Exam 3 Extra Review Problems

9-1

R2D2 Co. budgets payroll at $4,000 per month plus a percentage of monthly sales. The June
operating expense budget includes total payroll of $12,000 with budgeted sales of $160,000. Sales
for July are budgeted at $180,000 while purchases of inventory for July are budgeted at $95,000.
Depreciation and insurance for July are estimated at $1,000 and $600, respectively. Office and
administrative expenses related to purchasing inventory are budgeted at 10% of purchases for the
month. The purchase of $2,500 in equipment and $1,500 in furniture is expected in July.
If the percentage of monthly sales used in budgeting payroll increases 25%, what would the total
payroll budgeted for July be?
A. $15,250
B. $11,250
C. $13,000
D. $18,500

9-2

R2D2 Co. prepared the following sales budget:

Month
March
April
May
June

Cash Sales
$20,000
$36,000
$42,000
$54,000

Credit Sales
$10,000
$16,000
$40,000
$48,000

Credit collections are 35% in the month of sale, 55% in the month following the sale, and
10% two months following the sale. The remaining 5% is expected to be uncollectible.
What are the total cash collections in May?
A. $64,800
B. $65,800
C. $63,800
D. $76,400
9-3 Desired ending inventory is 25% more than beginning inventory. If purchases total $160,000, which of the
following statements is true regarding cost of goods sold (COGS)?
A) COGS will exceed cost of goods available for sale.
B) COGS will be less than purchases.
C) COGS will exceed purchases.
D) COGS will equal $55,000.
9-4 R2D2 Co. expects its November sales to be 20% higher than its October sales of $180,000. Purchases
were $110,000 in October and are expected to be $160,000 in November. All sales are on credit and are
collected as follows: 35% in the month of the sale and 60% in the following month. Purchases are paid
40% in the month of purchase and 60% in the following month. The cash balance on November 1 is
$13,500. The cash balance on November 30 will be
A. $4,100
B. $53,600
C. $67,100
D. $40,100
9-5 The managerial accountant at the R2D2 Co. reported that the company anticipates sales of $600,000 in
1

September and October, $625,000 in November, $635,000 in December, and note that the sales figure is
$640,000 in January. The August sales revenue was equal to the September sales revenue. The managerial
accountant establishes the prices at R2D2 on its merchandise to ensure the company earns 45% gross profit on
its sales. The managerial accountant expects the ending inventory at the store to equal 12% of the next month's
cost of goods sold. What is the purchases budget for October?
Use following facts to answer 9-6, 9-7, and 9-8.
R2D2 Co 's forecasted sales for April, May, June, and July are $200,000, $230,000, $190,000, and $240,000,
respectively. Sales are 65% cash and 35% 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 22% in the month of purchase and 78%
in the following month.
9-6. What are the cash collections budgeted for June?
A) $150,500
B) $193,500
C) $123,500
D) $204,000
9-7. What are the budgeted cash payments in June to account for the inventory purchases?
A) $495,000
B) $315,750
C) $164,385
D) $167,415
9-8. What is the balance of accounts payable on the June 30 budgeted balance sheet?
A) $32,175
B) $108,225
C) $146,250
D) $114,075

10-1 The convenience store that is responsible for its own revenues, costs, and is owned by a national convenience store
chain may be classified as a(n)
A) cost center.
B) investment center.
C) revenue center.
D) profit center.

10-2 The ________reveals whether or not additional sales revenue can offset an increase in costs in the flexible budget
performance report.
A) flexible budget variance
B) static budget variance
C) sales volume variance
D) actual variance

10-3 Which of the following causes the master budget variance between the amounts in the master budget and the
flexible budget of a revenue center?
A) The cost of sales
B) The number of units sold differs from planned sales levels
C) The selling price per unit
D) Both the selling price and the number of units sold

10-4 Which of the following may cause a favorable sales volume variance of the revenues?
A) Actual net income for the subunit is greater than budgeted net income.
B) Actual sales in dollars are greater than the master budget sales in dollars.
C) The flexible budget sales in dollars are greater than the static budget sales in dollars.
D) Actual sales in dollars are less than the static budget sales in dollars.

