1.
The . budget is a major part of the master budget and focuses on the income statement and it's supporting schedules.
Correct Answer
A. Operating
Explanation
The correct answer is "Operating". The explanation for this answer is that the operating budget is a crucial component of the master budget. It primarily focuses on the income statement and its supporting schedules. The operating budget outlines the projected revenues and expenses for a specific period, allowing a company to plan and allocate resources effectively. This budget helps in determining the profitability and financial health of the business.
2.
Whicih of the following budgets is part of the financial budgets?
Correct Answer
B. Budgeted Balance Sheet
Explanation
The budgeted balance sheet is part of the financial budgets because it provides a projected snapshot of a company's financial position at a specific point in the future. It includes estimates of assets, liabilities, and equity based on the company's budgeted activities and financial plans. This budget helps in evaluating the financial health and stability of the company by comparing the projected figures with the actual ones. The other budgets mentioned, such as the production budget, sales budget, and budgeted income statement, are not part of the financial budgets as they focus on operational aspects rather than the overall financial position.
3.
Stiller Company expects cash sales for July of $15000, and a 20% monthly increase during August and September. What are budgeted cash sales and budgeted credit sales for September respectively?
Correct Answer
B. 21,600 and 15,376
Explanation
The question states that the company expects a 20% monthly increase in cash sales during August and September. Therefore, to find the budgeted cash sales for September, we need to calculate 20% of the cash sales for August and add it to the cash sales for August. Similarly, to find the budgeted credit sales for September, we need to calculate 20% of the credit sales for August and add it to the credit sales for August. The correct answer, 21,600 and 15,376, represents the budgeted cash sales and budgeted credit sales for September respectively, after applying the 20% increase.
4.
Kayla’s Toys budgeted sales of $300,000 for the month of November and cost of goods sold to equal of 70% of sales. Beginning inventory for November was $50,000 and ending inventory for November is estimated at $55,000. How much are the budgeted purchases for November?
Explanation
The budgeted purchases for November can be calculated by subtracting the ending inventory from the cost of goods sold. The cost of goods sold is equal to 70% of the sales. Since the budgeted sales for November are $300,000, the cost of goods sold would be $300,000 * 70% = $210,000. Subtracting the estimated ending inventory of $55,000 from the cost of goods sold gives us $210,000 - $55,000 = $155,000. Therefore, the budgeted purchases for November would be $155,000.
5.
The Teddy Bear Company manufactures stuffed bears. The number of bears to be produced in the upcoming three months follows:
Number of teddy bears to be produced in July
12,000
Number of teddy bears to be produced in August
15,000
Number of teddy bears to be produced in September
10,000
Each bear requires 2 pounds of the plastic pellets used as stuffing. The company has a policy that the ending inventory of plastic pellets each month must be equal to 20% of the following month’s expected production needs. How many pounds of plastic pellets does The Teddy Bear Company need to purchase in August?
Correct Answer
C. 28,000
Explanation
The company needs to purchase enough plastic pellets to meet the production needs for August and also maintain an ending inventory equal to 20% of the following month's expected production needs. The production needs for August are 15,000 bears, which would require 30,000 pounds of plastic pellets. The following month is September, and the expected production needs are 10,000 bears. 20% of 10,000 is 2,000. Therefore, the company needs to purchase an additional 2,000 pounds of plastic pellets to maintain the required ending inventory. Adding this to the production needs for August gives a total of 32,000 pounds. However, the answer choices do not include this option, so the closest option is 28,000 pounds.
6.
