Management Accounting 2 PE Q PDF

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LAGUNA STATE POLYTECHNIC UNIVERSITY LOS BAÑOS CAMPUS FIRST SEMESTER A.Y. 2017-2018 Name:

PRELIM EXAM

Date:

Section: Subject:

Score:

Management Accounting 2

Professor:

W.V. DANGUE

MULTIPLE CHOICE 1. The first step in the capital budgeting evaluation process is to a. request proposals for projects. b. screen proposals by a capital budgeting committee. c. determine which projects are worthy of funding. d. approve the capital budget. 2.

Capital budgeting is the process a. used in sell or process further decisions. b. of determining how much capital stock to issue. c. of making capital expenditure decisions. d. of eliminating unprofitable product lines.

3.

Net annual cash flow can be estimated by a. deducting credit sales from net income. b. adding depreciation expense to net income. c. deducting credit purchases from net income. d. adding advertising expense to net income.

4.

Which of the following is not a capital budgeting decision? a. Constructing new studios b. Replacing old equipment c. Scrapping obsolete inventory d. Remodeling an office building

5.

When the annual cash flows from an investment are unequal, the appropriate table to use is the a. future value of 1 table. b. future value of annuity table. c. present value of 1 table. d. present value of annuity table.

6.

A company's cost of capital refers to the a. rate the company must pay to obtain funds from creditors and stockholders. b. total cost of a capital project. c. cost of printing and registering common stock shares. d. rate of return earned on common stock.

7.

A project that when accepted or rejected will not affect the cash flows of another project. a. Independent projects b. Mutually exclusive projects c. Dependent projects d. Both b and c

8.

When disposing of an old asset and replacing it with a new one, tax effect on a. gain on sale of the old asset reduces the basis of the new asset b. gain on sale of the old asset increases the basis of the new asset c. loss on sale of the old asset increases the basis of the new asset d. correct answer not given

9.

A major difference between an investment in working capital and one in depreciable assets is that a. an investment in working capital is never returned, while most depreciable assets have some residual value. b. an investment in working capital is returned in full at the end of a project’s life, while an investment in depreciable assets has no residual value. c. an investment in working capital is not tax-deductible when made, nor taxable when returned, while an investment in depreciable assets does allow tax deductions. d. because an investment in working capital is usually returned in full at the end of the project’s life, it is ignored in computing the amount of the investment required for the project.

10. Which of the following is not a typical cash inflow in capital investment decisions? a. Incremental revenues b. Salvage value c. Cost reductions d. Additional working capital 11. If there were no income taxes,

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a. b. c. d.

depreciation would be ignored in capital budgeting. the NPV method would not work. income would be discounted instead of cash flow. all potential investments would be desirable.

12. In deciding whether to replace a machine, which of the following is NOT a sunk cost? a. The expected resale price of the existing machine. b. The book value of the existing machine. c. The original cost of the existing machine. d. The depreciated cost of the existing machine. 13. Which of the following is NOT a defect of the payback method? a. It ignores cash flows because it uses net income. b. It ignores profitability. c. It ignores the present values of cash flows. d. It ignores the pattern of cash flows beyond the payback period. 14. Which of the following methods of evaluating capital investment projects incorporates the time value of money? a. Payback period, accounting rate of return, and internal rate of return b. Accounting rate of return, net present value, and internal rate of return c. Payback period and accounting rate of return d. Net present value and internal rate of return 15. The net present value (NPV) model can be used to evaluate and rank two or more proposed projects. The approach that computes the total impact on cash flows for each option and then converts these total cash flows to their present values is called the a. differential approach b. contribution approach c. incremental approach. d. total project approach. 16. The profitability index a. does not take into account the discounted cash flows. b. Is calculated by dividing total cash flows by the initial investment. c. allows comparison of the relative desirability of projects that require differing initial investments. d. will never be greater than 1.0. 17. According to the reinvestment rate assumption, which method of capital budgeting assumes cash flows are reinvested at the project’s rate of return? a. payback period b. internal rate of return c. net present value d. none of the above 18. The rate of interest that produces a zero net present value when a project’s discounted cash operating advantage is netted against its discounted net investment is the: a. Cost of capital b. Cutoff rate c. Discount rate d. Internal rate of return 19. The relationship between payback period and IRR is that a. a payback period of less than one-half the life of a project will yield an IRR lower than the target rate. b. the payback period is the present value factor for the IRR. c. a project whose payback period does not meet the company’s cutoff rate for payback will not meet the company’s criterion for IRR. d. none of the above. 20. When comparing NPV and IRR, which is not true? a. With NPV, the discount rate can be adjusted to take into account increased risk and the uncertainty of cash flows b. With IRR, cash flows can be adjusted to account for risk c. NPV can be used to compare investments of various size or magnitude d. Both NPV and IRR can be used for screening decisions 21. NPV indicates a project is deemed desirable (acceptable) when the NPV is a. greater than or equal to zero b. less than zero c. greater than or equal to the risk-adjusted cost of capital d. less than or equal to the risk-adjusted cost of capital