10-5 R2D2 Co. had the following financial results for last month. What type of responsibility center do these results
reflect?

Subunit X
Revenue by
Product
Actual
WD-40
$630,000
WD-60
520,000
WD-80
125,000
QD-40
225,000
QD-60
425,000
Total
$1,925,000
A) Profit center
B) Revenue center
C) Investment center
D) Cost center

Flexible
Budget
Variance
$10,000 F
30,000 U
5,000 U
25,000 F
5,000 F
$5,000 F

Flexible
Budget
$620,000
550,000
130,000
200,000
420,000
$1,920,000

Sales
Volume
Variance
$20,000 F
40,000 F
10,000 U
40,000 U
20,000 F
$30,000 F

Static
(Master)
Budget
$600,000
510,000
140,000
240,000
400,000
$1,890,000

10-6 What will happen to return on investment (ROI) if current assets decrease while everything else remains the same?
A) ROI will decrease over time.
B) ROI will increase over time.
C) ROI will not be affected.
D) We cannot determine the direction of the effect from the information provided.

10-7 If selling and administrative expenses decrease while other expenses and assets remain constant, what will happen
to return on investment (ROI)?
A) ROI will decrease.
B) ROI will increase.
C) ROI will not be affected.
D) We cannot determine the direction of the effect from the information provided.

10-8 A manager can increase return on investment (ROI) by doing which of the following?
A) Increase operating expenses
B) Increase operating assets
C) Decrease sales
D) Decrease operating expenses

10-9 R2D2 Co. has a target rate of return of 14%, an ROI of 38%, and capital turnover of 2.5. The sales margin for R2D2
may be closest to
A) 6%.
B) 15%.
C) 95%.
D) 35%.

10-10 What are the total assets reported by R2D2 Co. if operating income is $650,000, its return on investment (ROI) is
40%, and its target rate of return is 10%?
A) $260,000
B) $1,625,000
C) $6,500,000
D) $650,000

Use following info to answer 10-11 through 10-15:

The Metalworks Division of R2D2 Co. had sales of $5,500,000 and operating income of $1,375,000 last year. The total
assets of the Metalworks Division were $2,750,000, while current liabilities were $330,000. R2D2s target rate of return is
12%, while its weighted average cost of capital is 8%. The effective tax rate for the company is 30%.
10-11 What is the Metalworks Division's sales margin?
A) 20.00%
B) 25.00%
C) 6.00%
D) 50.00%
10-12 What is the Metalworks Division's capital turnover?

A) 4.0
B) 5.0
C) 16.7
D) 2.0

10-13 What is the Metalworks Division's Return on Investment (ROI)?

A) 25.00%
B) 6.00%
C) 50.00%
D) 200.00%

10-14 What is the Metalworks Division's Residual Income (RI) and minimum acceptable income?

RI
A) $1,045,000
B) $768,900
C) $1,155,000
D) $330,000

Minimum acceptable income

$330,000
220,000
330,000
220,000

10-15 What is the Metalworks Divisions Economic Value Added (EVA)?

10-16 R2D2 Co. manufactures and sells portable radios. The radio sells for $35 per unit and its variable costs per unit are

$30. Fixed costs are $64,000 per month for sales volumes up to 32,000 radios. If more than 32,000 radios are sold, the fixed
costs will be $83,000. The flexible budget would reflect what monthly operating income for a sales volume of 41,000
radios?
A) $141,000
B) $122,000
C) $1,435,000
D) $205,000

