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Question
#1
Consider the following statements about the accounting for inflation in a capital budgeting
analysis
I
An analyst can use nominal dollars in conjunction with a
nominal interest rate
II
An analyst can use real dollars in conjunction with a real
interest rate
III
An analyst can use nominal dollars in conjunction with a
real interest rate
Which of the above statements is (are) correct?
II only
I and II
III only
I only
II and III
Management Accounting and Control - Capital Budgeting (Average)
Question #2
Maria Agnes Calay won a grant from Small Enterprise Business last month. Together with her
adviser, Alexander Grande III, they proposed to set up a La Presa Inn and Resort in their
barangay. Their business proposal is extensive, environmental friendly and helps nearby
barangays earn livelihood projects.
La Presa
La Presa is an upland barangay in Tuba, Benguet between the twin peaks of Mt. . Cabuyao and
Sto Tomas. They grow very good strawberries, lettuces and some crops grown in high altitude
places.
Project proponents
Xander Grande is the heir to the Grande Hotel. He has an extensive experience in running
hotel chains. He recently returned from his studies in London School of Economics where he
specialized in corporate finance. He runs his own investment company called Malaya
Investments with his staff, Orly.
Mang Boboy Calay is the leader of the La Presa project. He is high school graduate but is street
smart farmer. He does not like finance and management jargons but can execute business
strategies flawlessly if he understands the concept.
Manong Bangky is in charge of the Bangky Souvenirs business. He sells La Presa stuffed toys
made in Benguet. He has 2 best sellers items, the Kambal na Strawberry and Pusong
Strawberry.
Judy is the owner of the La Presa Restaurant uses 5,000 wanton per month for its famous Soup
no. 5. Current costs are:
Ingredients cost
P4.00
Labor and other variable
expenses
2.00
Mirasol runs the Strawberya Enterprises that manufactures and bottles vegetable mixtures
used for baking. Monthly production averages 200,000 bottles per month for the three
quarters of the current year. Each bottle sells for P20 in the market. The annual fixed costs for
Strawberya is P7,200,000 evenly distributed on a twelve month period.
The first quarter of the year is a critical period for Strawberya. It is during this quarter of the
year where the demand of the product is expected to go down due to seasonal variation.
During this period, the demand is estimated to be an average of 40,000 bottles per month.
On the belief that the company will be saved from greater losses, management is considering
to shutdown operations during the first quarter of the following year. A decision to shutdown
would decrease the fixed assets by 30%. However, during the shut down period, additional
cost of P140,000 is needed for security and insurance. To restart operations again, the company
will spend another P50,000.
The following data concerning production cost per bottle are gathered from the records of
Strawberya Enterprises:
Direct materials
7
Direct labor
4
Variable overhead
3
Variable selling
expenses
2
Total variable costs
16
Dona Soledad owns and operate the Grande Manufacturing, an agricultural and processing
company. It expects to spend P400,000 in 2016 in appraisal costs if it does not change its
incoming materials inspection method. If it decides to implement a new receiving method, it
will save P40,000 in fixed appraisal costs and variable costs of P0.40 per unit of finished
product. The new method involves P60,000 in training costs and an additional P160,000 in
annual equipment rental. It takes two units of material for each finished product.
Internal failure costs average P80 per failed unit of finished goods. During 2015, 5% of all
completed items had to reworked. External failure costs average P200 per failed unit. The
company’s average external failures are 1% of units sold. The company carries no ending
inventories, because all jobs are on a per order basis and a just-in-time inventory ordering
method is used.
Which of the following is taken into account by the net-present-value method?
A Project's Immediate Cash Flows (Yes): Cash Flows During a Project's Life (No); Time Value
of Money (No)
A Project's Immediate Cash Flows (Yes): Cash Flows During a Project's Life
(Yes); Time Value of Money (Yes)
A Project's Immediate Cash Flows (No): Cash Flows During
a Project's Life (Yes); Time Value of Money (Yes)
A Project's Immediate Cash Flows (No):
Cash Flows During a Project's Life (Yes); Time Value of Money (No)
A Project's Immediate
Cash Flows (Yes): Cash Flows During a Project's Life (Yes); Time Value of Money (No)
Management Accounting and Control - Capital Budgeting (Difficult)
Question #3
An investment opportunity costing P180,000 is expected to yield net cash flows of P53,000
annually for five years. The IRR of the investment is between
14 and 16%.
12 and 14%.
10 and 12%.
16 and 18%.
Management Accounting and Control - Capital Budgeting (Average)
Question #4
Lea Corporation will evaluate a potential investment in an advanced manufacturing system by
use of the net-present-value (NPV) method. Which of the following system benefits is likely to
be omitted from the NVP analysis?
Improved product quality.
Greater flexibility in the production process.
manufacturing cycle time.
Savings in operating costs.