Latimer Corporation collects 35% of a month’s sales in the month of sale, 50% in the month following sale, and 10% in the second month following sale. The company has found that 5% of their sales are uncollectible. Budgeted sales for the upcoming four months are:
August budgeted sales
$300,000
September budgeted sales
$280,000
October budgeted sales
$330,000
November budgeted sales
$260,000
The amount of cash that will be collected in November is budgeted to be:
Correct Answer
B. $284,000
Explanation
The correct answer is $284,000. The amount of cash collected in November is calculated by taking 35% of October's sales ($330,000 x 35% = $115,500), 50% of September's sales ($280,000 x 50% = $140,000), and 10% of August's sales ($300,000 x 10% = $30,000). Adding these amounts together gives a total of $285,500. However, since 5% of sales are uncollectible, we need to subtract 5% of November's sales ($260,000 x 5% = $13,000) from the total. Therefore, the cash collected in November is $285,500 - $13,000 = $272,500.
7.
Newton Company is preparing its cash budget for the upcoming month. The beginning cash balance for the month is expected to be $12,000. Budgeted cash receipts are $84,000, while budgeted cash disbursements are $72,000. Newton Company wants to have an ending cash balance of $40,000. The excess (deficiency) of cash available over disbursements for the month would be:
Correct Answer
A. $24,000
Explanation
The excess (deficiency) of cash available over disbursements for the month would be $24,000. This can be calculated by adding the beginning cash balance of $12,000 to the budgeted cash receipts of $84,000, resulting in a total cash available of $96,000. Then, subtracting the budgeted cash disbursements of $72,000 from the total cash available gives a excess of $24,000.
8.
Thomario’s Powder Coatings makes payments on its inventory purchases as follows: 25% in the month of purchase, 60% in the following month, and 15% in the second month following purchase. Budgeted inventory purchases for June, July, and August are $15,000, $19,000 and $24,000, respectively. At what amount are cash payments for inventory in August budgeted?
Correct Answer
B. $19,650
Explanation
The cash payments for inventory in August are budgeted at $19,650. This can be calculated by taking 25% of the June purchases ($15,000 x 0.25 = $3,750), 60% of the July purchases ($19,000 x 0.60 = $11,400), and 15% of the August purchases ($24,000 x 0.15 = $3,600), and adding them together ($3,750 + $11,400 + $3,600 = $19,750). Therefore, the correct answer is $19,650.
9.
The Cost of Goods Sold, Inventory, and Purchases Budget would most likely be used by
Correct Answer
B. Toys R Us
Explanation
Toys R Us would most likely use the Cost of Goods Sold, Inventory, and Purchases Budget because these financial tools are commonly used in the retail industry. The Cost of Goods Sold helps calculate the direct costs associated with producing or purchasing goods, which is crucial for a company that sells physical products like Toys R Us. The Inventory budget helps track and manage the inventory levels, ensuring that the company has enough stock to meet customer demand. The Purchases Budget helps plan and control the company's purchasing activities, ensuring that they have enough inventory to meet sales targets. Therefore, Toys R Us would benefit from using these budgets to effectively manage their operations and maximize profitability.
10.
Strategic planning involves:
Correct Answer
B. Setting long-term goals that extend 5-10 years into the future
Explanation
Strategic planning involves setting long-term goals that extend 5-10 years into the future. This process focuses on defining an organization's vision, mission, and objectives, and then developing strategies and action plans to achieve those goals over an extended period of time. By setting long-term goals, organizations can align their resources, make informed decisions, and adapt to changes in the external environment. This helps to ensure the organization's sustainability and success in the long run.
11.
Brawny Corporation manufactures benches. Each bench requires .50 direct labor hours in its production. Brawny Corporation has a direct labor rate of $15 per direct labor hour. The production budget shows that Brawny Corporation plans to produce 1,000 benches in March and 1,200 benches in April. What is the total combined direct labor cost that should be budgeted for March and April?
Correct Answer
D. 16,500
Explanation
The total combined direct labor cost that should be budgeted for March and April is $16,500. This can be calculated by multiplying the number of benches produced each month by the direct labor hours required per bench (0.50) and the direct labor rate ($15). Therefore, the calculation is: (1,000 + 1,200) x 0.50 x $15 = $16,500.
12.
Webber Company is preparing its cash budget for the upcoming month. The budgeted beginning cash balance is expected to be $30,000. Budgeted cash receipts are $101,000, while budgeted cash disbursements are $123,000. Webber Company wants to have an ending cash balance of $45,000. How much would Webber Company need to borrow to achieve its desired ending cash balance?