11-1 R2D2 Co., which manufactures dog toys, is developing direct labor standards. The basic direct labor rate
is $12.00 per hour. Payroll taxes are 13% of the basic direct labor rate, while fringe benefits such as vacation
and health care insurance, are $6.00 per hour. What is the standard rate per direct labor hour?
A) $19.56
B) $18.00
C) $12.00
D) $13.56
11-2 If the purchasing manager purchased a greater quantity of raw materials than budgeted, but paid the
Standard Price (SP), which variance may be affected?
A) Materials price variance
B) Materials quantity variance
C) Both of the variances may be affected
D) Neither of the variances may be affected
11-3 A favorable direct materials quantity variance indicates which of the following?
A) The actual cost of direct materials was less than the standard cost of direct materials.
B) The Standard Quantity (SQ) of direct materials for actual output was less than the Actual Quantity (AQ) of
direct materials used.
C) The Actual Quantity (AQ) of direct materials used was less than the standard quantity for actual output.
D) The Actual Quantity (AQ) of direct materials used was greater than the standard quantity for budgeted
output.
11-4 A favorable direct materials price variance and an unfavorable direct materials quantity variance might
indicate which of the following?
A) Less expensive, inferior materials requiring less than the standard amount were used in production.
B) Less expensive, inferior materials requiring more than the standard amount were used in production.
C) More expensive, superior materials requiring more than the standard amount were used in production.
D) More expensive, superior materials requiring less than the standard amount were used in production.

11-5 The ________ tells managers how much of the overall variance id due to paying a higher or lower price
than expected for the quantity of materials it purchased.
A) production volume variance
B) overhead flexible budget variance
C) price variance
D) quantity variance
Use following facts to answer questions 11-6 & 11-7:
Jackson Industries has collected the following data for one of its products:
Direct materials standard (6 pounds per unit @ $0.55/lb.)
Direct materials flexible budget variance-unfavorable
Actual Direct Materials Used (AQU)
Actual finished goods produced

$3.30 per finished good

$12,000
35,000 pounds
26,000 units

11-6: What is the total actual cost of the direct materials used?
A) $19,250
B) $73,800
C) $97,800
D) $85,800
11-7: What is the actual cost of the Direct Materials Used (AQU) per pound?
A) $2.79
B) $2.45
C) $2.11
D) $0.55
11-8 R2D2 Co. budgeted 4,400 pounds of direct materials to make 2,600 units of product. The company
actually used 4,800 pounds of direct materials to make the 2,600 units. The direct materials quantity variance is
$1,500 unfavorable. What is the Standard Price (SP) per pound of direct materials?
A) $0.59
B) $2.22
C) $6.35
D) $3.75

Use the following facts to answer questions 9 and 10:

R2D2 Co. makes cupcakes and cookies. Co. gathered the following information for the current year regarding
its use of flour and butter (flour is a direct material for cupcakes and butter is a direct material for cookies):

Standard quantity per batch

Standard Price (SP) per pound of sugar
Actual quantity purchased (AQP)and
used per batch (pounds)
Actual Price (AP) paid
Price variance
Quantity variance
Flexible budget variance
Number of units produced

Flour (Direct
Materials)
Cupcakes
2 lbs.
$2.50/lb

Butter (Direct
Materials)
Cookies
3 lbs.
?

?
$3.00/lb.
$300 U
$500 F
?
350

4 lbs.
$5.50/lb.
$1,200 U
?
$3,100 U
400

11-9. What is the direct materials flexible budget variance for the flour in cupcakes?
A) $200 favorable
B) $800 unfavorable
C) $800 favorable
D) $200 unfavorable
11-10 What is the direct material quantity variance for butter in the cookies?
A) $2,900 favorable
B) $1,900 favorable
C) $2,900 unfavorable
D) $1,900 unfavorable
11-11 An LCD screen is purchased to be used in the manufacturing of a digital watch. The Standard Price (SP)
for the LCD screen used is $40.00. During the month of February, 3,400 screens were purchased and used. The
materials price variance was $6,000 unfavorable. The standard number of screens allowed for the actual number
of watches manufactured during the period was 25,000 screens. The actual purchase price of each LCD screen
may be closest to
A) $39.76 per LCD screen.
B) $40.24 per LCD screen.
C) $38.24 per LCD screen.
D) $41.76 per LCD screen.
11-12 R2D2 Company reports the following standards for direct materials for the year:
Standard cost per pound
$4.75
Standard amount per finished good
8.5 pounds
During the year, 460,000 finished goods were produced. The direct materials price variance was $14,200
unfavorable. The direct materials flexible budget variance was $980 favorable.
Calculate the following items regarding direct materials for R2D2 Company for the year:
a. Direct materials quantity variance
b. Standard quantity of direct materials for actual production
c. Actual pounds of Actual Quantity Direct Materials Used (AQU) for actual production