Management Accounting and Control - Capital Budgeting (Difficult)
Shorter
Question #5
Anjo Company is considering a P600,000 investment in new equipment that is anticipated to
produce the following data over a five-year life:
Year
Cash Inflows
Cash Outflows
Depreciation
1
P350,000
P130,000
P120,000
2
450,000
190,000
120,000
3
450,000
170,000
120,000
4
340,000
150,000
120,000
5
300,000
130,000
120,000
Ignoring income taxes and assuming that cash flows occur evenly throughout a year, the
equipments approximate payback period is:
over 5 years
Solution:
2 years, 1 month
1 year, 7 months
2 years, 5 months
Net cash flows:
Year 1 (P350,000 P130,000)
P220,000
Year 2 (P450,000 P190,000)
260,000
Year 2 (P450,000 P170,000)
280,000
First two years: P600,000 - (P220,000 + P260,000) =
P120,000
Third year P120,000 / 280,000 = 0.43 year
12 months x 0.43 = 5.6 months
Payback period is 2 years and 5 months
Management Accounting and Control - Capital Budgeting (Difficult)
Question #6
Flying K Company has two service departments and two producing departments. Cost of the
Building and Grounds service department are allocated to other departments on the basis of
square footage of space occupied. The departments in the company and the amount of space
occupied. The departments in the company and the amount of space occupied. The
departments in the company and the amount of space occupied by each department are
presented below:
Building and Grounds
2,000 sq. ft.
Cafeteria
8,000 sq. ft.
Producing Department
A
20,000 sq. ft.
Producing Department
B
30,000 sq. ft.
Budgeted costs in the Building and Grounds department total P34,800 for the year.
Assuming the step method is used and Building and Grounds costs are allocated first, the
amount of the Building and Grounds costs allocated to the Cafeteria would be:
4,800
0
5,568
4,680
Solution:
34,800 x (8,000 / 58,000) = P4,800
Management Accounting and Control - Capital Budgeting (Difficult)
Question #7
When an organization allows divisional managers to be responsible for short-term loans and
credit, the division's invested capital should be measured by
average total liabilities minus total assets
total assets minus total liabilities
average total liabilities minus average current assets
average total assets minus average total liabilities
average total assets minus average current liabilities
Management Accounting and Control - Capital Budgeting (Average)
Question #8
Ian borrows P50,000 from her bank on January 1, 2001. She is to repay the loan in equal
annual installments over 30 years. How much is her annual repayment if the bank charges 10
percent interest?
1,667
4,200
5,304
2,865
Management Accounting and Control - Capital Budgeting (Average)
Question #9
The technique most concerned with liquidity is
Payback method
Internal rate of return
Net present value technique
book rate of return
Management Accounting and Control - Capital Budgeting (Average)
Question #10
Catherine Division has been stagnant over the past five years, neither growing (No)r
contracting in size and profitability. Investments in new property, plant, and equipment have
been minimal. Would the division's use of total assets (valued at net book value) when
measuring ROI result in (1) using numbers that are consistent with those on the balance sheet
and (2) a rising ROI over time?
Consistent with Numbers on the Balance Sheet? (No); Produce a Rising Return on
Investment Over Time? (Yes)
Consistent with Numbers on the Balance Sheet? (Yes); Produce a Rising Return on
Investment Over Time? (Yes)
Consistent with Numbers on the Balance Sheet? (Yes); Produce a Rising Return on
Investment Over Time? (No)
Consistent with Numbers on the Balance Sheet? (No); Produce a Rising Return on
Investment Over Time? (No)
Consistent with Numbers on the Balance Sheet? (Yes); Produce a Rising Return on
Investment Over Time? (Need more information to judge)
Management Accounting and Control - Capital Budgeting (Difficult)
Question #11
Louis recently invested in a project that has an expected annual cash inflow of P7,000 for 10
years, and an expected payback period of 3.6 years. How much did Louis invest in the project?
36,000
19,444
25,200
40,000
Management Accounting and Control - Capital Budgeting (Easy)
Question #12
James Company has an asset that cost P5,000 and currently has accumulated depreciation of
P2,000. Suppose the firm sold the asset for P2,500 and is subject to a 30% income tax rate.
The net after-tax cash flow of the disposal is
2,650
2,500
2,100
some other amount
2,350
Management Accounting and Control - Capital Budgeting (Average)
Question #13
Pepx is considering the acquisition of new machinery that will produce uniform benefits over
the next eight years. The following information is available:
Annual savings in cash operating costs:
P350,000
Annual depreciation expense: P250,000
If the company is subject to a 30% tax rate, what denominator should be used to compute the
machinery's payback period?
170,000
245,000
320,000
70,000
Some other amount
Management Accounting and Control - Capital Budgeting (Average)
Question #14
A learning curve of 70% assumes that direct labor costs are reduced by 30% for each doubling
of output. What is the cost of the 8th unit produced as an approximate percentage of the first
unit produced?
70%
34.30%
0.343%
30%
Solution:
Units Cumulative costs per unit
1
Assumed figure
P1.00
2
(1 x 70%)
0.70
4
(0.70 x 70%)
0.49
8
(0.49 x70%)
0.343
0.343 + 1
34.3%
Management Accounting and Control - Capital Budgeting (Difficult)
Question #15
Relevant cash flows for net present value (NPV) models include all of the following excep
depreciation expense on the newly acquired piece of equipment
cash outflows related to purchasing additional inventories for another retail store
outflows to purchase new equipment
reductions in operating cash flows as a result of using the new equipment.
