the greater capacity willincrease by \(\$ 100,000\) per year
. Selecting Between Two Investments. Meridian Township has \(\$ 60,000\) of surplus cash in a fund that will not be used for one year. The township treasurer has two investment possibilities
. Net Returns and Discounted Rate of Return. The Echols Company is considering new word processing equipment that can reduce personnel costs by an estimated \(\$ 60,000\) a year. The new equipment is
. Selecting the Better Machine. A Topeka party store owner is considering the purchase of a new ice machine. Two firms offer machines that promise the same sales. Both will last five years. The
. Sales Offer as Investment. The owner of a self-storage business has just received an offer that is worth \(\$ 600,000\) after taxes for the storage buildings. The orrner is interested in another
. Different Investment Goals. Three projects are being evaluated. All have the same initial investment and expected life. Data from the projects are:\section*{Required:}1. If present value and
. Uneven Cash Flows. The following projects each require an \(\$ 80,000\) investment.\section*{Required:}1. For each project, find the payback period.2. For each project, find the ARR.3. For each
. New Business. Zacha Co. purchased a new machine for \(\$ 50,000\) to expand capacity. Sales are expected to increase by 20 percent. The only additional fixed expense is the depreciation on the new
. Equipment Replacement. By replacing present equipment with more efficient equipment, Willie Company estimates that cash operating costs can be reduced by \(\$ 65,000\) a year. In addition,
. Investment in Another Company. The management of Musser Enterprises, in Cologne, Germany, is considering a DM10,000,000 investment to acquire the assets of Ener-Tec Company, a small company that
. Capital Budgeting Ethics. Tadd and Todd manage similar stores of Tough Tires. They met at a recent managers' conference and discussed their need for new car lifts at their stores. At the meeting,
. Find the Missing Values. For these projects, provide the missing value, if: A B = T C = Initial investment Life of project Annual net cash inflow D E = Internal rate of return Present value factor
. Ranking Projects. The following projects have been evaluated using four capital budgeting techniques.\section*{Required:}1. Based only on the information provided, rank the projects for each of the
. Tax Shield. Your boss is considering a new parking lot for employees that will cost \(\$ 200,000\). The company is in the 40 percent tax bracket. Your boss says, "It will only cost us \(\$
. Payback and Discounted Returns. Ignore tax impacts. Carol Towel. manager of Timber Ridge Investments. uses the payback method in selecting investment alternatives. She states that, "If I can
. Relevant Costs. Aussie Auto Wash Company has just installed a special machine for washing cars in its Perth outlet. The machine cost A \(\$ 20.000\). Its operating costs, based on a yearly volume
. Incremental Costs and Revenues. The Sopariwala Company has the opportunity to market a new product. The sales manager believes that the firm could sell 5,000 units per year at \(\$ 14\) per unit
. Improving Investment Returns. For many years Emilio Perez has been successful in the retail garment industry in Nogales, Mexico. Recently he has learned of an opportunity to purchase a two-story
. Finding Unknowns. Fill in the blanks for the following independent cases.The investments have a life of ten years and no salvage value. Ignore taxes. Annual Cash Inflow Cost of Investment Capital
. Investment Returns and Sales Volume. D. D. Ward, whose uncle whispered "plastics" into his ear soon after he graduated from college years ago, founded Plastic Opportunities, Inc. Ward is
. Change in the Value of Money. Ann Aust, manager of Town Company, states that she used to accept investments that yielded discounted returns (after income taxes) of 18 percent. With a decreasing
. Management Ethics and Cost Savings. Keefer Company operates several factories, one of which was built some 70 years ago and is in poor condition. The factory has a fire insurance policy covering
. Alternative Uses. The Edo Building Company owns an office building in the business center of Tokyo. The building has a large unused lobby area. The facilities manager for the firm, Yuri Misatuni,
. Basic Replacement Decision. You are given the following data:\section*{Required:}1. Determine the NPV of the replacement decision.2. What is the profitability index of the replacement decision?
. Value of a Business. Jawbreaker, Ltd., a Hong Kong firm, makes and sells candy in large lots for other firms that package and sell the candy under various brand names. The firm could acquire a
. Expanding a Product Line. Ghafari Brothers Company makes office equipment, such as tables, desks, computer equipment consoles, and work tables. The sales manager is trying to decide whether to
. Changes in the Economic Environment. Four years ago, Belanger Properties, Inc. invested \(\$ 10,000,000\) in a venture in an economic development zone in another country. The investment was
. Equipment Replacement Concerns. The Molding Department of Hornus, Inc. has been investigating the acquisition of new equipment costing \(\$ 100,000\). Cash savings before income taxes from the use
. Break-Even Volume and Investment. For several years, Grabski Company has used a combination of its own equipment and rental equipment to handle materials. The company has its own equipment to
. Ranking Investment Alternatives. Mazzeo Industries has designated \(\$ 1.2\) million for capital investment expenditures during the upcoming year. Its cost of capital is 14 percent. Any unused
. Proposal Preparation. Yoder Instruments Company manufactures a variety of products. The sales manager of Yoder, Dave Shockley, has stated repeatedly that he could sell more units of one of the
Analyze several issues which complicate calculations in capital investment decisions.
Evaluate the financing decision independent of the acquisition decision.
Understand the significance of accelerated depreciation and MACRS.
Understand the use of life-cycle costing in capital budgeting.
Use sensitivity analysis and expected values to help assess risk in capital investment decisions.
See the importance of a post-audit of capital investment decisions in improving control and in evaluating future capital investments.
Integrate the evaluation of social costs of capital investments into the quantitative analysis.
How can projects be ranked when initial capital investments are different?
Why is an initial investment in additional inventory different than an investment in machinery? Explain the difference in cash flows.