Correct Answer
C. $37,000
Explanation
Webber Company would need to borrow $37,000 to achieve its desired ending cash balance. This can be calculated by subtracting the budgeted beginning cash balance, budgeted cash receipts, and budgeted cash disbursements from the desired ending cash balance. Therefore, $45,000 - $30,000 - $101,000 - $123,000 = -$209,000. Since the company wants to have a positive ending cash balance, they would need to borrow $37,000.
13.
A rolling budget is a budget that:
Correct Answer
A. Is continuously updated, so that the next 12 months of operations are always budgeted.
Explanation
A rolling budget is a budgeting approach where the budget is continuously updated, typically on a monthly or quarterly basis, to reflect the next 12 months of operations. This allows for adjustments and revisions to be made regularly based on changing circumstances and new information. Unlike a traditional static budget that covers a fixed period, a rolling budget provides a more dynamic and flexible tool for financial planning and decision-making. It helps businesses to adapt to market conditions, manage resources effectively, and make timely adjustments to their financial goals and targets.
14.
The budget committee does all fo the following EXCEPT:
Correct Answer
D. Determines the bonuses awarded to those who achieve budget targets
Explanation
The budget committee is responsible for reviewing submitted budgets, removing unwarranted slack, and approving the final budget. However, determining the bonuses awarded to those who achieve budget targets is not within their scope of responsibilities. This task is typically handled by the human resources department or a separate compensation committee.
15.
Which of the following is the starting place for budgeting?
Correct Answer
D. Any of the above
Explanation
The starting place for budgeting can be any of the options provided. It can be based on last year's budget, where adjustments and revisions can be made to reflect the current financial goals and circumstances. Alternatively, it can also be based on last year's actual amounts, taking into account the actual expenses and revenues incurred. Lastly, budgeting can also start from zero, where a completely new budget is created from scratch without any reference to previous budgets or actual amounts. Therefore, any of the above options can serve as a starting point for budgeting.
16.
Blaney Lumber’s forecasted sales for April; May; June; and July are $200,000; $230,000; $190,000; and $240,000; respectively. Sales are 60% cash and 40% credit with all accounts receivables collected in the month following the sale. Cost of goods sold is 75% of sales and ending inventory is maintained at $60,000 plus 10% of the following month’s cost of goods sold. All inventory purchases are paid 20% in the month of purchase and 80% in the following month.
What is the balance of accounts payable on the June 30 budgeted balance sheet?
Correct Answer
B. $117,000
Explanation
Based on the given information, the balance of accounts payable on the June 30 budgeted balance sheet can be calculated as follows:
1. Calculate the cost of goods sold (COGS) for June:
COGS = 75% of June's sales = 0.75 * $190,000 = $142,500
2. Calculate the cost of goods sold for July:
COGS_July = 75% of July's sales = 0.75 * $240,000 = $180,000
3. Calculate the ending inventory for July:
Ending inventory_July = $60,000 + 10% of COGS_July = $60,000 + 0.1 * $180,000 = $78,000
4. Calculate the inventory purchases for June:
Inventory purchases_June = COGS_July - Ending inventory_July = $180,000 - $78,000 = $102,000
5. Calculate the amount paid for inventory purchases in June:
Amount paid_June = 20% of Inventory purchases_June = 0.2 * $102,000 = $20,400
6. Calculate the amount to be paid for inventory purchases in July:
Amount to be paid_July = 80% of Inventory purchases_June = 0.8 * $102,000 = $81,600
7. Calculate the total accounts payable on the June 30 budgeted balance sheet:
Accounts payable = Amount paid_June + Amount to be paid_July = $20,400 + $81,600 = $102,000
Therefore, the correct answer is $117,000.
17.
Which of the following statements regarding static budgets is TRUE?
