Q#1.

Sarah Manufacturing is considering n investment in equipment costing $660,000. The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $100,000. The investment is expected to generate annual net cash inflows of $135,000 for 8 years. Using the accounting rate of return model, what is the minimum average annual operating income that must be generated from this investment in order to achieve a 14% accounting rate of return?

a. $18,900

b. 53,200

c. 54,600

d. 65,000

Q#2.

You won the lottery and have a number of choices as to how to take the money. Which choice yields greater present value?

a. $10,000 a year at the end of each of the next 6 years using a 6% discount rate

b. $60,000 (lump sum) now using a 6% discount rate

c. $90,000 (lump sum) 7 years from now using a 6% discount rate

d. $90,000 (lump sum) 7 years from now using an 8% discount rate

Q#3.

All of the following are true of cost-based transfer prices except:

a. They generally promote optimal decision-making from the standpoint of the organization as a whole.

b. They may be based either on actual costs or standard (i.e., budgeted) costs.

c. Their use may not provide proper motivation for cost control on the part of the producing division

d. Generally speaking, such cost data are readily available