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Exam 25: Capital Budgeting and Managerial Decisions

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Question 101

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Briefly describe the time value of money. Why is the time value of money important in capital budgeting?

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The time value of money means that, typi...

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Question 102

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Lattimer Company had the following results of operations for the past year: $\begin{array}{l}\text { Sales } ( 15,000 \text { units at } \$ 12 ) &&\$18,000\\\text { Variable manufacturing costs } & \$ 97,500 & \\\text { Fixed manufacturing costs } & 21,000 & \\\text { Selling and administrative expenses (all fixed) } & 36,000 & ( 154,500 ) \\\text { Operating income } & & \$ 25,500\end{array}$ A foreign company whose sales will not affect Lattimer's market offers to buy 5,000 units at $7.50 per unit. In addition to existing costs, selling these units would add a $0.25 selling cost for export fees. Lattimer's annual production capacity is 25,000 units. If Lattimer accepts this additional business, the special order will yield a:

A) $3,750 profit.
B) $3,250 loss.
C) $8,250 loss.
D) $2,000 loss.
E) $5,000 profit.

F) A) and E)
G) B) and C)

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Question 103

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The following present value factors are provided for use in this problem. $\begin{array} { | l | l | l | } \hline \text { Periods } & \text { Present value of } \mathbf { \$ 1 } \text { at } \mathbf { 8 \% } & \text { Present value of an annuity of } \mathbf { \$ 1 } \text { at } \mathbf { 8 \% } \\\hline 1 & 0.9259 & 0.9259 \\\hline 2 & 0.8573 & 1.7833 \\\hline 3 & 0.7938 & 2.5771 \\\hline 4 & 0.7350 & 3.3121 \\\hline\end{array}$ Xavier Co. wants to purchase a machine for $37,000 with a four-year life and a $1,000 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $12,000 in each of the four years. What is the machine's net present value?

A company manufactures two products. Each unit of product X requires 10 machine hours and each unit of product Y requires 4 machine hours. The company's productive capacity is limited to 180,000 machine hours. Each unit of product X sells for $15 and has variable costs of $7. Each unit of product Y sells for $8 and has variable costs of $3. If the company can sell all that it produces of both products, what should the sales mix be?

If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B; assuming fixed costs are the same, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin.

The potential benefits lost by taking a specific action when two or more alternative choices are available is known as a(n) :

The ________ is computed by dividing a project's annual after-tax net income by the annual average amount invested.

Restating future cash flows in terms of their present value is called discounting.

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. $\begin{array} { l r r } & \text { Project X } & \text { Project } Y \\\text { Cost of machine } & \$ 68,000 & \$ 60,000 \\ \text { Net cash flow: }\\\text { Year 1 } & 24,000 & 4,000 \\\text { Year } 2 &24,000 & 26,000 \\\text { Year 3 } & 24,000 & 26,000\\\text { Year 4 } & 0 & 20,000 \\\end{array}$ - If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

Incremental costs should be considered in a make or buy decision.