Exam 25: Capital Budgeting and Managerial Decisions

If two projects have the same risks,the same payback periods,and the same initial investments,they are equally attractive.

When making capital budgeting decisions,companies usually prefer shorter payback periods.Explain why shorter payback periods are desirable.

Braybar Company is deciding between two projects.Each project requires an initial investment of $350,000.The projected net cash flows for the two projects are listed below.The revenue is to be received at the end of each year.Braybar requires a 10% return on its investments.The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below.Use net present value to determine which project should be pursued and explain why.

The accounting rate of return is calculated as:

Sherman Company can sell all of its products A and Z that it can produce,but it has limited production capacity.It can produce 6 units of A per hour or 10 units of Z per hour,and it has 20,000 production hours available.Contribution margin per unit is $12 for A and $10 for Z.What is the most profitable sales mix for this company?

A company is considering a proposal to invest $30,000 in a project that would provide the following net cash flows: Year 1 $ 6,500 Year 2 10,700 Year 3 15,000 Year 4 12,800 Compute the project's payback period.

An _____________________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.

A disadvantage of using the payback period to compare investment alternatives is that:

The ___________ is computed by discounting the future net cash flows from the investment at the project's required rate of return and then subtracting the initial amount invested.

You have evaluated three projects using the net present value (NPV)method.How would you decide which one of the projects to select?

The accounting rate of return uses cash flows in its calculation.

Saxon Manufacturing is considering purchasing two machines.Each machine costs $9,000 and will produce cash flows as follows: End of Machine Year A B 1\ldots\ldots\ldots\ldots\ldots \ 5,000 \ 1,000 2\ldots\ldots\ldots\ldots\ldots 4,000 2,000 3\ldots\ldots\ldots\ldots\ldots 2,000 11,000 Saxon Manufacturing uses the net present value method to make the decision,and it requires a 15% annual return on its investments.The present value factors of 1 at 15% are: 1 year,0.8696; 2 years,0.7561; 3 years,0.6575.Which machine should Saxon purchase?

A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value.The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year.If a table of present values of 1 at 12% shows values of 0.8929 for one year,0.7972 for two years,and 0.7118 for three years,what is the net present value of the cash flows from the investment,discounted at 12%?

A company is considering purchasing a machine for $21,000.The machine will generate an after-tax net income of $2,000 per year.Annual depreciation expense would be $1,500.What is the payback period for the new machine?

Peters,Inc.sells a single product and reports the following results from sales of 100,000 units: Sales ($45 unit)…………..…………….… $4,500,000 Less costs and expenses: Direct materials ($16/unit)………….… $1,600,000 Direct labor ($9/unit)…………….….… 900,000 Variable overhead ($3/unit)…….…….. 300,000 Fixed overhead ($8.10/unit)…….......... 810,000 Variable administrative ($4.50/unit)…. 450,000 Fixed administrative ($4/unit)………... 400,000 Total costs and expenses……………... $(4,460,000) Operating income………………………… $ 40,000 A foreign company wants to purchase 15,000 units.However,they are willing to pay only $36 per unit for this one-time order.They also agree to pay all freight costs.To fill the order,Peters will incur normal production costs.Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance.No additional administrative costs (variable or fixed)will be incurred in association with this special order. Required: (1)Should Peters accept the order if it does not affect regular sales? Explain. (2)Assume that Peters can accept the special order only by giving up 5,000 units of its normal sales.Should Peters accept the special order under these circumstances?

The calculation of the payback period for an investment when net cash flow is even (equal)is:

Monterey Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value.Monterey uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year.In calculating the accounting rate of return,what is Monterey's average investment?

Marcus processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data: Sales Value Additional Value after with no further Processing further Product Processing Costs processing Acta \ 1,350 \ 900 \ 2,700 Corda 450 225 630 Limo 90 45 180 Which product(s)should not be processed further?

In evaluating capital budgeting alternatives,there are two primary methods that do not consider the time value of money. These methods are _______________ and __________________. There are also two primary methods that consider the time value of money; these are ___________________ and _______________________.

A company is considering two projects,Project A and Project B.The following information is available for each project: Project A Project B Investment $2,000,000 $500,000 Net present value of cash flows …… $800,000 $300,000 Calculate the profitability index for each project.Based on the profitability index, which project should the company pursue and why?