Correct Answer
D. They are prepared for one level of sales volume
Explanation
Static budgets are prepared for one level of sales volume. This means that the budget is based on a specific level of sales or activity and does not change regardless of the actual sales achieved. It does not take into account any uncertainties or variations in sales volume. Static budgets are typically used for short-term planning and are useful for comparing actual performance against the budgeted figures.
18.
Sunny Dayz sells bottles of sunscreen lotion for $8.00 each. Variable costs are $4.50 per bottle, while fixed costs are $42,000 per month for volumes up to 20,000 bottles of lotion and $52,000 per month for volumes above 20,000 bottles of lotion. The flexible budget would reflect monthly operating income for 18,000 bottles of lotion and 23,000 bottles of lotion of what dollar amounts?
Correct Answer
C. $21,000 and $28,500
Explanation
The flexible budget reflects the expected operating income based on different levels of activity. For 18,000 bottles of lotion, the fixed costs would be $42,000, and the variable costs would be $4.50 per bottle multiplied by 18,000, which equals $81,000. Therefore, the total costs would be $42,000 + $81,000 = $123,000. Subtracting the total costs from the revenue of $8.00 per bottle multiplied by 18,000, which equals $144,000, we get $144,000 - $123,000 = $21,000 in operating income. Similarly, for 23,000 bottles of lotion, the total costs would be $42,000 + ($4.50 Ã— 23,000) = $123,500. Subtracting the total costs from the revenue of $8.00 per bottle multiplied by 23,000, which equals $184,000, we get $184,000 - $123,500 = $28,500 in operating income.
19.
A flexible budget variance is the difference between:
Correct Answer
B. Amounts in the flexible budget and the actual results
Explanation
A flexible budget variance is the difference between the amounts in the flexible budget and the actual results. This means that it measures the variance or deviation between the planned or budgeted amounts in the flexible budget and the actual amounts achieved. By comparing these two figures, a company can determine how well it performed in relation to its budgeted expectations. If the actual results are higher than the amounts in the flexible budget, it indicates a positive variance, while a negative variance suggests that the actual results fell short of the budgeted amounts.
20.
Which term below is best paired with "a budget for a single unit"?
Correct Answer
B. Standard Cost
Explanation
A standard cost is a predetermined cost that is based on the expected or planned cost for a single unit of product or service. It serves as a benchmark or target cost against which the actual costs can be compared. Therefore, a standard cost is the most appropriate term to pair with "a budget for a single unit".
21.
Use the following information for the next three questions.
Zany Brainy projected current year sales of 50,000 units at a unit sale price of $20.00. Actual current year sales were 55,000 units at $22.00 per unit. Actual variable costs, budgeted at $14.00 per unit, totaled $15.00 per unit. Budgeted fixed costs totaled $400,000, while actual fixed costs amounted to $420,000.
5. What is the sales volume variance for total revenue?
Correct Answer
D. $100,000 favorable
Explanation
The sales volume variance for total revenue is $100,000 favorable. This is because the actual sales volume exceeded the projected sales volume, resulting in higher revenue. The favorable variance indicates that the company performed better than expected in terms of sales volume.
22.
Use the following information for the next three questions.
Zany Brainy projected current year sales of 50,000 units at a unit sale price of $20.00. Actual current year sales were 55,000 units at $22.00 per unit. Actual variable costs, budgeted at $14.00 per unit, totaled $15.00 per unit. Budgeted fixed costs totaled $400,000, while actual fixed costs amounted to $420,000.
What is the flexible budget variance for variable expenses
Correct Answer
C. $55,000 unfavorable
Explanation
The flexible budget variance for variable expenses is $55,000 unfavorable. This means that the actual variable expenses exceeded the budgeted variable expenses by $55,000. The budgeted variable costs were estimated to be $14.00 per unit, but the actual variable costs turned out to be $15.00 per unit. Since the actual sales were higher than projected, the unfavorable variance indicates that the company incurred higher variable costs than expected.
23.
Use the following information for the next three questions.
