Consider the following two mutually exclusive projects, each of which require an initial investment of $100,000 and have no salvage value. This organization, which has a cost of capital of 15%, must choose one or the other, ignore taxes.

Year Project A Project B

1 $10,000 $50,000

2 20,000 40,000

3 30,000 30,000

4 40,000 20,000

5 50,000 10,000

a. Compute the payback period of these two projects. Using the payback criterion, which

project is more desirable?

b. Calculate the Net Present Value for each project

c. Calculate the profitability index

d. Which is the better investment? Why?

Question 2

T.E. Toys Ltd, produces toys for national distribution. The management has recently established a standard cost system to control costs. The standards on one toy are:

Materials 12 pieces per toy at $0.56 per piece

Labour 2 hours per toy at $3.75 per hour

During the month of February 2013, the company produced 1,000 toys. Production data for the month are as follows:

Materials: 17,500 pieces were purchased for use in production, at a total cost of

$8,925, of which 3,500 pieces were still in inventory at the end of the

month.

Labour: 2,500hours were worked, at a cost of $10,500.

Required:

a. Calculate the material purchases price variance

b. Calculate the material usage variance

c. Calculate the labour rate variance

d. Calculate the labour efficiency variance

e. State one possible cause for the material usage variance calculated in (b) above