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ACC Final Part 1

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1. What is the first step of capital budgeting?
a. Gathering the money for the investment
b. Identifying potential projects
c. Getting the accountant involved
d. All of the above

2. Ian, Corp., is considering two expansion projects. The first project streamlines the company’s warehousing facilities. The second project automates inventory utilizing bar code scanners. Both projects generate positive NPV, yet Ian, Corp., only chooses the bar coding project. Why?
a. The payback period is greater than the warehouse project’s life.
b. The internal rate of return of the warehousing project is less than the company’s
required rate of return for capital projects.
c. The company is practicing capital rationing.
d. All of the above are true.

3. Which of the following methods does not consider the investment’s profitability?
a. ROR
b. Payback
c. NPV
d. IRR

4. Suppose Francine Dunkelberg’s Sweets is considering investing in warehouse-management software that costs $550,000, has $65,000 residual value, and should lead to cost savings of $130,000 per year for its five-year life. In calculating the ROR, which of the following figures should be used as the equation’s denominator (average amount invested in the asset)?
a. $275,000
b. 242,500
c. 307,500
d. 615,000

5. Your rich aunt has promised to give you $1,000 a year at the end of each of the next four years to help you pay for college. Using a discount rate of 7%, the present value of the gift can be stated as
a. PV = $1,000 (PV factor, i = 4%, n = 7).
b. PV = $1,000 (Annuity PV factor, i = 7%, n = 4).
c. PV = $1,000 (Annuity FV factor, i = 7%, n = 4).
d. PV = $1,000 x 7% x 4.

6. Which of the following affects the present value of an investment?
a. The type of investment (annuity versus single lump sum)
b. The number of time periods (length of the investment)
c. The interest rate
d. All of the above

7. Which of the following is true regarding capital rationing decisions?
a. Companies should always choose the investment with the highest NPV.
b. Companies should always choose the investment with the highest ROR.
c. Companies should always choose the investment with the shortest payback period.
d. None of the above

8. In computing the IRR on an expansion at Mountain Creek Resort, Vernon Valley would consider all of the following except?
a. Present value factors
b. Depreciation on the assets built in the expansion
c. Predicted cash inflows over the life of the expansion
d. The cost of the expansion

9. Consider how McKnight Valley Snow Park Lodge could use capital budgeting to decide whether the $13,000,000 Water Park Lodge expansion would be a good investment. Assume Smith Valley’s managers developed the following estimates concerning the expansion:

Number of additional skiers per day 115
Average number of days per year that weather
conditions allow skiing at Smith Valley 151
Useful life of expansion (in years) 8
Average cash spent by each skier per day 242
Average variable cost of serving each skier per day 81
Cost of expansion 13,000,000
Discount rate 14%

Assume that Smith Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $950,000 at the end of 8
year life.

1. Compute the average annual net cash inflow from the expansion.
2. Compute the average annual operating income from the expansion.

10. Consider how Smith Valley Snow Park Lodge could use capital budgeting to decide whether the $13,500,000 Water Park Lodge expansion would be a good investment. Assume Smith Valley’s managers developed the following estimates concerning the expansion:

Number of additional skiers per day 115
7Average number of days per year that weather
conditions allow skiing at Smith Valley 142
1Useful life of expansion (in years) 10
Average cash spent by each skier per day 236
Average variable cost of serving each skier per day 76
Cost of expansion 13,500,000
Discount rate 10%

Assume that Smith Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $1,000,000 at the end of 10
year life.

Compute the payback period for the expansion project.

11. Consider how White Valley Snow Park Lodge could use capital budgeting to decide whether the $12,000,000 Waterfall Park Lodge expansion would be a good investment. Assume Smith Valley’s managers developed the following estimates concerning the expansion:

Number of additional skiers per day 119
Average number of days per year that weather
conditions allow skiing at Smith Valley 145
Useful life of expansion (in years) 10
Average cash spent by each skier per day 241
Average variable cost of serving each skier per day 78
Cost of expansion 12,000,000
Discount rate 12%

Assume that Smith Valley uses the straight-line depreciation method and expects the
lodge expansion to have a residual value of $750,000 at the end of 10
year life. The average annual operating income from the expansion is $1,687,565 and the
depreciation has been calculated as $1,125,000

Calculate the ROR.

12. Amazon.com expected to receive which of the following benefits when it started its budgeting process?
a. The budget provides Amazon.com’s managers with a benchmark against which to
compare actual results for performance evaluation.
b. The planning required to develop the budget helps managers foresee and avoid potential problems before they occur.
c. The budget helps motivate employees to achieve Amazon.com’s sales growth and cost reduction goals.
d. All of the above

13. Which of the following is the cornerstone (or most critical element) of the master budget?
a. The operating expenses budget
b. The sales budget
c. The budgeted balance sheet
d. The inventory, purchases, and cost of goods sold budget

14. The budgeted statement of cash flows is part of which element of Amazon.com’s master budget?
a. The financial budget
b. The capital expenditures budget
c. The operating budget
d. None of the above

15. Mallcentral sells 1,000,000 hardcover books a day at an average price of $30. Assume that Mallcentral’s purchase price for the books is 75% of the selling price it charges retail customers. Mallcentral has no beginning inventory, but it wants to have a three-day supply of ending inventory. Assume that operating expenses are $1,000,000 per day.

Compute Mallcentral’s budgeted sales for the next (seven-day) week.

a. $157,500,000
b. $435,000,000
c. $217,000,000
d. $210,000,000

16. Mallcentral sells 1,000,000 hardcover books a day at an average price of $30. Assume that Mallcentral’s purchase price for the books is 75% of the selling price it charges retail customers. Mallcentral has no beginning inventory, but it wants to have a three-day supply of ending inventory. Assume that operating expenses are $1,000,000 per day.

Determine Mallcentral’s budgeted purchases for the next (seven-day) week
a. $300,000,000
b. $157,500,000
c. $225,000,000
d. $75,000,000

17. Mallcentral sells 1,000,000 hardcover books a day at an average price of $30. Assume that Mallcentral’s purchase price for the books is 75% of the selling price it charges retail customers. Mallcentral has no beginning inventory, but it wants to have a three-day supply of ending inventory. Assume that operating expenses are $1,000,000 per day.

What is Mallcentral’s budgeted contribution margin for a (seven-day) week?
a. $157,500,000
b. $45,500,000
c. $52,500,000
d. $164,500,000

18. Which of the following expenses would not appear in Amazon.com’ cash budget?
a. Depreciation expense
b. Interest expense
c. Marketing expense
d. Wages expense

19. Information technology has made it easier for Amazon.com’s managers to perform all of the following tasks except
a. preparing responsibility center performance reports that identify variances between
actual and budgeted revenues and costs.
b. rolling up individual units’ budgets into the companywide budget.
c. sensitivity analyses.
d. removing slack from the budget.

20. Which of the following managers is responsible for revenues and expenses but not ROI?
a. Investment center manager
b. Profit center manager
c. Cost center manager
d. Revenue center manager

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