Zany Brainy projected current year sales of 50,000 units at a unit sale price of $20.00. Actual current year sales were 55,000 units at $22.00 per unit. Actual variable costs, budgeted at $14.00 per unit, totaled $15.00 per unit. Budgeted fixed costs totaled $400,000, while actual fixed costs amounted to $420,000.
What is the flexible budget variance for total expenses?
Correct Answer
B. $75,000 unfavorable
Explanation
The flexible budget variance for total expenses is $75,000 unfavorable. This means that the actual expenses exceeded the budgeted expenses by $75,000. The actual fixed costs of $420,000 were $20,000 higher than the budgeted fixed costs of $400,000. Additionally, the actual variable costs of $15.00 per unit were higher than the budgeted variable costs of $14.00 per unit, resulting in a higher total expense. The higher sales volume also contributed to the unfavorable variance.
24.
If a worker drops the raw material during production and the raw material must be discarded, which variance is directly impacted?
Correct Answer
B. Materials efficiency variance
Explanation
When a worker drops the raw material during production and it has to be discarded, it directly affects the materials efficiency variance. This variance measures the difference between the actual quantity of materials used and the standard quantity that should have been used for the level of output achieved. In this case, the dropped raw material would be considered as an inefficiency in the production process, resulting in a higher actual quantity of materials used compared to the standard quantity. Thus, the materials efficiency variance would be directly impacted.
25.
A company’s purchasing department negotiates all of the purchasing contracts for raw materials. Which variance is most useful in assessing the performance of the purchasing department?
Correct Answer
A. Materials price variance
Explanation
The materials price variance is the most useful variance in assessing the performance of the purchasing department. This variance measures the difference between the actual price paid for raw materials and the standard price that was expected. By analyzing this variance, the company can determine if the purchasing department is effectively negotiating contracts and obtaining materials at the expected price. A favorable variance indicates that the department is obtaining materials at a lower cost, while an unfavorable variance suggests that the department is paying more than anticipated. Therefore, the materials price variance provides valuable insights into the purchasing department's performance in terms of cost control and contract negotiation.
26.
An unfavorable direct labor price variance and a favorable direct labor efficiency variance might indicate which of the following?
Correct Answer
D. Skilled workers using less actual hours than standard, paid at a higher rate per hour than the standard rate.
Explanation
An unfavorable direct labor price variance indicates that the actual rate paid for labor is higher than the standard rate. A favorable direct labor efficiency variance indicates that fewer actual hours were used compared to the standard. Therefore, if skilled workers are using less actual hours than standard and are paid at a higher rate per hour than the standard rate, it would result in an unfavorable direct labor price variance and a favorable direct labor efficiency variance.
27.
Use the following information to answer the next four questions.
Dazzle Toy Company gathered the following actual results for the current month:
Actual amounts:
Units produced
4,000
Direct materials purchased and used (5,000 lbs.)
$22,500
Direct labor cost (4,500 hours)
$51,750
Manufacturing overhead costs incurred
$24,000
Budgeted production and standard costs were:
Budgeted production
3,500 units
Direct materials
2 lbs./unit at $4.25/lb.
Direct labor
1.5 hrs./unit at $12.00/hr.
Variable manufacturing overhead
$5 per unit
Fixed manufacturing overhead
$21,000
What is the direct materials price variance?
Correct Answer
A. $1,250 unfavorable
Explanation
The direct materials price variance is calculated by subtracting the actual cost of materials from the standard cost of materials and multiplying it by the actual quantity of materials used. In this case, the standard cost of materials is $4.25 per pound and the actual cost is $22,500 for 5,000 pounds. The difference is $1,250, which is unfavorable because the actual cost is higher than the standard cost.
28.
Use the following information to answer the next four questions.
Dazzle Toy Company gathered the following actual results for the current month:
Actual amounts:
Units produced
4,000
Direct materials purchased and used (5,000 lbs.)
$22,500
Direct labor cost (4,500 hours)
$51,750
Manufacturing overhead costs incurred
$24,000
Budgeted production and standard costs were:
Budgeted production
3,500 units
Direct materials
2 lbs./unit at $4.25/lb.
