Incremental Analysis and Capital Budgeting

According to the text, which of the following is the final step in management's decision-making process?

What is the primary focus of incremental analysis?

A cost that has already been incurred and will not be changed or avoided by any present or future decision is known as what type of cost?

Sunbelt Company produces blenders at a variable cost of $8 per unit and has fixed manufacturing costs of $400,000 per month. A special order is received for 3,000 blenders at $12 per unit. Assuming Sunbelt has excess capacity, what would be the increase in net income if the order is accepted?

In a make-or-buy decision, management must consider which of the following?

What is the basic decision rule for a sell-or-process-further decision?

Jeffcoat Company is considering replacing a machine with a book value of $40,000. A new machine is available for $120,000 and the old machine can be sold for $5,000. In the incremental analysis for the replacement decision, what is the treatment of the $40,000 book value?

If a company eliminates an unprofitable product line, what is a potential outcome for the company's overall net income?

Which of the following is NOT one of the three common quantitative techniques for capital budgeting discussed in the chapter?

The annual rate of return method is calculated by dividing expected annual net income by what?

Reno Company is considering an investment of $130,000 in new equipment. The equipment is expected to last 5 years with no salvage value. Expected annual net income is $13,000. What is the annual rate of return?

What is the primary formula for the cash payback technique when net annual cash flows are equal?

A project costs $200,000 and is expected to generate net annual cash flows of $50,000 for 8 years. What is the cash payback period?

What is the primary decision rule for the Net Present Value (NPV) method?

The Internal Rate of Return (IRR) is the interest rate that causes the present value of the proposed capital expenditure to equal what?

An investment of $130,000 is expected to generate net annual cash flows of $39,000 for 5 years. What is the internal rate of return factor?

Using the IRR factor of 3.33333 for a 5-year project, and referring to the Present Value of an Annuity of 1 table, what is the approximate internal rate of return?

Which of the following is considered a weakness of the cash payback approach to capital budgeting?

What is the primary difference between the two discounted cash flow methods, Net Present Value and Internal Rate of Return?

Baron Company can make ignition switches for $9 per unit or buy them from Ignition, Inc. for $8 per unit. If Baron buys the switches, only $10,000 of its $60,000 in fixed costs can be eliminated. If Baron buys the switches, it can use the freed-up capacity to generate $38,000 of additional income. What is the net income increase or decrease if Baron chooses to buy?

Woodmasters Inc. can sell an unfinished table for $50 (at a cost of $35). To finish the table, it would incur an additional $2 in direct materials, $4 in direct labor, and $2.40 in variable overhead. The finished table sells for $60. What is the incremental net income per unit from processing further?

Which of the capital budgeting techniques described in the chapter is generally recognized as the best conceptual approach?

Reno Company expects equal net annual cash flows of $39,000 for 5 years from an investment. Using a discount rate of 12 percent, what is the present value of these cash flows? (PV of an annuity of 1 for 5 periods at 12 percent is 3.60478)

If a project's Net Present Value (NPV) is zero, what is the relationship between the project's rate of return and the required rate of return?

A key difference between the annual rate of return technique and the cash payback technique is that:

Which of the following is NOT one of the common types of decisions that involve incremental analysis?

What is the cash payback period for an investment of $300,000 if the uneven net annual cash flows are $60,000 in year 1, $90,000 in year 2, $90,000 in year 3, and $120,000 in year 4?

In the incremental analysis for a special price order, which costs are generally considered relevant?

The potential benefit that may be obtained by following an alternative course of action is known as:

If a project has an internal rate of return of 15 percent and the company's required rate of return is 12 percent, the project should be:

Which capital budgeting method uses accrual accounting data rather than cash flows?

An investment has a cost of $200,000 and a 5-year life. Annual net income is projected to be $20,000, and annual cash flow is $60,000. What is the cash payback period?

An investment has a cost of $200,000, a 5-year life, and zero salvage value. Annual net income is projected to be $20,000. What is the annual rate of return?

The process of making capital expenditure decisions in business is known as:

In the context of the make-or-buy decision, what does outsourcing refer to?

The rate of return that management expects to pay on all borrowed and equity funds is known as the:

If a company has a choice between two projects and chooses Project A, the potential benefit that could have been obtained from choosing Project B is considered:

Which two capital budgeting methods ignore the time value of money?

An investment of $100,000 has a useful life of 4 years. The net annual cash flows are $40,000, $30,000, $20,000, and $50,000. What is the cash payback period?

Cobb Company has excess capacity. It incurs costs of $28 per unit ($18 variable, $10 fixed) to make a product that sells for $42. A special order for 5,000 units at $25 each will have additional shipping costs of $1 per unit. What is the incremental net income from accepting the order?

What does the annual rate of return method measure?

If a company can use released productive capacity from a 'buy' decision to generate additional income, this income is treated as:

A project has a net present value of $(2,512.30) using a discount rate of 15 percent. This means that:

When comparing two investment proposals, the one with the higher positive net present value is generally considered:

In incremental analysis, financial information is considered relevant if it:

A company is considering eliminating a product line that has a contribution margin of $50,000 and allocated fixed costs of $70,000. If the segment is eliminated, $40,000 of the fixed costs can be avoided. What is the effect on net income?

What is the first step in calculating the internal rate of return for a project with equal annual cash flows?

How is depreciation expense treated when converting net income to net annual cash flow for capital budgeting analysis?

Juanita Company can make electrical cords at a total cost of $166,000 or buy them for $149,400. If they buy, they can use the released capacity to generate an additional $5,000 of income. What is the net income increase or decrease from buying the cords?

The corporate capital budget authorization process described in the chapter typically ends with which group giving final approval?