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A306 Healy|90 Exam 2 Revision
Questions
The potential benefit given up when selecting one alternative over another is a(n) ______ cost. - โ โ opportunity
When computing the simple rate of return, the annual incremental net operating income in the numerator should ______ the investment's depreciation charges. - โ โ be reduced by
The length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates is the - โ โ payback period
The term capital budgeting is used to describe how managers plan significant investments in projects that have ______ implications. - โ โ long-term
Another term for the minimum required rate of return is the cost of - โ โ capital
The internal rate of return - โ โ is the discount rate that makes NPV equal to zero for a project
Suppose a project with a negative net present value would provide intangible benefits. To estimate the annual value of intangible benefits needed to accept the project, ______ the negative net present value excluding intangible benefits by the ______. - โ โ divide, present value factor for an annuity
The net present value of a project is ______. - โ โ used when determining whether or not a project is an acceptable capital investment and the difference between the present value of cash inflows and present value of cash outflows for a project
Investment required รท Annual net cash inflow is the formula to find the factor that needed to calculate the ______. - โ โ internal rate of return
A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in ______. - โ โ contribution margin
Stephens, Inc. is considering dropping a product line. During the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $110,000. Of the fixed expenses, $95,000 are avoidable. If Stephens drops the product line, net operating income will ______. - โ โ increase by 11,
- relevant costs : VC and avoidable FC
170,000-86,000 = contribution margin of $84,
A set of activities ranging from development to production to after- sales service is called ______. - โ โ the value chain
Anything that prevents you from getting more of what you want is a(n) _______ - โ โ constraint
When making a volume-trade off decision, managers should ignore ______. - โ โ fixed costs
To maximize total contribution margin when a constrained resource exists, produce the products with the ______. - โ โ highest contribution margin per unit of the constrained resource
Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows:
Variable manufacturing cost
cost per unit: $
cost total: $240,
Supervisor salary
$
$60,
Depreciation
$
$20,
Allocated fixed overhead
$
If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should ______. - โ โ Buy:
$18 x 20,000= $360,
Make:
Relevant costs = Variable Manufacturing and supervisor salary
$15 x 20,000= $300,
$360,000-$300,000= $60,000 advantage to make
To determine if a project is acceptable compare the internal rate of return to the company's - โ โ hurdle rate
The simple rate of return equals the - โ โ annual incremental net operating income รท initial investment
The key to effective decision making is ______. - โ โ Differential analysis
Synonyms for differential costs include ______ cost. - โ โ incremental and avoidable
When making a decision, qualitative differences between alternatives ______ be ignored. - โ โ should not
When making a decision whether to keep an existing piece of equipment or replace it, which of the following is (are) considered a sunk cost? - โ โ Both the original purchase price and annual depreciation expense
When making a decision, irrelevant items are included in the analysis of both alternatives when using ______. - โ โ the total cost approach ONLY.
In order to prevent confusion and keep attention focused on critical information, it is desirable to ________. - โ โ isolate relevant costs from irrelevant costs.
When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n) ______ cost. - โ โ relevant
When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) ______ cost. - โ โ avoidable and/or incremental
Which of the following should not be included in the analysis when making a decision? - โ โ Non-differential future costs and sunk costs
Differential costs and benefits that should be considered in a decision ______. - โ โ may be qualitative or quantitative
When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are ______ costs. - โ โ irrelevant
Isolating relevant costs is desirable because ______. - โ โ critical information may be overlooked with the total cost approach, all information needed for the total cost approach is rarely available, and irrelevant costs may be used incorrectly in the analysis
When a constraint exists, companies need to focus on maximizing _____ - โ โ total contribution margin
When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a(n) ______ cost. - โ โ irrelevant
Differential revenue is an example of a(n) ______ benefit.
Multiple choice question. - โ โ relevant
If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is ______ - โ โ The profit from the best alternative use of the resource
capacity, choosing to lease or buy new equipment, and deciding to replace old equipment
The two broad categories into which capital budgeting decisions fall are _____ decisions and ______ decisions. - โ โ screening, preference
Typical capital budgeting cash outflows include ______. - โ โ working capital invested, initial equipment investments, and installation costs
Working capital ________ - โ โ often increases when a company takes on a new project
The term discounting cash flows refers to the process of calculating the ______ value of those cash flows. - โ โ present
What assumption underlies net present value analysis? - โ โ All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate
Capital budgeting decisions ______. - โ โ require a great deal of analysis prior to acceptance and involve an immediate cash outlay in order to obtain a future return
When a capital investment decision is being made between two or more alternatives, the project with the shortest payback period is always the most desirable investment. - โ โ false
Current Assets less current liabilities - โ โ working capital
One dollar today is worth ______ a dollar a year from now - โ โ more than
A capital investment project's payback period is the ______. - โ โ length of time it takes for the project to recover its initial cost from the net cash inflows generated
The basic premise of the payback method is the ______, the more desirable the investment. - โ โ faster the cost of the investment is recovered
NPV is the _______ - โ โ difference between the present value of a project's cash inflows and the present value of the project's cash outflows
The cost of capital is the ______. - โ โ average rate of return a company must pay its long-term creditors and shareholders for the use of their funds
In an equipment capital budgeting decision, recovering the original investment means that the ______ - โ โ investment has generated enough cash inflows to completely cover the cost of the equipment
When net cash inflow is the same every year, the equation used to calculate the factor of the internal rate of return is _________ - โ โ investment required / annual net cash inflow
The factor of the internal rate of return is 5.033 for a project lasting 7 years. The internal rate of return is ______ % - โ โ 9% (annuity table)
Little Tots Gym has a required rate of return of 13%. The gym is considering the purchase of $12,500 of new equipment. The internal rate of return on the project has been calculated to be 11%. This project ______. - โ โ should be rejected
A postaudit is a valuable process because ______. - โ โ actual values can be used to determine if the project is performing as expected.
Which of the following statements are true?
- When using the internal rate of return method, the cost of capital is used as the hurdle rate.
- In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return.
- When the net present value method is used, the discount rate equals the hurdle rate.
- The cost of capital may be used to screen out undesirable projects. - โ โ - When using the internal rate of return method, the cost of capital is used as the hurdle rate.
- When the net present value method is used, the discount rate equals the hurdle rate.
- The cost of capital may be used to screen out undesirable projects.
Typical capital budgeting decisions include _____ decisions. - โ โ lease or buy, cost reduction, and equipment selection