How can inflation be incorporated into capital investment analysis?
What problem arises if alternative investments have different useful lives? Identify at least one solution.
By incorporating inflation into the discount rate, what assumptions are made?
A project can be divided into Phase I and Phase II. Phase II is a continuation of Phase I, cannot be developed by itself, and may or may not be developed. Phase I looks like a sure "winner," but
What is meant by financing decisions and investing decisions? Why should they be analyzed separately?
Why would the annual cost of leasing differ from the annual cost of buying? Identify factors on both sides.
How are the ideas of social costs, environmental costs, and intangible benefits linked to life-cycle costing in capital investment analysis?
What depreciation methods are built into most of the annual MACRS depreciation percentages?
If capital investment analysis depends so heavily on estimates of future cash flows, what controls exist to prevent overoptimistic estimates from inflating a given project's rate of return?
(a) ABC Company uses a 14 percent hurdle rate. XYZ Company uses a 20 percent hurdle rate. What could cause this difference in rates?(b) In DEF Corporation, Division G uses a 12 percent hurdle rate;
What information does sensitivity analysis provide that net present value analysis does not?
What does the term "expected value" mean? Is it real? How can it replace a specific estimate of a key variable?
How can intangible benefits and costs be incorporated into capital investment analysis?
A business analyst recently said, "Social costs of many decisions often far outweigh the business dollars and cents amounts." Why might this be true?
A local not-for-profit organization's director was heard to say, "Capital investment analysis works for profit-making organizations but not for us. We're trying to maximize benefits to the people
Suggest several advantages of using life-cycle costing for capital project analysis.
Purchases and Cash Payments. A production plan by quarter for Storr Company is:Four units of materials are used in producing each unit of product. Each unit of materials costs $0.60. Ending materials
Purchases and Collections. Murphy Neat Shirts Co. sells shirts and is budget- ing for 1998. The beginning accounts receivable, inventory (at cost), and accounts payable balances and partial 1998
Revised Production Budget. By mid-September, the sales manager of Pillai Supplies, Inc. realized that the original forecast for the fourth quarter would have to be revised. The original and revised
Forecast Cash Payments. January 1 actual inventory for Stock & Stem Com- pany was $5,000, and payables were $3,000. Cost of goods sold figures for Janu- ary, February, and March were $30,000,
Direct Materials Purchases and Cash Payments. The Campbell Company prepared a production budget for the first months of 1999 as follows:Two units of Material 03 are required for each pound of product
Labor Cost Budget. Coats Cartons, Inc. manufactures two basic product lines—Sturdee and Rain-Proof. Past experience has shown that 10 units of Sturdee can be produced per labor hour and 8 units of
Purchases and Cash Receipts. Olympia Candies is preparing a budget for the second quarter of the current calendar year. The March ending inventory of mer- chandise was $106,000, which was higher than
Cash Collections and Receivables. Past experience has demonstrated that 70 percent of the net sales billed in a month by Henry Company is collected during the month, 20 percent is collected in the
Cash Receipts From Sales. Ponytail Productions has forecast revenues as follows:Required 1. Calculate the amount of cash receipts the company is budgeting by month in the fourth quarter.2. If the
Budget Schedules and Changes. Gardner Hardware provided these budget data:Other data are as follows:(a) Sales are on credit, with 60 percent of sales collected in the month after sale and 40 percent
Production Cost Budget. A manufacturing budget for 1999 was prepared for Sequeira Metals, of Barcelona, Spain, and is as follows:Budgeted cost estimates in Spanish pesetas are based on the previous
Cash Payments for Operations. Drescher Paper Products, Inc. averages a gross profit of 30 percent. Sales for August were $500,000. The beginning inventory balance for August was $15,000 higher than
Estimated Income Statement. Ridgway Appliances, Inc. prepared a budget for 1998 by quarters. Budget data appear as follows:Ridgway is trying to reduce inventories. Direct labor is budgeted at
Adequacy of Cash Flow With "What Ifs." Jennifer Victor is preparing a budget of cash receipts and disbursements for Gourmet Food Services, Inc. Some sales are for cash, and the remainder is billed on
Budgeted Balance Sheet. The balance sheet for Griffith Stores, Inc. at Decem- ber 31, 1998, is:Cash receipts for the year are collections on accounts receivable amounting to $846,000. Cash payments
Expense Budgeting. An expense budget for next year is being prepared by Ballard Testing Services. Past studies show the expense behavior pattern as:A wide variety of tests is performed. Some take as
Managerial Behavior and Budget Ethics. Stoller Corporation has seen a new revision of the budget system each year for the past five years. Bonuses followed strong budget performances. The following
Payments for Materials. Emory Mills, Inc. is hard pressed for cash to meet scheduled payments for materials and other costs. Materials are purchased as needed for production. A month is required for
Expenses and Cash Disbursements. Danell Andersen, the treasurer of Danish Ancient Studies Association, is planning an expense budget for 1999 in Danish krone. Rent for the office is expected to
Budgeted Cost of Goods Manufactured. Saleem Plastic Products had an in- ventory of 25,000 units of finished product on January 1. Sales forecasts for the first six months are as follows:Saleem
Cash Forecasting. Mr. Otley started a used computer store in London and is looking at cash flows very carefully. He collected the following budget figures for 1998 in pounds:Required:Prepare a cash
Cash Flows and "What If." M. W. Cope, a member of the board of directors of Bryja Markets, Inc., is concerned about the ability of the company to repay a loan in the amount of $250,000 that matures
Cash Budget. Colonnese Company, a French firm, is preparing a cash budget in French francs for the first six months of 1998. Dividends on stock investments of FF60,000 should be collected in March

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