1. A firm is considering a project requiring an investment of $30,000. The proje

Question

1. A firm is considering a project requiring an investment of $30,000. The project would generate an annual cash flow of $7,251 for the next six years. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The approximate internal rate of return for the project is:

a.11%.

b.10%.

c.12%.

d.9%.

2. The budgeted contribution margin of two products is $1,000 the actual contribution margin is $500 and the total variable expenses are $750. The contribution margin variance is:

a.$750(U)

b.$500(F)

c.$750(F)

d.$500(U)

3. Buying multiperiod activity capacity is often done by paying cash up front and is always:

a.irrelevant because it is a sunk cost.

b.relevant because it generates future revenues or benefits.

c.relevant because it could reduce future costs.

d.relevant because it is a variable cost.

4. In activity-based costing (ABC), unit-level costs are highest in the:

a.introduction phase of a product's life cycle.

b.growth phase of a product's life cycle.

c.maturity phase of a product's life cycle.

d.decline phase of a product's life cycle.

5. Melancholy Company is considering the purchase of production equipment that costs $800,000. The equipment is expected to generate an annual cash flow of $250,000 and have a useful life of five years with no salvage value. The firm's cost of capital is 12 percent. The company uses the straight-line method of depreciation with no mid-year convention. There are no income taxes. The payback period in years for the project is

a.3.20 years.

b.4.20 years.

c.3.25 years.

d.2.90 years.

Explanation / Answer

Total present value factors of 12% for 6 years is 4.11

Total present value factors of 11% for 6 years is 4.23

present value of cash inflows if rate of return is 12% then 7251*4.11= 29801.61

Present value of cash inflows if rate of return is 11% the 7251*4.23 = 30671.73

IRR = 11+ 30671.73-30000/30671.73-29801.61 = 11.772

So option 12% is appropriate

2. Contribution margin varience = Actual contribution - budgeted contribution

500-1000 = 500U

3. Buying multiperiod activity capacity is paid by cash up front because it is a sunk cost and not relevant

4. unit level cost will be higher at the introduction stage and it will be reduced as experience curve increases

5. the payback period is 800000/250000 = 3.2

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