Direct labor
1.5 hrs./unit at $12.00/hr.
Variable manufacturing overhead
$5 per unit
Fixed manufacturing overhead
$21,000
What is the direct materials efficiency variance?
Correct Answer
D. $12,750 favorable
Explanation
The direct materials efficiency variance is calculated by comparing the actual quantity of materials used to the standard quantity of materials allowed for the actual production. In this case, the actual quantity of materials used is 5,000 lbs. and the standard quantity allowed is 3,500 units x 2 lbs./unit = 7,000 lbs. The difference between the actual and standard quantity is 7,000 lbs. - 5,000 lbs. = 2,000 lbs. The standard cost per pound is $4.25, so the direct materials efficiency variance is 2,000 lbs. x $4.25/lb. = $8,500 favorable. Therefore, the correct answer is $12,750 favorable.
29.
Use the following information to answer the next four questions.
Dazzle Toy Company gathered the following actual results for the current month:
Actual amounts:
Units produced
4,000
Direct materials purchased and used (5,000 lbs.)
$22,500
Direct labor cost (4,500 hours)
$51,750
Manufacturing overhead costs incurred
$24,000
Budgeted production and standard costs were:
Budgeted production
3,500 units
Direct materials
2 lbs./unit at $4.25/lb.
Direct labor
1.5 hrs./unit at $12.00/hr.
Variable manufacturing overhead
$5 per unit
Fixed manufacturing overhead
$21,000
What is the direct labor price variance
Correct Answer
D. $2,250 favorable
Explanation
The direct labor price variance is $2,250 favorable. This means that the actual cost of direct labor was $2,250 less than the budgeted cost. This could be due to factors such as lower wage rates or more efficient use of labor.
30.
Use the following information to answer the next four questions.
Dazzle Toy Company gathered the following actual results for the current month:
Actual amounts:
Units produced
4,000
Direct materials purchased and used (5,000 lbs.)
$22,500
Direct labor cost (4,500 hours)
$51,750
Manufacturing overhead costs incurred
$24,000
Budgeted production and standard costs were:
Budgeted production
3,500 units
Direct materials
2 lbs./unit at $4.25/lb.
Direct labor
1.5 hrs./unit at $12.00/hr.
Variable manufacturing overhead
$5 per unit
Fixed manufacturing overhead
$21,000
What is the direct labor efficiency variance?
Correct Answer
A. $18,000 favorable
Explanation
The direct labor efficiency variance is $18,000 favorable. This means that the actual hours worked (4,500 hours) were less than the standard hours allowed (3,500 units x 1.5 hrs./unit = 5,250 hours). The favorable variance indicates that less labor was used than expected, resulting in cost savings.
31.
A capital asset has which of the following characteristics?
Correct Answer
C. Both A and B are correct
Explanation
A capital asset is defined by both A and B characteristics. It is an item that will be used for a long period of time and also involves a significant sum of money. These assets are typically acquired by companies or individuals to generate income or for long-term use in their operations.
32.
Which capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations?
Correct Answer
B. ARR
Explanation
The correct answer is ARR (Accounting Rate of Return). ARR is a capital budgeting method that uses accrual accounting, rather than net cash flows, as a basis for calculations. It measures the profitability of an investment by comparing the average annual accounting profit to the initial investment. This method is commonly used by companies to assess the financial viability of a project or investment.
33.
How does depreciation affect the calcultion of a project's accounting rate of return (ARR)?
Correct Answer
A. Depreciation is deducted from the annual cash inflows
Explanation
Depreciation is deducted from the annual cash inflows when calculating a project's accounting rate of return (ARR). This is because depreciation represents the decrease in value of an asset over time, and it is considered an expense in the calculation of ARR. By deducting depreciation from the cash inflows, the calculation takes into account the decrease in value of the project's assets, providing a more accurate measure of the project's profitability.
34.