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22. Bruell Company is considering to replace its old equipment with a new one. The old equipment had a net book value of P100,000, 4 remaining useful life with P25,000 depreciation each year. The old equipment can be sold at P80,000. The new equipment costs P160,000, have a 4-year life. Cash savings on operating expenses before 40% taxes amount to P50,000 per year. What is the amount of investment in the new equipment? a. P160,000 b. P 80,000 c. P 72,000 d. P 68,000 23. Taal Company is considering the purchase of a machine that promises to reduce operating costs by equal amounts every year of its 6-year useful life. The machine will cost P840,000 and has no salvage value. The machine has a 20% internal rate of return. Taal Company is subject to 40% income tax rate. The present value of 1 for 6 periods at 20% is 3.326, and at the end of 6 periods is 0.3349. The approximate annual cash savings before tax is closest to: a. P252,555 b. P187,592 c. P112,555 d. P327,592 24. Mayon Company is considering replacing its old machine with a new and more efficient one. The old machine has book value of P100,000, a remaining useful life of 4 years, and annual straightline depreciation of P25,000. The existing machine has a current market value of P80,000. The replacement machine would cost P160,000, have a 4-year life, and will save P50,000 per year in cash operating costs. If the replacement machine would be depreciated using the straight-line method and the tax rate is 40%, what should be the increase in annual income taxes? a. P14,000 b. P40,000 c. P28,000 d. P 4,000 25. For P450,000, Maleen Corporation purchased a new machine with an estimated useful life of five years with no salvage value. The machine is expected to produce cash flow from operations, net of 40 percent income taxes, as follows: First year P160,000 Second year 140,000 Third year 180,000 Fourth year 120,000 Fifth year 100,000 Maleen will use the sum-of-the-years-digits’ method to depreciate the new machine as follows: First year P150,000 Second year 120,000 Third year 90,000 Fourth year 60,000 Fifth year 30,000 The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12 percent at end of each period are: End of: Period 1 0.89280 Period 2 0.79719 Period 3 0.71178 Period 4 0.63552 Period 5 0.56743 Had Maleen used straight-line method of depreciation instead of declining method, what is the difference in net present value provided by the machine at a discount rate of 12 percent? a. Increase of P 9,750 b. Decrease of P24,376 c. Decrease of P 9,750 d. Increase of P24,376 26. A piece of labor saving equipment that Marubeni Electronics Company could use to reduce costs in one of its plants in Angeles City has just come onto the market. Relevant data relating to the equipment follow: Purchase cost of the equipment Annual cost savings that will be provided by the equipment Life of the equipment

P432,000 90,000 12 years

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What is the simple rate of return to be provided by the equipment? a. Between 15% and 18%. b. 20.83%. c. 25.00%. d. 12.50%. 27. Show Company is negotiating to purchase an equipment that would cost P200,000, with the expectation that P40,000 per year could be saved in after-tax cash operating costs if the equipment were acquired. The equipment’s estimated useful life is 10 years, with no salvage value, and would be depreciated by the straight-line method. Show Company’s minimum desired rate of return is 12 percent. The present value of an annuity of 1 at 12 percent for 10 periods is 5.65. The present value of 1 due in 10 periods, at 12 percent, is 0.322. The average accrual accounting rate of return (ARR) during the first year of asset’s use is: a. 20.0 percent b. 10.0 percent c. 10.5 percent d. 40.0 percent 28. Consider a project that requires cash outflow of P50,000 with a life of eight years and a salvage value of P5,000. Annual before-tax cash inflow amounts to P10,000 assuming a tax rate of 30% and a required rate of return of 8%. Salvage value is ignored in computing depreciation. The project has a payback period of a. 5.0 years b. 6.0 years c. 5.6 years d. 6.6 years 29. It is the start of the year and Agudelo Company plans to replace its old grinding equipment. The following information are made available by the management:

Equipment cost Current salvage value Salvage value, end of useful life Annual operating costs Accumulated depreciation Estimated useful life

Old P70,000 14,000 5,000 44,000 55,300 10 years

New P120,000 16,000 32,000 10 years

The company is not subject to tax and its cost of capital is 12%. What is the present value of all the relevant cash flows at time zero? a. (P 54,000) b. (P106,000) c. (P120,000) d. (P124,700) 30. The Mejicano Company is planning to purchase a piece of equipment that will reduce annual cash expenses over its 5-year useful life by equal amounts. The company will depreciate the equipment using straight-line method of depreciation based on estimated life of 5 years without any salvage value. The company is subject to 40 percent tax. The marginal cost of capital for this acquisition is 11.055 percent. The management accountant calculated that the internal rate of return based on the estimated after-tax cash flows is 12.386 percent and a net present value of P10,000. The president, however, wants to know the profitability index before he finally decides. What is the profitability index for this investment? a. 1.011 b. 1.022 c. 1.034 d. 1.044 31. Diamond Company is planning to buy a coin-operated machine costing P400,000. For book and tax purposes, this machine will be depreciated P80,000 each year for five years. Diamond estimates that this machine will yield an annual inflow, net of depreciation and income taxes, of P120,000. Diamond’s desired rate of return on its investments is 12%. At the following discount rates, the NPVs of the investment in this machine are: Discount Rate 12% 14% 16% 18%

NPV +P3,258 + 1,197 708 - 2,474

Diamond’s expected IRR on its investment in this machine is a. 3.25% b. 16.00% c. 12.00%

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d.

15.30%

32. Katol Company invested in a machine with a useful life of six years and no salvage value. The machine was depreciated using the straight-line method. It was expected to produce annual cash inflow from operations, net of income taxes, of P6,000. The present value of an ordinary annuity of P1 for six periods at 10% is 4.355. The present value of P1 for six periods at 10% is 0.564. Assuming that Katol used a time- adjusted rate of return of 10%, what was the amount of the original investment? a. P10,640 b. P22,750 c. P29,510 d. P26,130 33. Paper Products Company is considering a new product that will sell for P100 and has a variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500,000 and having a five-year useful life and no salvage value is needed, and will be depreciated using the straight-line method. The machine has fixed cash operating costs of P200,000 per year. The firm is in the 40 percent tax bracket and has cost of capital of 12 percent. The present value of 1, end of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478. How many units per year the firm must sell for the investment to earn 12 percent internal rate of return? a. 17,338 b. 9,838 c. 28,897 d. 12,338 34. Aloha Co. is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost P500,000 and would be fully depreciated by the straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some already polluted harbor. The Aloha Co.’s cost of capital is 12 percent, and its marginal tax rate is 40 percent. If the ship produces equal annual labor cost savings over its 10-year life, how much do the annual savings in labor costs need to be to generate a net present value of P0 on the project? Use the following PV: annuity of 1, 10 periods at 12% - 5.6502; end of 10th period – 0.32197. a. P 68,492 b. P114,154 c. P147,487 d. P 88,492 35. The following data pertain to Julian Corp. whose management is planning to purchase a unit of equipment. 1. Economic life of equipment – 8 years. 2. Disposal value after 8 years – Zero. 3. Estimated net annual cash inflows for each of the 8 years – P81,000. 4. Time-adjusted internal rate of return – 14% 5. Cost of capital of Bayan Muna – 16% 6. The table of present values of P1 received annually for 8 years has these factors: at 14% = 4.639, at 16% = 4.344 7. Depreciation is approximately P46,970 annually. Find the required increase in annual cash inflows in order to have the time-adjusted rate of return approximately equal the cost of capital. a. P5,501 b. P6,501 c. P4,344 d. P5,871 36. The Mark X Corp. contemplates the temporary shutdown of its plant facilities in a provincial area which is economically depressed due to natural disasters. Below are certain manufacturing and selling expenses. 1. Depreciation 5. Sales commissions 2. Property tax 6. Delivery expenses 3. Interest expense 7. Security of premises 4. Insurance of facilities Which of the following expenses will continue during the shutdown period? a. All expenses in the list. b. All except 5 and 6. c. Items 1, 2 and 3 only. d. Items 1, 2, 3, 4, 6, and 7 only. 37. In equipment-replacement decisions, which one of the following does not affect the decisionmaking process?

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