Question

A project requires an initial investment of $350,000 and will return $140,000 each year for six years.

Factors: Present Value of $1		Factors: Present Value of an Annuity
(r = 10%)		(r = 10%)
Year 0	1.0000
Year 1	0.9091	Year 1	0.9091
Year 2	0.8264	Year 2	1.7355
Year 3	0.7513	Year 3	2.4869
Year 4	0.6830	Year 4	3.1699
Year 5	0.6209	Year 5	3.7908
Year 6	0.5645	Year 6	4.3553

If taxes are ignored and the required rate of return is 10%, what is the project's net present value (rounded to the nearest dollar)?

Group of answer choices

$259,742

$114,803

$340,000

$109,742

A project requires an initial investment of $350,000 and will return $140,000 each year for six years.

Factors: Present Value of $1		Factors: Present Value of an Annuity
(r = 10%)		(r = 10%)
Year 0	1.0000
Year 1	0.9091	Year 1	0.9091
Year 2	0.8264	Year 2	1.7355
Year 3	0.7513	Year 3	2.4869
Year 4	0.6830	Year 4	3.1699
Year 5	0.6209	Year 5	3.7908
Year 6	0.5645	Year 6	4.3553

Ignoring qualitative issues and income taxes, should the company invest in this project?

Group of answer choices

No, because the net present value shows a return that is less than the company's required rate of return.

There is not enough quantitative information to answer this question.

No, because the internal rate of return cannot be calculated.

Yes, because the net present value shows a return that is above the company's required rate of return.

Clothing Products LLC manufactures shirts. The company is interested in outsourcing production to a reputable manufacturing company that can supply the shirts for $10 per unit. Clothing Products LLC produces 20,000 shirts each year. Variable production costs are $4 per unit and annual fixed costs are $160,000. If production is outsourced, all variable costs and 60 percent of annual fixed costs will be eliminated. Ignoring qualitative factors and income taxes, which is the best alternative?

Group of answer choices

Producing the shirts internally is the best option and results in $24,000 in savings compared to outsourcing production.

Outsourcing production is the best option and results in $64,000 in savings.

Producing the shirts internally is the best option and results in $64,000 in savings compared to outsourcing production.

Outsourcing production is the best option and results in $24,000 in savings.

Support Tech Inc. has two customers; Rosen and Hernandez. Rosen generates $300,000 in income after direct fixed costs are deducted, and Hernandez generates $290,000 in income after direct fixed costs are deducted. Allocated fixed costs total $510,000 and are assigned 40 percent to Rosen and 60 percent to Hernandez.  Total allocated fixed costs remain the same regardless of how these costs are assigned to customers.  

The amount of allocated fixed costs to be assigned to Hernandez totals ________ .

Group of answer choices

$204,000

$290,000

$220,000

$306,000

Support Tech Inc. has two customers; Rosen and Hernandez. Rosen generates $300,000 in income after direct fixed costs are deducted, and Hernandez generates $290,000 in income after direct fixed costs are deducted. Allocated fixed costs total $510,000 and are assigned 40 percent to Rosen and 60 percent to Hernandez.  Total allocated fixed costs remain the same regardless of how these costs are assigned to customers.  

After allocating fixed costs to Rosen, the amount of profit or (loss) for this customer totals ________ .

Group of answer choices

$590,000

($16,000)

$204,000

$96,000

Support Tech Inc. has two customers; Rosen and Hernandez. Rosen generates $300,000 in income after direct fixed costs are deducted, and Hernandez generates $290,000 in income after direct fixed costs are deducted. Allocated fixed costs total $510,000 and are assigned 40 percent to Rosen and 60 percent to Hernandez.  Total allocated fixed costs remain the same regardless of how these costs are assigned to customers.  

Which of the following is the course of action preferred by management regarding Hernandez?

Group of answer choices

Drop Hernandez because this customer generates a net loss.

Keep Hernandez because eliminating this customer would have the effect of decreasing company profit by $290,000.

Drop Hernandez because this customer generates less income after direct fixed costs than Rosen.

Keep Hernandez because eliminating this customer would have the effect of increasing company profit by $290,000.

Which of the following best describes the difference between using differential analysis and capital budgeting for decision-making?

Group of answer choices

Differential analysis involves short-run operating decisions and capital budgeting involves long-run capacity decisions.

Differential analysis involves long-run capacity decisions and capital budgeting involves short-run operating decisions.

Differential analysis and capital budgeting require an analysis of differential revenues and costs.

Differential analysis requires calculating the present value of future cash flows and capital budgeting does not.

Answer 1

A project requires an initial investment of $350,000 and will return $140,000 each year for six years.

NPV = 140,000 X 4.3553 - 350,000 = 609,742 - 350,000 = 259,742

Ignoring qualitative issues and income taxes, should the company invest in this project?

Yes, because the net present value shows a return that is above the company's required rate of return.

Ignoring qualitative factors and income taxes, which is the best alternative?

Particular	Make	Buy
Purchase price		200,000
Variable Cost	80,000
Fixed Cost	96,000
Total	176,000	200,000

Producing the shirts internally is the best option and results in $24,000 in savings compared to outsourcing production.

The amount of allocated fixed costs to be assigned to Hernandez totals

510,000 X 60% = 306,000

After allocating fixed costs to Rosen, the amount of profit or (loss) for this customer totals

300,000 - 510,000 X 40% = 96,000

Keep Hernandez because eliminating this customer would have the effect of decreasing company profit by $290,000.

Which of the following best describes the difference between using differential analysis and capital budgeting for decision-making

Differential analysis involves short-run operating decisions and capital budgeting involves long-run capacity decisions.