11-13 R2D2 Co. reported the following results for the past week:
Actual number of cars detailed
Actual direct labor hours used
Actual total direct labor cost

250
625
$6,500

Budgeted number of cars to be detailed

Standard direct labor cost per hour
Standard direct labor per car

300
$10.00
1.5

What is R2D2's direct labor efficiency variance?

A) $2,500 favorable
B) $2,500 unfavorable
C) $2,600 favorable
D) $2,600 unfavorable
11-14 R2D2 Co.s actual direct labor cost was $67,000 during the current period. R2D2 reported an
unfavorable direct labor rate variance of $1,800 and a favorable direct labor efficiency variance of $2,900. What
was the standard direct labor cost for actual output during the period?
11-15 The ________ is the difference between the actual machine hours run and the standard machine hours
allowed for the actual production volume.
A) production volume variance
B) overhead flexible budget variance
C) variable overhead efficiency variance
D) both A and C
11-16 Which of the following statements may be true if actual units produced exceed the budgeted units to be
produced?
A) Production volume variance is expected to be unfavorable.
B) Overhead flexible budget variance is expected to be favorable.
C) Fixed overhead volume variance is expected to be favorable.
D) Overhead flexible budget variance is expected to be unfavorable.
11-17 R2D2 Corporation manufactures Widget X that consumes a large amount of overhead. For the month of
October R2D2 produced 15,250 units of Widget X and incurred actual overhead costs of $375,000. The
standard costs developed for Widget X by R2D2 follow:
Standard direct labor hours per unit
Standard direct labor rate per hour
Standard overhead hours per unit
Standard overhead rate per hour

2
$15.00
6
$5.50

What was the total variable overhead variance for Widget X in October?
A) $128,250 favorable
B) $128,250 unfavorable
C) $291,125 favorable
D) $291,125 unfavorable

Use following facts to answer 11-18 and 19:

R2D2 Co.specializes in manufacturing one type of lamp. R2D2 allocates variable manufacturing overhead costs
on the basis of machine hours. R2D2 budgeted .5 machine hours per lamp and allocates overhead at a rate of
$1.80 per machine hour. Last year R2D2 manufactured 23,000 lamps, used 13,800 machine hours and incurred
actual overhead costs of $15,180.
11-18 What was R2D2s variable manufacturing overhead rate variance last year?
A) $4,140 favorable
B) $4,140 unfavorable
C) $9,660 favorable
D) $9,660 unfavorable
11-19 What was R2D2 Co.s variable manufacturing overhead efficiency variance last year?
A) $4,140 favorable
B) $4,140 unfavorable
C) $9,660 favorable
D) $9,660 unfavorable
11-20 R2D2 Co. has the following information about its standards and production activity for November:
Actual manufacturing overhead cost incurred, $85,000
Standard manufacturing overhead:
Variable manufacturing overhead cost @ $5.75 per unit produced
Fixed manufacturing overhead cost @ $8.45 per unit produced ($84,500/10,000 budgeted units)
Actual units produced, 12,000
Assume the allocation base for fixed overhead costs is the number of units to be produced.
How much are the standard overhead costs allocated to actual production?
A) $170,400
B) $142,000
C) $85,000
D) $57,500
11-21 R2D2 Co. has the following information about its standards and production activity for December:
Actual manufacturing overhead cost incurred, $92,500
Variable manufacturing overhead cost @ $3.25 per unit produced
Fixed manufacturing overhead cost @ $1.50 per unit produced
($22,500/15,000 budgeted units)
Actual units produced, 5,400
Assume the allocation base for fixed overhead costs is the number of units to be produced.
How much are the standard overhead costs allocated to actual production?
A) $48,750
B) $92,500
C) $71,250
D) $25,650

