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| 1.
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The cost of a new machine is $24,000. The machine has a 5-year service life and no salvage. The annual cash flow will be 15% of the cost of the machine. The payback will occur: |
| | A) | in 6.7 years |
| | B) | in 15.0 years |
| | C) | in 1.5 years |
| | D) | after the machine's service life has expired |
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| 2.
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Equipment will be purchased at a cost of $30,000. It will have no salvage value. The cash flows are expected to be: $12,000, $10,000, $15,000, and $8,000, over the life of the equipment. The payback period will occur in: |
| | A) | 3.1 years |
| | B) | 4.0 years |
| | C) | 2.50 years |
| | D) | 2.53 years |
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| 3.
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The company expects an after-tax income of $2,400 per year over the life of an investment that will cost $25,000, has a 5-year service life, and has no salvage value. The average return on investment (accounting rate of return) is: |
| | A) | 19.2% |
| | B) | 9.2% |
| | C) | 10.4% |
| | D) | 9.6% |
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| 4.
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Which is not true of the net present value method of determining the acceptability of an investment? |
| | A) | Net cash flows from the investment are estimated |
| | B) | The net cash flows are discounted at an acceptable rate of return |
| | C) | The initial cost of the investment is added to the net cash flows |
| | D) | A positive net present value of the cash flows is required |
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| 5.
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Each of the three projects cost $20,000, the amount available for investment. Each project has a service life of 3 years and no salvage value. The investment cash flows and present value of $1 at 10% are: | Project A | Project B | Project C | PV factor
at 10% | | Year 1 | $10,000 | $28,000 | $ 1,000 | .909 | | Year 2 | 10,000 | 1,000 | 3,000 | .826 | | Year 3 | 10,000 | 1,000 | 26,000 | .751 |
If 10% is an acceptable earnings rate, which project should be selected? |
| | A) | Project A |
| | B) | Project B |
| | C) | Project C |
| | D) | none of the projects |
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| 6.
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When selecting an earnings rate to use in evaluating projects under the net present value method, a company will consider a rate that: |
| | A) | is equal to the current interest rate to borrow money |
| | B) | is equal to the current rate of return on assets |
| | C) | is equal to the current tax rate |
| | D) | exceeds the current interest rate to borrow money |
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| 7.
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Which line of the following schedule is incorrect? |
| | A) | Payback period
Basis of Measurement: Cash Flows
Measure Expressed As: Number of Years |
| | B) | Net Present value
Basis of Measurement: Cash Flows
Measure Expressed As: Dollar Amount |
| | C) | Internal rate of return
Basis of Measurement: Accrual Income
Measure Expressed As: Percent |
| | D) | Accounting rate of return
Basis of Measurement: Accrual Income
Measure Expressed As: Percent |
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| 8.
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Which of the following is incorrect? |
| | A) | Payback period
Basis of Measurement: Cash Flows
Measure Expressed As: Number of Years |
| | B) | Net Present value
Basis of Measurement: Cash Flows
Measure Expressed As: Percent |
| | C) | Internal rate of return
Basis of Measurement: Cash Flows
Measure Expressed As: Percent |
| | D) | Accounting rate of return
Basis of Measurement: Accrual Income
Measure Expressed As: Percent |
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| 9.
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An additional cost that results from a particular course of action is known as a(an): |
| | A) | sunk cost |
| | B) | opportunity cost |
| | C) | incremental cost |
| | D) | net present cost |
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| 10.
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A cost incurred as a consequence of a past irrevocable decision and that, therefore, cannot be avoided, is known as a: |
| | A) | decremental cost |
| | B) | differential cost |
| | C) | sunk cost |
| | D) | opportunity cost |
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| 11.
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Which of the following is not a relevant cost in decision making? |
| | A) | Opportunity cost |
| | B) | Relevant benefits |
| | C) | Avoidable costs |
| | D) | Sunk costs |
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| 12.
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The cost to produce 8,000 units at 70% capacity is:
Direct materials: $16,000
Direct labour: $8,000
Factory overhead, all fixed: $12,000
Selling expense (40% variable, 60% fixed): $8,000
What unit price would the company have to charge to make $2,000 on a sale of 500 additional units that would be shipped out of the normal market area? |
| | A) | $8.90 |
| | B) | $7.80 |
| | C) | $7.40 |
| | D) | $7.00 |
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| 13.
