Question 7A Company A sets price equal to cost plus 60%. Recently, Company A cha

Question

Question 7A
Company A sets price equal to cost plus 60%. Recently, Company A charged a customer a price of $42 for an item. What was the cost of the item to Company A?

a $26.25

b $42

c $25.20

d $67.20

e $40.32




Question 7B
Company A has just designed a new product with a target cost of $64. Company A requires new product to have a profit of 20%. What is the target price for the new product?

a $64

b $12.80

c $320

d $80

e $53




Question 7C
The capital investment decision making model that assumes that each cash inflow is reinvested at the required rate of return is

a net present value.

b internal rate of return.

c payback period.

d accounting rate of return.

e none of these.






Question 7D
The best model for choosing the best of several competing projects is

a net present value.

b internal rate of return.

c payback period.

d accounting rate of return.

e none of these.






Question 7E
One disadvantage of the payback period is that

a it is sometimes used as a crude measure of risk.

b managers may choose investments with quick payback periods to maximize short term criteria on which their own bonuses, etc. may be based.

c it cannot be used for investments with unequal cash inflows.

d it cannot be used if the entire cost of the investment does not occur immediately.

e all of these.







Question 7F
The reason that a discount factor in year 3 is less than a discount factor in year 2 is that

a cash flows are uneven.

b compounding does not occur.

c cash flows are even.

d present value is positive.

e a dollar received in three years is worth less than a dollar received in two years.

Explanation / Answer

1) The price of an item is $42 But the price was set as cost plus 60% Let the cost of the item be "x" x + 0.60 (x) = $42 x( 1+ 0.60) = $42 x = $42 / 1.60 = $26.25 Therefore, the cost of the item to company A is $26.25. The correct option is a)$26.25 2) Here the company requires a gain of 20% The target cost of the item is $64 Let the price of the product be $53 Then profit on the product is calculated as: Profit = 20%($53) = 0.20 ($53) = $10.6 Therefore, the price of the new product is Cost + profit = $53 + $10.6 = $63.6 Therefore, the price of the new product is approximately $64 The correct option is a) $64 3) b) Internal rate of return The internal rate of return method assumes that the cash flows can be reinvested at whatever the internal rate of return turns out to be-even if the internal rate of return is very high. The net present value method assumes that the cash flows can be reinvested at the discount rate. Therefore, the correct option is b) Internal rate of return. 4) The best model for choosing the several competeting projects is Net present value. The correct option is a) Net present value. 5) One disadvantage of payback period is it cannot be used if the entire cost of the investment does not occur immediately. The correct option is d) 6) The reason that a discount factor in year 3 is less than that of year 2 is that a dollar received in three years is worth less than a dollar received in two years. The correct option is e)

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