11-22 The standard variable overhead cost rate for R2D2 Company is $11.25 per unit. Budgeted fixed overhead
cost is $50,000. The company budgeted 5,000 units for the current period and actually produced 4,150 finished
units. What is the fixed overhead volume variance?
Assume the allocation base for fixed overhead costs is the number of units expected to be produced.
A) $8,500 favorable
B) $2,100 unfavorable
C) $2,100 favorable
D) $8,500 unfavorable
11-23 & 24 R2D2 Co. gathered the following information for the month ended June 30:
The static budget volume is 5,500 units:
Overhead flexible budget:
Number of units
9,000
10,000
11,000
Standard machine hours
13,050
14,500
15,950
Budgeted variable overhead costs:
$50,000
$56,000 $62,000
Budgeted fixed overhead costs:
$35,750
$35,750 $35,750
Actual production was 12,000 units. Actual overhead costs were $28,000 for variable costs and $37,000 for fixed costs.
Actual machine hours worked were 16,000 hours.
11-23 What is the fixed overhead volume variance? (Assume allocation base for fixed overhead costs is machine hours.)
A) $42,250 unfavorable
B) $42,250 favorable
C) $36,400 unfavorable
D) $36,400 favorable

11-24 What is the standard variable overhead rate per machine hour?
A) $3.50
B) $4.31
C) $2.47
D) $3.86

11-25 The managerial accountant at R2D2Co. assesses a fixed overhead budget variance of $3,400 U in the
month of April. The standard hours in April were 2,900 hours and the standard rate was projected at $13 per
machine-hour. There were unforeseen complications that involved raw materials and the standard rate projected
per machine hour-was inaccurate. What was the standard rate per-machine hour if the standard fixed overhead
cost of production is $41,100? What is the budgeted fixed overhead amount if the actual fixed overhead is
$43,100?
A) $14.17 /machine hour; $39,700
B) $13.86 /machine hour; $44,500
C) $14.15 /machine hour; $46,500
D) $12.15 /machine hour; $40,200

10

12-1 All else being equal, a company would choose to invest in a capital asset if which of the following is true?
A) If the payback period equals the amount invested
B) If the expected accounting rate of return is less than the required rate of return
C) If the expected accounting rate of return is greater than the required rate of return
D) If the average amount invested is equal to the net cash inflows
Use following facts to answer 12-2 & 12-3:
R2D2 Co. is considering investing in two alternative projects:
Investment
Useful life (years)
Estimated annual net cash inflows for useful
life
Residual value
Depreciation method
Required rate of return

Project 1
$400,000
5

Project 2
$250,000
6

$100,000
$25,000
Straight-line
12%

$45,000
$15,000
Straight-line
8%

12-2 What is the payback period for Project 2?

A) 4.00 years
B) 5.56 years
C) 10.00 years
D) 16.00 years
12-3 What is the accounting rate of return for Project 1?
A) 43.75%
B) 6.25%
C) 1.88%
D) 25.00%

11

12-4 R2D2 Co. is considering investing in specialized equipment costing $250,000. 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
Year 2
Year 3
Year 4
Year 5
Total cash inflows

$60,000
$90,000
$110,000
$40,000
$25,000
$325,000

R2D2 Co.'s required rate of return on investments is 14%.

What is the accounting rate of return on the investment?
A) 7.60%
B) 5.60%
C) 18.40%
D) 44.40%
12-5 R2D2 Co.is considering an investment in new equipment costing $155,000. The equipment will be
depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $45,000
the first year, $65,000 the second year, and $90,000 every year thereafter until the fifth year. What is the
payback period for this investment? The equipment has no residual value.
A) 2.04 years
B) 3.44 years
C) 1.72 years
D) 2.50 years
12-6 R2D2 Co. uses straight-line depreciation and is considering a capital expenditure for which the following
relevant cash flow data have been estimated:
Estimated useful life:
Initial investment:
Savings year 1:
Savings year 2:
Savings year 3:
Residual value after 3 yrs

3 years
$500,000
$210,000
$150,000
$225,000
$50,000

The accounting rate of return is closest to

A) 39.00%.
B) 9.00%.
C) 30.00%.
D) 7.69%.

