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Customer Question

Use the following to answer questions 25-26:

Chicago Co. is interested in purchasing a machine that would improve its operational efficiency. The cost is $200,000 with an estimated residual value of $20,000 and a useful life of eight years. Cash inflows are expected to increase by $40,000 a year. The company's minimum rate of return is 10 percent. The present value of $1 for eight years at 10 percent is 0.467, and the present value of an annuity of $1 at 10 percent and eight years is 5.335.


25.The net present value of the project is
A)$74,520.
B)$120,100.
C)$93,400.
D)$22,740.


26.The project earns a rate of return of
A)Unable to determine from the data given
B)greater than 10 percent.
C)less than 10 percent.
D)10 percent.


Use the following to answer questions 27-28:

Memphis Co. is going to purchase a machine for $83,200 that will increase cash flows by $40,000 in the first year, $30,000 the second year, and $25,000 the third year. The machine will have no residual value. The minimum rate of return is 10 percent. The present value factors for the three years are 0.909, 0.826, and 0.751, respectively.


27.The machine's net present value is
A)$21,800.
B)($3,285).
C)$79,915.
D)($4,286).


28.The machine's actual rate of return is
A)Unable to determine from the data given
B)greater than 10 percent.
C)less than 10 percent.
D)10 percent.


29.Boston Corp. is evaluating three projects. Each project will return a total of $600,000 to the company in cash flows over a three-year period. The cash flows for the three projects are as follows:

Year 1Year 2Year 3Total
Project A$300,000$200,000$100,000$600,000
Project B200,000200,000200,000600,000
Project C100,000200,000300,000600,000

Which project represents the best investment for Boston?
A)Project A
B)Project B
C)Project C
D)All projects are equally good investments.


Use the following to answer questions 30-31:

Seattle, Inc., is contemplating a project that costs $180,000. Expectations are that annual cash revenues will be $70,000 and annual expenses (including depreciation) will total $30,000. The project has a six-year useful life and a residual value of $30,000.


30.The accounting rate of return for the project is
A)53.3 percent.
B)22.2 percent.
C)66.7 percent.
D)38.1 percent.


31.The project's payback period is
A)2.31 years.
B)2.77 years.
C)2.14 years.
D)2.57 years.


Use the following to answer questions 32-34:

The state of Illinois has passed a law requiring that every automobile be inspected at least once a year for pollution control. Anfang Enterprises is considering entering into this type of business. After extensive studies, Joseph Anfang has developed the following set of projected annual data on which to make his decision:

Direct service labor$333,000.00
Variable service overhead costs270,000.00
Fixed service overhead costs280,000.00
Marketing expenses120,000.00
General and administrative expenses170,000.00
Minimum profit90,000.00
Cost of assets employed500,000.00

Anfang believes that his company will inspect 100,000 automobiles per year. The company earns an average of 18.75 percent return on its assets.


32.The price to be charged for inspecting each automobile using the return on assets pricing method would be calculated as follows:
A)($883,000.00 ÷ 100,000) + {($883,000.00 ÷ 100,000) × [($90,000 + $290,000) ÷ $883,000.00]}
B)($1,173,000.00 ÷ 100,000) + [($1,173,000.00 ÷ 100,000) × ($90,000 ÷ $1,173,000.00)]
C)($1,173,000.00 ÷ 100,000) + [($500,000 ÷ 100,000) × 0.1875]
D)None of these


33.The price to be charged for inspecting each automobile using the time and materials pricing method would be calculated as follows:
A)($883,000.00 ÷ 100,000) + {($883,000.00 ÷ 100,000) × [($90,000 + $290,000) ÷ $883,000.00]}
B)($1,173,000.00 ÷ 100,000) + [($1,173,000.00 ÷ 100,000) × ($90,000 ÷ $1,173,000.00)]
C)($1,173,000.00 ÷ 100,000) + [($500,000 ÷ 100,000) × 0.1875]
D)None of these


34.The price to be charged for inspecting each automobile using the gross margin pricing method would be calculated as follows:
A)($1,173,000.00 ÷ 100,000) + [($1,173,000.00 ÷ 100,000) × ($90,000 ÷ $1,173,000.00)]
B)($1,173,000.00 ÷ 100,000) + [($500,000 ÷ 100,000) × 0.1875]
C)($883,000.00 ÷ 100,000) + {($883,000.00 ÷ 100,000) × [($90,000 + $290,000) ÷ $883,000.00]}
D)None of these


35.The pricing method that establishes selling prices based on a stipulated rate above total production costs is
A)return on assets pricing.
B)target cost pricing.
C)gross margin pricing.
D)time and materials pricing.


36.The pricing method that is used primarily by service businesses is
A)return on assets pricing.
B)gross margin pricing.
C)target cost pricing.
D)time and materials pricing.


37.The pricing method that establishes selling prices based on a specified rate of return on the assets employed in the operation is
A)target cost pricing.
B)return on assets pricing.
C)time and materials pricing.
D)gross margin pricing.


38.Which of the following is not a cost-based pricing method?
A)Target costing
B)Time and materials pricing
C)Return on assets pricing
D)Gross margin pricing


39.Market research shows potential customers will buy a particular product at a selling price of $3,700. If the desired profit is 28 percent of target cost, the company should make the product if the cost does not exceed
A)$3,700.
B)$1,036.
C)$2,664.
D)$2,891.


40.Which of the following is not one of the three commonly used methods for determining transfer prices?
A)Dictated
B)Negotiated
C)Cost-plus
D)Market-based

Edited by Customer on 6/18/2008 at 7:55 PM
Submitted: 6 years ago.
Category: Homework

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