Exam 9: Using Accounting Information to Make Managerial Decisions

Andrea Kris is opening a small flower shop that will focus primarily on delivery, though it will provide a small showroom for walk-in customers.A local florist is retiring and selling her small flower shop to Andrea for $162,500.The shop has a remaining life of 20 years.Andrea expects to have incremental revenues of $81,250 per year and pay approximately 60% of revenues in operating costs.What is the payback period for Andrea's flower shop?

Investing in a capital project may involve making screening decisions, preference decisions, and funding decisions.Discuss how each of these decisions is made, the goal of each, and give an example of each.

To calculate the present value of an annuity, divide the amount to be received each year by the present value of an annuity factor.

The accounting rate of return differs from other methods of capital budgeting in that it

In calculating the net present value of a project, the appropriate discount rate should be similar across companies.

Like net present value, the internal rate of return considers the amount and timing of future cash flows.

Your company is considering a capital project that will require a net initial investment of $249,972.The project is expected to have a 7-year life and will generate an annual net cash inflow of $43,200.Using the tables, what is the internal rate of return?

When a company invests in a capital asset, recouping the original investment is called return on investment.

Friendly Freddie's Furniture Store uses an 8-year old van to deliver furniture to customers within a 50-mile radius of the store.The van has an original cost of $22,000.It costs $1,000 each month to operate the van.Unfortunately, the van was in an accident last week and it will cost $5,000 for repairs.Freddie has found a new van that will cost $35,000.Freddie expects to get 10 years use from the new van and estimates that the operating costs will be $800 each month.Freddie can sell his old van as is for $2,500. Required: Identify the amount and timing of the cash flows relevant to Friendly Freddie's decision to replace the van.

Which of the following does not use interest expense as a component of amounts in its computations?

Press Smart's pressing machine sells for $185,556.At this price, the annual cost savings that the pressing machine will generate for Rob's Dry Cleaner over its 8-year life will yield an internal rate of return of 12%.Rob's Dry Cleaner requires that all projects achieve a return of 15%. Required: What price does Rob's Dry Cleaner need to negotiate with Press Smart so that the system will achieve that return?

The accounting rate of return is also known as the

Capital budgeting decisions involve all of the following except

Marple Industries is evaluating a capital project with a net initial investment of $120,000.The project is expected to generate net cash inflows of $15,000 each year.Calculate the payback period for the project.

The net initial investment is the net cash outflow

The following data pertain to an investment proposal: What is the present value of the proposed investment?

Woods Manufacturing is considering the purchase of a new sewing machine that costs $18,000.The machine, because of its efficiency, will save about $4,000 in cost each year.The machine is expected to have a salvage value of $3,000 and a life of 6 years.Woods' required rate of return is 12%.Using the interest tables, what is the machine's net present value?

Two types of return can be expected from investment in long-term assets.There are

Bend Manufacturers is considering investing in a new truck that will be used to deliver its custom-made furniture.The truck currently used by Bend cost the company $72,000 eight years ago.Two years from now, the company anticipates spending $20,000 to overhaul the old truck, at which time the truck could be used for an additional 10 years.The old truck costs $8,000 per month in gas, insurance, and other costs to operate.Ron Shop, Controller of Bend Manufacturers, is considering the purchase of a new truck which will cost $100,000 and which has a useful life of 10 years.The new truck will only cost $4,800 per month to operate but will require an overhaul 8 years from now that is expected to cost $8,000.Ron believes the old truck can be sold for $16,000.If the new truck is purchased, he estimates that the new truck could be sold for $28,000 at the end of its useful life.Which of the following is not a relevant cash flow in the decision to replace the truck?

Major Emig owns a pet store.Major wants to convert a storeroom into a space that can be leased to a pet groomer.Major believes that pet owners coming to the store to have their pets groomed will shop while they wait and generate additional revenues for the store.The conversion would cost $180,000 and will have a useful life of 20 years.The space will be leased to a local pet groomer for $36,000 per year.Electricity, water and other utilities are expected to be $7,200 per year. Required: a.Calculate the annual operating income generated by the conversion project. b.Calculate the accounting rate of return for the conversion project. c.If the conversion project is successful in generating new business for the pet store, how will the accounting rate of return be affected?