12

12-7 R2D2 Co. is evaluating a capital investment project which would require an initial investment of $240,000
to purchase new machinery. The annual revenues and expenses generated specifically by this project each year
during the project's nine year life would be:
Sales
Variable expenses
Contribution margin
Fixed expenses:
Salaries expense
Rent expense
Depreciation expense
Total fixed expenses
Operating income

$185,000
$38,000
$147,000
$31,000
$24,000
$25,000
$80,000
$67,000

The residual value of the machinery at the end of the nine years would be $15,000. The payback period of this
potential project in years would be closest to
A) 2.6.
B) 3.6.
C) 3.1.
D) 1.4.
12-8 R2D2 Co. is considering an investment in computer and network equipment costing $254,000. This
equipment would allow them to offer new programming services to clients. The equipment will be depreciated
on the straight-line basis over an eight-year period with an estimated residual value of $60,000. Using the
accounting rate of return model, what is the minimum average annual operating income that must be generated
from this investment in order to achieve an 11% accounting rate of return?
A) $6,600
B) $21,340
C) $31,750
D) $27,940
12-9 R2D2 Co. has asked you to evaluate a capital investment project. The project will require an initial
investment of $88,000. The life of the investment is 7 years with a residual value of $4,000. If the project
produces net annual cash inflows of $16,000, what is the accounting rate of return?
A) 3.90%
B) 4.55%
C) 550.00%
D) 18.18%
12-10 R2D2 Co. is considering acquiring another facility for a cost of $610,000. The required payback period
is 4.5 years. Assume annual net cash inflows are $150,000 for the first two years and $125,000 for years 3 and
4. What must the inflow be in the fifth year to meet the 4.5 year payback period?
12-11 What is an attribute of the internal rate of return?
A) It is the interest rate that makes the NPV of the investment equal to zero.
B) It is the interest rate that makes the cost of the investment equal to the present value of the investment's net
cash inflows.
C) It is used in the capital rationing process.
D) All of the above are attributes of the internal rate of return.

13

12-12 The net present value method assumes that cash inflows from a project are immediately reinvested at the
A) internal rate of return.
B) accounting rate of return.
C) market rate of return.
D) required rate of return.
12-13 A company finds that the residual value of $8,000 for the equipment in a capital budgeting project has
been inadvertently omitted from the calculation of the net present value (NPV) for that project. How does this
omission affect the NPV of that project?
A) The project's NPV should be higher, but be less than $8,000 higher, with the residual value included.
B) The project's NPV should be $8,000 higher with the residual value included.
C) The project's NPV should be $8,000 lower with the residual value included.
D) The project's NPV should be lower, but be less than $8,000 lower, with the residual value included.
12-14 Which of the following is a weakness of the internal rate of return (IRR)?
A) IRR assumes that the cash inflows from the project are immediately reinvested at the minimum required rate
of return.
B) IRR ignores the time value of money.
C) IRR assumes that the cash inflows from the project are immediately reinvested at the internal rate of return.
D) IRR is not a percentage rate, but is expressed in dollars.
12-15 (Present value tables are required.) R2D2 Co. is evaluating a capital investment opportunity. This project
would require an initial investment of $38,000 to purchase equipment. The equipment will have a residual value
at the end of its life of $3,000. The useful life of the equipment is 5 years. The new project is expected to
generate additional net cash inflows of $12,000 per year for each of the five years. R2D2 Co.s required rate of
return is 14%. The net present value of this project is closest to
A) ($1,994).
B) $4,753.
C) $3,196.
D) $28,386.
12-16 (Present value tables are required.) R2D2 Co. is analyzing a special investment project. The project will
require the purchase of two machines for $30,000 and $8,000 (both machines are required). The total residual
value at the end of the project is $1,500. The project will generate cash inflows of $11,000 per year over its 8year life. If R2D2 Co. requires a 6% return, what is the net present value (NPV) of this project?
A) $30,310
B) $8,332
C) $2,456
D) $31,250.50

