Explain some of the uncertainties associated with cost pools (in activity based costing)

A certain firm is evaluating the proposed acquisition of a new milling machine. The cost
of machine is Rs. 1,000,000 and it would cost another Rs. 200,000 to modify it for
special use. The firm has been using the straight-line depreciation assuming 5 years life
and Rs 100,000 of salvage value. The machine would require an increase in net working
capital (inventory) of Rs.100,000. The milling machine would have no effect on
revenues, but it is expected to save the firm Rs. 400,000 per year in before-tax operating
costs, mainly in labor. Company’s marginal tax rate is 40 percent. If the project’s cost of
capital is 12 percent, should the machine be purchased? Give your decision based on
NPV and IRR.

A particular ranking system determines the cost of living in the most expensive cities in the world as an index. This index scales city X as 100 and expresses the cost of living in other cities as a percentage of the city X cost. For​ example, in​ 2007, the cost of living index in city Y was 125.7 ​, which means that it was 26 ​% higher than city X. The accompanying scatterplot shows the index for 2007 plotted against the 2006 index for 15 cities. Complete parts a through e below. LOADING... Click the icon to view the data table and scatterplot. ​a) Describe the association between the cost of living indices in 2007 and 2006. Choose the correct answer below. A. The association between the cost of living indices in 2007 and 2006 is​ negative, linear, and strong. B. The association between the cost of living indices in 2007 and 2006 is​ negative, linear, and weak. C. The association between the cost of living indices in 2007 and 2006 is​ positive, linear, and strong. Your answer is correct. D. The association between the cost of living indices in 2007 and 2006 is​ positive, curved, and strong. E. The association between the cost of living indices in 2007 and 2006 is​ positive, linear, and weak. F. There is no association between the cost of living indices in 2007 and 2006. ​b) The Upper R squared for the regression equation is 0.847 . Interpret the value of Upper R squared . Select the correct choice below and fill in the answer box to complete your choice. ​(Type an integer or a​ decimal.) A. The value of Upper R squared equalsnothing ​% indicates the percentage of the variability in cost of living in 2006 that can be explained by variability in cost of living in 2007. B. The value of Upper R squared equals84.7 ​% indicates the percentage of the variability in cost of living in 2007 that can be explained by variability in cost of living in 2006. Your answer is correct. C. The value of Upper R squared equalsnothing ​% indicates the percentage of the variability in cost of living in 2006 that cannot be explained by variability in cost of living in 2007. D. The value of Upper R squared equalsnothing ​% indicates the percentage of the variability in cost of living in 2007 that cannot be explained by variability in cost of living in 2006. ​c) Find the correlation. The correlation coefficient is . 920 . ​(Round to three decimal places as​ needed.) ​d) Using the data​ provided, find the least squares fit of the 2007 index to the 2006 index. ModifyingAbove 2007 Index with caret equals3.605plusleft parenthesis nothing right parenthesis times 2006 Index ​(Round to three decimal places as​ needed.) ​e) Predict the 2007 cost of living index of city 2 and find its residual. The predicted 2007 cost of living index of city 2 is nothing . ​(Round to one decimal place as​ needed.)

City   Index_2006   Index_2007
1   117.3   125.7
2   121.8   122
3   102.3   104.3
4   93   95.8
5   111.7   119.6
6   112.9   124.8
7   95.3   97.3
8   109.9   111.5
9   100.5   101.8
10   95.8   103.6
11   121.2   121.4
12   119.3   124.6
13   105.9   118.3
14   111.2   119.4
15   111.3   115.8

"A firm is considering purchasing a computer system. -Cost of system is $199,000. The firm will pay for the computer system in year 0. -Project life: 5 years -Salvage value in year 0 (constant) dollars: $17,000 -Depreciation method: five-years MACRS -Marginal income-tax rate = 40% (remains constant over time) -Annual revenue = $144,000 (year-0 constant dollars) -Annual expenses (not including depreciation) = $91,000 (year-0 constant dollars) If the general inflation rate is 4.1% during the project period (which will affect all revenues, expenses, and the salvage value but not depreciation), determine the INFLATION-FREE IRR' of the computer system. Enter your answer as a percentage between 0 and 100."

Question 16

The cost of capital associated with an investment does not depend on the risk of that investment.

Select one:

True

False

Question 17

Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,000. There are two options for future use of the land: 1) the land can be sold today for $350,000 on a net after-tax basis; 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at?

Select one:

a. The sales price of $350,000 less the book value of the improvements.

b. The present book value of $225,000.

c. The original $150,000 purchase price of the land itself.

d. The property should be valued at zero since it is a sunk cost.

e. The after-tax sales value of $350,000.

Question 18

Generally, bankruptcy costs have no impact on a firm’s decision to increase debt financing.

Select one:

True

False

Question 19

Watson's Automotive has a $400,000 bond issue outstanding that is selling at 85 percent of face value. Watson's also has 21,000 shares of common stock outstanding with a market price of $21 a share. What is the weight of the debt as it relates to the firm's weighted average cost of capital?

Select one:

a. 44 percent

b. 42 percent

c. 48 percent

d. 40 percent

e. 41 percent

Question 20

The market value of a firm that invests in projects providing a return less than its WACC should increase over time.

Select one:

True

False

An analyst wants to determine whether the cost of a flight depends on the distance. She collects a set of data of the round-trip fare for flights between Boston and some other cities on major airlines and the distance between cities. The following table gives the descriptive statistics of the distance (in miles) and the cost (in dollars). Mean Standard Deviation Miles (x) 1650.4 1074.4 Costs (y) 291 111.71 r = 0.9352 Compute the coefficient of determination and interpret your answer.

a. 93.53% of total variations on the y-variable (Cost of the flight) can be explained by the regression line

b. 87.46% of total variations on the y-variable (Cost of the flight) can be explained by the regression line

c. There is a positive, strong linear relationship between the cost of the flight and the distance

d. There is a positive, weak linear relationship between the cost of the flight and the distance e. None of the choices

New lithographic equipment, acquired at a cost of $843,200 on March 1 at the beginning of a fiscal year, has an estimated useful life of five years and an estimated residual value of $94,860. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. On the basis of the data presented to the manager, the double-declining-balance method was selected.

In the first week of the fifth year, on March 4, the equipment was sold for $140,199.

Tyson is considering 2 alternative investments (A and B). The cost of each is $100,000. The annual net cash flows for the 5 year investment are:

Answer the following:

Payback period for Alternative 'A'[Q1] format: x.xx

Payback period for Alternative 'B'[Q2] format: x.xx

NPV for Alternative 'A' at 10% discount rate[Q3] format: $xx,xxx

NPV for Alternative 'B' at 10% discount rate[Q4] format: $xx,xxx

IRR for Alternative 'A'[Q5] format: xx.xx%

IRR for Alternative 'B'[Q6] format: xx.xx%

Profitability Index Alternative 'A'[Q7] format: x.xx

Profitability Index Alternative 'B'[Q8] format: x.xx

King’s Department Store is contemplating the purchase of a new machine at a cost of $35,370. The machine will provide $5,200 per year in cash flow for nine years. King’s has a cost of capital of 11 percent. Use Appendix D for an approximate answer but calculate your final answer using the financial calculator method.

What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)