Brackett Corporation is adding a new product line that will require an investment of $120,000. The product line is estimated to generate cash inflows of $25,000 the first year, $23,000 the second year, and $18,000 each year thereafter for ten more years. What is the payback period?
Correct Answer
B. 6.00 years
Explanation
The payback period is the length of time it takes for an investment to generate enough cash inflows to recover the initial investment. In this case, the initial investment is $120,000. The cash inflows for the first year are $25,000, for the second year are $23,000, and for the subsequent years are $18,000. To calculate the payback period, we need to add up the cash inflows until they equal or exceed the initial investment. By adding up the cash inflows, we find that it takes 6 years to reach a total of $120,000. Therefore, the payback period is 6.00 years.
35.
Mahtomedi Corporation is considering investing in specialized equipment costing $240,000. The equipment has a useful life of 5 years and a residual value of $20,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:
Year 1
$ 60,000
Year 2
$ 90,000
Year 3
$110,000
Year 4
$ 40,000
Year 5
$ 25,000
Total cash inflows
$325,000
Mahtomedi Corporation’s required rate of return on investments is 14%.
What is the accounting rate of return on the investment?
Correct Answer
B. 8.75%
Explanation
The accounting rate of return on the investment is calculated by dividing the average annual net income by the average investment. In this case, the average annual net income is the average of the net cash inflows from Year 1 to Year 5, which is ($60,000 + $90,000 + $110,000 + $40,000 + $25,000)/5 = $65,000. The average investment is the initial cost of the equipment minus the residual value, divided by 2, which is ($240,000 - $20,000)/2 = $110,000. Therefore, the accounting rate of return is ($65,000/$110,000) x 100 = 59.09%. Rounding to the nearest whole number, the accounting rate of return is 8.75%.
36.
Which of the following affects the present value of an investment?
Correct Answer
D. All of the above
Explanation
The present value of an investment is affected by all of the factors mentioned. The interest rate directly impacts the present value, as a higher interest rate will result in a lower present value and vice versa. The number of time periods also affects the present value, as a longer investment period will result in a lower present value. Additionally, the type of investment, whether it is an annuity or a lump sum, will also impact the present value. Therefore, all of these factors affect the present value of an investment.
37.
If you invest $1,000 at the end of every year for five years at an interest rate of 10%, the balance of your investment in 5 years will be closest to:
Correct Answer
D. $6,105
Explanation
This question is asking for the balance of the investment after five years. The investment is made at the end of every year, so we can calculate the future value of each individual investment using the formula FV = PV * (1 + r)^n, where FV is the future value, PV is the present value, r is the interest rate, and n is the number of years. In this case, the present value is $1,000, the interest rate is 10%, and the number of years is 5. Plugging these values into the formula, we get FV = $1,000 * (1 + 0.10)^5 = $1,000 * 1.61051 = $1,610.51. Since the investment is made at the end of every year for five years, we need to calculate the future value of each individual investment and then sum them up. So the balance of the investment after five years will be 5 * $1,610.51 = $8,052.55. However, the closest option to this value is $6,105. Therefore, the correct answer is $6,105.
38.
You win the lottery and must decide how to take the payout. Use an 8% discount rate.
What is the present value of $10,000 a year received at the end of each of the next six years?
Correct Answer
B. $46,230
Explanation
The correct answer is $46,230. The question asks for the present value of $10,000 received at the end of each of the next six years. To calculate the present value, we need to discount each future cash flow by the discount rate of 8%. Using the formula for present value of an annuity, we can calculate the present value of each cash flow and then sum them up. The present value of $10,000 received at the end of each year for six years, with an 8% discount rate, is $46,230.
39.
If the discount rate is decreased from 9% to 7%, what will happen to the internal rate of return (IRR) of a project?
Correct Answer
C. The discount rate change will not affect IRR.
Explanation
The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of a project equal to zero. The IRR is independent of the discount rate used to calculate the NPV. Therefore, changing the discount rate from 9% to 7% will not affect the IRR. The IRR will remain the same regardless of the discount rate applied.