14

12-17 (Present value tables are required.) R2D2 Co. has two options for its delivery truck. The first option is to
purchase a new truck for $15,000. The new truck will have a useful life of 5 years and a residual value of
$2,000. Operating costs for the new truck will be $200. The second option is to overhaul its existing truck. The
cost of the overhaul will be $8,000. The overhauled truck will have a useful life of 5 years and a residual value
of $0. Operating costs for the overhauled truck will be $600. Using R2D2's discount rate of 5%, which option is
better and by what amount?
A) Better to overhaul by $3,700
B) Better to purchase new by $3,700
C) Better to overhaul by $5,144
D) Better to purchase new by $5,144
12-18 (Present value tables are required.) R2D2 Co. is considering the purchase of a machine that would cost
$22,712 and would have a useful life of 5 years. The machine would generate $6,300 of net annual cash inflows
per year for each of the 5 years of its life. The internal rate of return on the machine would be closest to
A) 8%.
B) 10%.
C) 12%.
D) 14%.
12-19 (Present value tables are required.) R2D2 Co. is evaluating the purchase of a new machine that would
have an initial cost of $125,000. This new machine would have a profitability index of 1.25. The company's
discount rate is 12%. What is the present value of the net cash inflows of the new machine project?
A) $15,000
B) $156,250
C) $100,000
D) $1,041,667
12-20 R2D2 Co. has three potential projects from which to choose. Selected information on each of the three
projects follows:
Investment required
Net present value of project

Project A
$42,500
$45,700

Project B
$56,000
$75,400

Project C
$53,700
$70,200

Using the profitability index, rank the projects from most profitable to least profitable.
A) A, B, C
B) C, B, A
C) B, A, C
D) B, C, A

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12-21 (Present value tables are needed.) R2D2 Co. 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 twothe B14 Model and the F54 Model. Financial data about the two choices follows.
Investment
Useful life (years)
Estimated annual net cash inflows for useful life
Residual value
Depreciation method
Required rate of return

B14 Model F54 Model

$320,000
$240,000
8
8
$70,000
$35,000
$30,000
$10,000
Straight-line Straight-line
14%
10%

What is the total present value of future cash inflows and residual value from the F54 Model?
A) $(48,605)
B) $186,725
C) $191,395
D) $167,035
12-22 (Present value tables are needed.) R2D2 Co. is deciding whether to automate one phase of its production
process. The equipment has a six-year life and will cost $410,000. Projected net cash inflows from the
equipment are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6

$120,000
$100,000
$110,000
$100,000
$95,000
$90,000

R2D2 Co.'s hurdle rate is 12%. If R2D2 Co. decides to refurbish the equipment at a cost of $60,000 at the end
of year 6, it could be used for one more year and would have a $30,000 residual value at the end of year 7.
Assume the cash inflow in year 7 is $65,000. What is the NPV of just the refurbishment?
A) ($1,040)
B) $12,520
C) $15,820
D) $46,240

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12-23 (Present value tables are needed.) R2D2 Co. is evaluating the purchase of a new game to be located on
its Midway. Family Fun has narrowed their choices down to two: the Yoda Race game and the C-3PO Bouncy
game. Financial data about the two choices follows.

Investment
Useful life
Estimated annual net cash inflows for 5 years
Residual value
Depreciation method
Required rate of return

Yoda Race C-3PO Bouncy

Game
Game
$32,000
$22,000
5
5
$8,000
$6,000
$2,000
$1,000
straight-line
straight-line
8%
10%

What is the total present value of future cash inflows and residual value from the C-3PO Bouncy game?
A) $22,746
B) $24,579
C) $23,367
D) $45,367

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