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Given the following list of costs, which one should be ignored in a decision to produce additional units of product for a factory that is operating at less than 100% capacity, and the additional business will not use up the remainder of the plant capacity? |
| | A) | Fixed administrative expenses |
| | B) | Variable factory overhead |
| | C) | Per hour cost of direct labour |
| | D) | Variable selling expenses |
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| 14.
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Henny-Penny has 8,000 defective units of a product that cost $4 per unit to manufacture, and can be sold for $2 per unit. These units can be reworked for $1 per unit and sold at their full price of $6 each. If Henny-Penny rework the defective units, how much net return will result? |
| | A) | $ 24,000 |
| | B) | $ 8,000 |
| | C) | $(24,000 |
| | D) | $ 48,000 |
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| 15.
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Henny-Penny has 8,000 defective units of a product that cost $3 per unit to manufacture, and can be sold for $1 per unit. These units can be reworked for $3 per unit and sold at their full price of $5 each. Should Henny-Penny rework the defective units, how much incremental net return will result? |
| | A) | $24,000 |
| | B) | $(8,000) |
| | C) | $16,000 |
| | D) | $ 8,000 |
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| 16.
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Sales of 50,000 units at $4 per unit are made monthly. The unit cost is $1.50. Incremental costs of $1 per unit to further process the units will result in the 50,000 units being sold for $4.75 each. The company should: |
| | A) | Do further processing and sell the units at $4.75 |
| | B) | Sell the units at the current stage of completion (50,000 @ $4) |
| | C) | Do further processing on only one-half of the units |
| | D) | Commit its resources to a different product |
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| 17.
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Product A sells for $8 per unit. Its variable cost per unit is $5. Product B sells for $12 per unit. Its variable cost per unit is $8. The plant capacity is 300,000 machine hours. Which of the following will provide the best sales mix of Product A and Product B, assuming that the market limitation of Product A is 200,000 units? |
| | A) | 200,000 units of Product A, 100,000 units of Product B |
| | B) | 100,000 units of Product A, 200,000 units of Product B |
| | C) | 150,000 units of Product A, 150,000 units of Product B |
| | D) | No units of Product A, 300,000 units of Product B |
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| 18.
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Segment Auburn generates total sales of $52,000, its direct expenses are $11,000, and its indirect expenses are $13,000. Its cost of goods sold is $32,000. $3,000 of the direct expenses and $4,000 of its indirect expenses are avoidable expenses. |
| | A) | The company will lose $13,000 if Segment Auburn is eliminated. |
| | B) | Segment Auburn's revenue is greater than its avoidable costs. |
| | C) | Segment Auburn is a candidate for elimination. |
| | D) | Segment Auburn's unavoidable costs are greater than avoidable costs. |
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| 19.
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The following incomplete information is provided for investment decisions.| Year | Cash
Flow | Discount
Factor | Dicounted
Cash Flows | Cumulative
Cash Flows | | 0 | $(20,000) | 1.000 | $(20,000) | $(20,000) | | 1 | 8,000 | .909 | 7,272 | | | 2 | 12,000 | .826 | | | | 3 | 14,000 | .751 | | |
Using break-even time (BET) analysis, the investment will: |
| | A) | be recovered at the end of year 2 |
| | B) | not be recovered in three years |
| | C) | be recovered in 2.27 years |
| | D) | be recovered in 2.73 years |
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| 20.
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Which of the following is NOT a disadvantage of the net present value method? |
| | A) | Difficult to compare dissimilar projects. |
| | B) | Does not consider time value of money. |
| | C) | It is limited by the subjectivity inherent in predicting future cash flows. |
| | D) | It is limited by the subjectivity inherent in selecting the discount rate. |
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| 21.
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Which of the following statements is not true? |
| | A) | The payback period method is easy to calculate. |
| | B) | The accounting rate of return allows comparison across projects. |
| | C) | Two projects with the same net present value are equally desirable. |
| | D) | A project that has a higher IRR than the hurdle rate should be accepted. |
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| 22.
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Which of the following statements is CORRECT? |
| | A) | The internal rate of return is the rate such that the net present value equals zero. |
| | B) | When the net present value of a project is greater than or equal to zero, the project should be accepted. |
| | C) | When two projects have the same expected cash flows but differ in the timing of those flows, the accounting rate of return is superior to the net present value method. |
| | D) | The net present value method allows comparison of dissimilar projects. |
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