1. A truck, costing $25,000 and uninsured, was wrecked the very first day it was used. It can either be disposed of for $5,000 cash and be replaced with a similar truck costing $27,000, or rebuilt for $20,000 and be brand new as far as operating characteristics and looks are concerned. The best choice provides a net savings of: (Points : 2)

$2,000.

$5,000.

$7,000.

$12,000.

2. A decision bias is an inherent tendency of most decision makers that leads to incorrect decisions. An example of decision bias is: (Points : 2)

Failure to consider all relevant costs.

Failure to properly identify sunk costs as irrelevant.

Failure to consider opportunity cost.

Failure to adjust for the time value of money.

3. The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is: (Points : 2)

The variable manufacturing cost of the component.

The total manufacturing cost of the component.

The total variable cost of the component.

The fixed manufacturing cost of the component.

Zero.

4. Done on a regular basis, relevant cost pricing in special order decisions can erode normal pricing policies and lead to: (Points : 2)

Overconfidence in decision-making.

A loss in the firm’s profitability.

Conflicting goals between management and sales personnel.

A cost leadership strategy.

Maximization of resources.

5. Which one of the following is most descriptive of strategic analysis? (Points : 2)

Quantitative.

Customer focus.

Short-term focus.

Individual product focus.

Not linked to the firm’s strategy.

6. An effective analysis of sales mix needs to include an analysis of: (Points : 2)

Value chain analysis.

Production constraints.

Sales mix costing.

Revenue forecasting.

Joint manufacturing costs.

7. The opportunity cost of making a component part in a factory with no excess capacity is the: (Points : 2)

Variable manufacturing cost of the component.

Fixed manufacturing cost of the component.

Total manufacturing cost of the component.

Cost of the production given up in order to manufacture the component.

Net benefit foregone from the best alternative use of the capacity required.

8. Special orders: (Points : 2)

Are frequent.

Are infrequent.

Commonly represent a large part of a firm’s overall business.

Can never be profitable to a firm.

9. A profitable company pays $100,000 wages and has depreciation expense of $100,000. The company’s income tax rate is 40%. The after-tax effects on cash flow are a net cash outflow of: (Points : 2)

$40,000 for wages and a net cash inflow of $60,000 for depreciation expenses.

$40,000 for wages and a net cash inflow of $40,000 for depreciation expenses.

$60,000 for wages and a net cash inflow of $60,000 for depreciation expenses.

$60,000 for wages and a net cash inflow of $40,000 for depreciation expenses.

$40,000 for wages and a net cash inflow of $100,000 for depreciation expenses.

10. You just bought a new car for $125,000. Before you had time to get insurance, the car was wrecked. Weird Wally offers to take it off your hands for $10,000. You can then purchase a similar model for $128,000. A body-shop with an excellent reputation offers to rebuild it for $90,000 and loan you a similar model while the vehicle is being rebuilt. Once rebuilt, the body-shop claims, it will run like a new car and nobody will be able to tell the difference. What would you do from a financial point of view? (Points : 2)

Rebuild to save $13,000.

Rebuild to save $28,000.

Rebuild to save $38,000.

Sell to Weird Wally and save $7,000.

11. Operating at or near full capacity will require a firm considering a special order to recognize potentially the: (Points : 2)

Opportunity cost from lost sales.

Value of full employment.

Time value of money.

Need for good management.

Value of capacity resource management.

12. The excess of the present value of future cash flows over the initial investment outlay for a project is the: (Points : 2)

Internal rate of return (IRR) of the project.

Modified internal rate of return (MIRR) on the project.

Book (accounting) rate of return for the project.

Net present value (NPV) of the project.

Modified internal rate of return (MIRR) of the project.

13. The value chain analysis used in connection with the make or buy decision often leads a firm to make use of: (Points : 2)

Activity-based costing.

Cost-volume profit analysis.

Outsourcing activities.

Relevant cost-based pricing.

14. Which one of the following is correct for determining relevant costs? (Points : 2)

Differential.

Integrative.

Long-term focus.

Subjective.

Opportunistic.

15. Which one of the following methods assumes that all interim cash inflows generated by an investment earn a return equal to the internal rate of return (IRR) of the investment? (Points : 2)

Modified internal rate of return (MIRR).

Payback.

Net present value (NPV).

Present value index (PI).

Internal rate of return method (IRR).

16. When the internal rate of return (IRR) method and the net present value (NPV) method do not yield the same recommendation for the same investment project, the technique normally selected is: (Points : 2)

IRR, because all reinvestment of funds occurs at the rate of the cost of capital and because it takes into consideration the relative size of the initial investment.

NPV, because it takes into consideration the relative size of the initial investment.

IRR, because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero.

NPV, because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero.

17. In making capital budgeting decisions, the principal focus is on: (Points : 2)

Cash flows only.

Timing of the cash flows only.

Cash flows and the timing of the cash flows.

Accounting-based measures of revenues and expenses.

Nonfinancial performance indicators.

18. Generally speaking, when ranking two mutually exclusive investments with different initial amounts, management should give first priority to the project: (Points : 2)

That generates cash flows for the longer period of time.

Whose net after-tax cash flows equal the initial investment outlay.

That has the greater accounting rate of return (ARR).

Whose cash flows vary the least.

That has the greater profitability index (PI).

19. Which one of the following capital budgeting decision models consists of dividing the total initial investment outlay by annual after-tax cash inflows (when such inflows are assumed equal over time)? (Points : 2)

Profitability index.

Payback period.

Book (accounting) rate of return.

Internal rate of return.

Adjusted payback period.

20. Which of the following is not one of the four general classes of real options? (Points : 2)

Expansion option.

Exercise option.

Abandonment option.

Investment-timing option (e.g., delay)

21. The term “breakeven after-tax cash flow” represents: (Points : 2)

A pessimistic estimate in a typical scenario analysis.

An optimistic estimate in a typical scenario analysis.

The amount of after-tax cash flow needed to generate a return equal to a project’s IRR.

The cash flow needed to generate an IRR of zero.

An estimate that can be arrived at using Goal Seek in Excel.

22. Which one of the following statements concerning capital budgeting is not true? (Points : 2)

A basic objective underlying capital budgeting is to select assets that will earn a satisfactory return.

Capital budgeting is the process of planning asset investments.

Capital budgeting is based on precise estimates of future events.

Capital budgeting involves estimating the revenues and costs of each proposed project, evaluating their merits, and choosing those worthy of investment.

Capital budgeting uses after-tax cash flows in the analysis of proposed investments.

23. Which of the following statements regarding capital investment analysis is false? (Points : 2)

A long-term planning horizon is assumed.

Benefits of potential investment projects are conceptually expressed in terms of accounting income (or reduction in costs).

Project acceptance decisions are based on models that explicitly incorporate the time value of money.

Need to incorporate income-tax effects in the analysis, for both revenues (gains) as well as expenses (losses).

Discounted cash flow (DCF) decision models are used by a majority of large organizations.

24. Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The machine will generate a constant after-tax income of $100,000 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value.

What is the payback period for the new machine, under the assumption that cash inflows occur evenly throughout the year? (Points : 2)

4 years.

5 years.

6 years.

10 years.

15 years.

25. The capital budgeting method(s) that is (are) most likely to provide consistency between data for capital budgeting and data for subsequent performance evaluation is (are) the: (Points : 2)

Payback period.

Discounted cash flow (DCF) methods.

Book (i.e., accounting) rate of return method.

Discounted payback period.

Cash-flow proxy method.