Question 1: (3 marks)

Pheonix Co. wants to buy a machine to automate is manufacturing process at a cost of $675,000. The machine will be integrated into its existing manufacturing process. The investment is expected to generate $250,000 annual cash flows for a period of four years. The required rate of return is 14%. The machine is expected to have $35,000 at the end of the four-year period.

Required:

(a) What is the net present value of the investment? Would the company purchase the new machine? (2 marks)

(b) Would your answer of part (a) be different if there is a cut-off period of 2 years for Pheonix Co. to adopt any project? Explain. (1 mark)

Question 2: (3 marks)

Kid Co. manufactures a part for use in its production of toys. When 10,000 items are produced, the costs per unit are:

Direct materials	$0.60
Direct labor	3.00
Variable production overhead	1.20
Fixed production overhead		1.60
Total	$6.40

Toy Toy Co. has offered to sell to Kid Co. 10,000 units of the part for $6.00 per unit. The idle factory facilities could be sublet and earn rental income of $9,000 if Kid Co. accepts the offer. In addition, $1.00 per unit of fixed production overhead on the original item would be eliminated.

Required:

Which alternative is best for Kid Co.? By how much? (3 marks)

Question 3: (4 marks)

ABC Corp. operates chains of restaurants. It is structuring its performance measures with following objectives for coming year. Suggest TWO performance measures under each objective.

1. Increase profitability

2. Provide excellent service to customers

3. Establish competitive edge in in product and process innovations

4. Develop efficient production processes with latest information technology

Note: show all your workings to support your answers.