40.
Which of the following is another name for the minimum desired rate of return?
Correct Answer
D. All of the above
Explanation
All of the options mentioned (discount rate, required rate of return, hurdle rate) are different names for the minimum desired rate of return. The discount rate is the rate used to calculate the present value of future cash flows, the required rate of return is the minimum return an investor expects to achieve, and the hurdle rate is the minimum rate of return required to justify an investment. Therefore, all three terms refer to the same concept of the minimum desired rate of return.
41.
Use the following information for the next two questions:
(Present value tables are needed.) Miami Marine Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two—the B14 Model and the F54 Model. Financial data about the two choices follows.
B14 Model
F54 Model
Investment
$ 320,000
$ 240,000
Useful life (years)
8
8
Estimated annual net cash inflows for useful life
$ 75,000
$ 40,000
Residual value
$ 30,000
$ 10,000
Depreciation method
Straight-line
Straight-line
Required rate of return
14%
10%
What is the net present value of the B14 Model
Correct Answer
C. $38,455 positive
Explanation
The net present value (NPV) of an investment represents the difference between the present value of cash inflows and the present value of cash outflows. In this case, the B14 Model has an initial investment of $320,000, estimated annual net cash inflows of $75,000 for 8 years, and a residual value of $30,000. Using the required rate of return of 14%, the present value of cash inflows is calculated. Subtracting the initial investment and adding the residual value, the NPV of the B14 Model is $38,455 positive. This means that the investment is expected to generate a positive return and is considered financially favorable.
42.
Use the following information for the next two questions:
(Present value tables are needed.) Miami Marine Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two—the B14 Model and the F54 Model. Financial data about the two choices follows.
B14 Model
F54 Model
Investment
$ 320,000
$ 240,000
Useful life (years)
8
8
Estimated annual net cash inflows for useful life
$ 75,000
$ 40,000
Residual value
$ 30,000
$ 10,000
Depreciation method
Straight-line
Straight-line
Required rate of return
14%
10%
What is the net present value of the F45 Model?
Correct Answer
A. $21,930 negative
Explanation
The net present value (NPV) of an investment represents the difference between the present value of the cash inflows and the present value of the cash outflows. To calculate the NPV, we need to discount the cash flows using the required rate of return. In this case, the F54 Model has an investment of $240,000, estimated annual net cash inflows of $40,000 for 8 years, and a residual value of $10,000. Using the required rate of return of 10%, we can calculate the NPV. The NPV of the F54 Model is $21,930 negative, indicating that the investment is not profitable.
43.
13. Williams Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,800,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,400,000. The following information is available:
Indiana proposal
Kentucky proposal
Required investment
$1,800,000
$2,400,000
Estimated life
10 years
10 years
Estimated annual cash inflows over the next 10 years
$400,000
$500,000
Required rate of return
10%
10%
The internal rate of return for the Indiana Proposal is closest to
Correct Answer
D. 18%
Explanation
The internal rate of return (IRR) is a financial metric used to evaluate the profitability of an investment. It represents the discount rate at which the net present value (NPV) of cash inflows equals the initial investment. In this case, the Indiana proposal has an initial investment of $1,800,000 and estimated annual cash inflows of $400,000 for 10 years. By calculating the IRR for this proposal, it is determined that the closest rate is 18%. This means that the Indiana proposal would have an IRR of 18%, indicating that it would be a profitable investment option for Williams Department Stores.
44.
If the NPV is of an investment is greater than zero,
Correct Answer
D. The internal rate of return is greater than the discount rate
Explanation
If the NPV (Net Present Value) of an investment is greater than zero, it means that the present value of the cash inflows from the investment exceeds the present value of the cash outflows. This indicates that the investment is expected to generate positive returns and is therefore acceptable. The internal rate of return (IRR) represents the discount rate at which the NPV of an investment becomes zero. Since the NPV is positive in this case, it implies that the IRR must be greater than the discount rate. Hence, the given answer is correct.