Generro Company is considering the purchase of equipment that would cost $39,000 and offer annual cash inflows of $10,800 over its useful life of 5 years. Assuming a desired rate of return of 10%, is the project acceptable?
Multiple Choice
The answer cannot be determined.
Yes, since the positive net present value indicates the investment will earn a rate of return greater than 10%.
Correct
No, since the negative net present value indicates the investment will yield a rate of return below the desired rate of return.
Answer
Yes, since the positive net present value indicates the investment will earn a rate of return greater than 10%.
Yes, since the investment will generate $54,000 in future cash flows, which is greater than the purchase cost of $39,000.
Explanation
Revised estimate:
Net present value = (Expected annual cash flows × PV factor) − Cost of investment
Net present value = ($10,800 × 3.79079) − $39,000 = $1,940 (rounded)
PV factor from Appendix Table 2 (n = 5, i = 10)
The positive net present value suggests the investment will earn a rate of return in excess of 10 percent (if cash flows are indeed $10,800 each year). Because the projected rate of return is higher than the desired rate of return, this analysis suggests the company should accept the investment opportunity.
Multiple Choice
Frequency of occurrence.
Materiality of the variance amount.
The direction of the variance (favorable or unfavorable).
Correct
Capacity for management to control.
Answer
The direction of the variance (favorable or unfavorable). Correct
Explanation
Managers consider the materiality of a variance, the frequency with which it occurs, their capacity to control the variance, and the characteristics of the items behind the variance.
A negative net present value of $35,151.
A negative net present value of $2,651.
A positive net present value of $35,151.
A positive net present value of $2,651.Correct
Answer
A positive net present value of $2,651.Correct
Explanation
Net present value = (Expected annual cash flows × PV factor) − Cost of investment
Net present value = ($10,850 × 3.239720) − $32,500 = $2,651 (rounded)
PV factor from Appendix Table 2 (n = 4, i = 9)
Jackson Company estimated that its manufacturing employees would work 88,000 direct labor hours during the current year. During the year, its manufacturing employees actually worked 71,000 direct labor hours. Actual manufacturing overhead costs amounted to $352,000. Jackson applies overhead cost on the basis of direct labor hours. The manufacturing overhead account was overapplied by $17,200 during the current year. Based on this information the predetermined overhead rate was:
Multiple Choice
$5.29 per labor hour.
$4.80 per labor hour.
$6.40 per labor hour.
$5.20 per labor hour.Correct
Answer
$5.20 per labor hour.Correct
Explanation
Overapplied (underapplied) overhead = Applied overhead – Actual overhead costs
$17,200 = Applied overhead – $352,000
Applied overhead = $17,200 + $352,000 = $369,200
Overhead applied = Actual amount of allocation base × Predetermined overhead rate
$369,200 = 71,000 direct labor hours × Predetermined overhead rate
Predetermined overhead rate = $369,200 ÷ 71,000 direct labor hours = $5.20 per direct labor hour
Larry's Lawn Care incurs significant gasoline costs. This cost would be classified as a variable cost if the total gasoline cost:
Multiple Choice
increases in direct proportion to the number of hours the lawn equipment is operated.Correct
is not affected by the number of hours the lawn equipment is operated.
varies inversely with the number of hours the lawn equipment is operated.
None of these are correct.
Answer
increases in direct proportion to the number of hours the lawn equipment is operated. Correct
Explanation
The gasoline cost would be classified as variable if the total gasoline cost increases when the volume increases and the total gasoline cost decreases when the volume decreases.
Multiple Choice
The answer cannot be determined.
Yes, since the positive net present value indicates the investment will earn a rate of return greater than 10%.
Correct
No, since the negative net present value indicates the investment will yield a rate of return below the desired rate of return.
Answer
Yes, since the positive net present value indicates the investment will earn a rate of return greater than 10%.
Yes, since the investment will generate $54,000 in future cash flows, which is greater than the purchase cost of $39,000.
Explanation
Revised estimate:
Net present value = (Expected annual cash flows × PV factor) − Cost of investment
Net present value = ($10,800 × 3.79079) − $39,000 = $1,940 (rounded)
PV factor from Appendix Table 2 (n = 5, i = 10)
The positive net present value suggests the investment will earn a rate of return in excess of 10 percent (if cash flows are indeed $10,800 each year). Because the projected rate of return is higher than the desired rate of return, this analysis suggests the company should accept the investment opportunity.
All of the following factors should influence the decision to investigate a variance except:
Multiple Choice
Frequency of occurrence.
Materiality of the variance amount.
The direction of the variance (favorable or unfavorable).
Correct
Capacity for management to control.
Answer
The direction of the variance (favorable or unfavorable). Correct
Explanation
Managers consider the materiality of a variance, the frequency with which it occurs, their capacity to control the variance, and the characteristics of the items behind the variance.
An investment that costs $32,500 will produce annual cash flows of $10,850 for a period of 4 years. Given a desired rate of return of 9%, what will the investment generate?
Multiple ChoiceA negative net present value of $35,151.
A negative net present value of $2,651.
A positive net present value of $35,151.
A positive net present value of $2,651.Correct
Answer
A positive net present value of $2,651.Correct
Explanation
Net present value = (Expected annual cash flows × PV factor) − Cost of investment
Net present value = ($10,850 × 3.239720) − $32,500 = $2,651 (rounded)
PV factor from Appendix Table 2 (n = 4, i = 9)
Jackson Company estimated that its manufacturing employees would work 88,000 direct labor hours during the current year. During the year, its manufacturing employees actually worked 71,000 direct labor hours. Actual manufacturing overhead costs amounted to $352,000. Jackson applies overhead cost on the basis of direct labor hours. The manufacturing overhead account was overapplied by $17,200 during the current year. Based on this information the predetermined overhead rate was:
Multiple Choice
$5.29 per labor hour.
$4.80 per labor hour.
$6.40 per labor hour.
$5.20 per labor hour.Correct
Answer
$5.20 per labor hour.Correct
Explanation
Overapplied (underapplied) overhead = Applied overhead – Actual overhead costs
$17,200 = Applied overhead – $352,000
Applied overhead = $17,200 + $352,000 = $369,200
Overhead applied = Actual amount of allocation base × Predetermined overhead rate
$369,200 = 71,000 direct labor hours × Predetermined overhead rate
Predetermined overhead rate = $369,200 ÷ 71,000 direct labor hours = $5.20 per direct labor hour
Larry's Lawn Care incurs significant gasoline costs. This cost would be classified as a variable cost if the total gasoline cost:
Multiple Choice
increases in direct proportion to the number of hours the lawn equipment is operated.Correct
is not affected by the number of hours the lawn equipment is operated.
varies inversely with the number of hours the lawn equipment is operated.
None of these are correct.
Answer
increases in direct proportion to the number of hours the lawn equipment is operated. Correct
Explanation
The gasoline cost would be classified as variable if the total gasoline cost increases when the volume increases and the total gasoline cost decreases when the volume decreases.
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