Management Accounting and Control - Capital Budgeting (Average)
Question #16
The only future costs that are relevant to deciding whether to accept an investment are those
that will
affect net income in the period that they are incurred
be deductible for tax purposes
be different if the project is accepted rather than rejected
be saved if the project is accepted rather than rejected
Management Accounting and Control - Capital Budgeting (Average)
Question #17
If Co. X wants to use IRR to evaluate long-term decisions and to establish a cutoff rate of
return, X must be sure the cutoff rate is
at least equal to its cost of capital
at least equal to the rate used by similar companies
greater than the IRR on projects accepted in the past
greater than the current book rate of return
Management Accounting and Control - Capital Budgeting (Average)
Question #18
To partially eliminate the problems that are associated with the short-term focus of return on
investment, residual income, and EVA, the performance of a division's major investments is
commonly evaluated through
horizontal analysis
sensitivity analysis
performance operating plans
segmented reporting
postaudits
Management Accounting and Control - Capital Budgeting (Average)
Question #19
A cash flow measured in nominal dollars is
the adjustment for a change in the dollar's purchasing power
none of the above
the discounted cash flow
the actual cash flow that we experience
the realistic cash flow after taxes
Management Accounting and Control - Capital Budgeting (Average)
Question #20
Maria Agnes Calay won a grant from Small Enterprise Business last month. Together with her
adviser, Alexander Grande III, they proposed to set up a La Presa Inn and Resort in their
barangay. Their business proposal is extensive, environmental friendly and helps nearby
barangays earn livelihood projects.
La Presa
La Presa is an upland barangay in Tuba, Benguet between the twin peaks of Mt. . Cabuyao and
Sto Tomas. They grow very good strawberries, lettuces and some crops grown in high altitude
places.
Project proponents
Xander Grande is the heir to the Grande Hotel. He has an extensive experience in running
hotel chains. He recently returned from his studies in London School of Economics where he
specialized in corporate finance. He runs his own investment company called Malaya
Investments with his staff, Orly.
Mang Boboy Calay is the leader of the La Presa project. He is high school graduate but is street
smart farmer. He does not like finance and management jargons but can execute business
strategies flawlessly if he understands the concept.
Manong Bangky is in charge of the Bangky Souvenirs business. He sells La Presa stuffed toys
made in Benguet. He has 2 best sellers items, the Kambal na Strawberry and Pusong
Strawberry.
Judy is the owner of the La Presa Restaurant uses 5,000 wanton per month for its famous Soup
no. 5. Current costs are:
Ingredients cost
P4.00
Labor and other variable
expenses
2.00
Mirasol runs the Strawberya Enterprises that manufactures and bottles vegetable mixtures
used for baking. Monthly production averages 200,000 bottles per month for the three
quarters of the current year. Each bottle sells for P20 in the market. The annual fixed costs for
Strawberya is P7,200,000 evenly distributed on a twelve month period.
The first quarter of the year is a critical period for Strawberya. It is during this quarter of the
year where the demand of the product is expected to go down due to seasonal variation.
During this period, the demand is estimated to be an average of 40,000 bottles per month.
On the belief that the company will be saved from greater losses, management is considering
to shutdown operations during the first quarter of the following year. A decision to shutdown
would decrease the fixed assets by 30%. However, during the shut down period, additional
cost of P140,000 is needed for security and insurance. To restart operations again, the company
will spend another P50,000.
The following data concerning production cost per bottle are gathered from the records of
Strawberya Enterprises:
Direct materials
7
Direct labor
4
Variable overhead
3
Variable selling
expenses
2
Total variable costs
16
Dona Soledad owns and operate the Grande Manufacturing, an agricultural and processing
company. It expects to spend P400,000 in 2016 in appraisal costs if it does not change its
incoming materials inspection method. If it decides to implement a new receiving method, it
will save P40,000 in fixed appraisal costs and variable costs of P0.40 per unit of finished
product. The new method involves P60,000 in training costs and an additional P160,000 in
annual equipment rental. It takes two units of material for each finished product.
Internal failure costs average P80 per failed unit of finished goods. During 2015, 5% of all
completed items had to reworked. External failure costs average P200 per failed unit. The
company’s average external failures are 1% of units sold. The company carries no ending
inventories, because all jobs are on a per order basis and a just-in-time inventory ordering
method is used.
Mang Boboy will sell his old truck to finance the La Presa Inn. When disposing of the old truck
and replacing it with a new one, tax effect on
gain on sale of the old asset increases the basis of the new asset and loss on sale of the old
asset reduces the basis of the new asset
loss on sale of the old asset reduces the basis of the
new asset
gain on sale of the old asset increases the basis of the new asset
of the old asset reduces the basis of the new asset
Management Accounting and Control - Capital Budgeting (Easy)
gain on sale
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