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SAS26 ACC115 Common Final Exam 1

bs accountancy (University of Manila)

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ACC 115| Management Science

Module #26 Student Activity Sheet

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

Common Final Exam Materials:

Pen and non-scientific
calculator

GENERAL DIRECTIONS
READ THIS PAGE BEFORE STARTING THE ASSESSMENT

This is a 16 paged test and is composed of 1 section and has a total score of seventy (70) points. You
have 120 Minutes to finish this examination. The breakdown of the exam is as follows:

(1) Multiple-choice questions - The questions in this LEARNING OBJECTIVE:

section is with four answer choices. The test is
composed of 70 questions and is rated as 1 point each. This assessment measures the
competence of the student in terms of
All things unnecessary for the test must be put in front of the his/her application of knowledge and skills
testing area. Use BLACK or BLUE ink ballpen only. Write all your in the following topic:
answers on the designated answer sheet. Further, erasures are 1. Quantitative Techniques for
strictly NOT allowed and will invalidate your answers. Decision Making
2. Relevant Costing and Differential
You may NOT use smart phones or reference materials during Analysis
3. Capital Budgeting
the testing session. Only the allowed calculators should be used.

Try to answer all questions. In general, if you have some knowledge about a question, it is better to try
to answer it. You will not be penalized for guessing.

Be sure to allocate your time carefully so you can complete the entire test within the exam session. You
may go back and review your answers at any time during the exam session.

Those who are caught cheating or doing acts not allowed during the exam shall be instructed to
surrender their test papers and shall leave the testing room immediately. Subsequently, their papers
shall be rated as ZERO.

This concludes the instruction page.

You may now begin answering.

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ACC 115| Management Science

Module #26 Student Activity Sheet

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

Shade the letter of your answer on the answer sheet.

1. The effect of changes in semi-variable costs in relation to another item, such as direct-labor
hours, can be best determined by which of the following mathematical techniques?
a. Probability analysis c. Correlation analysis
b. Game theory d. Queuing theory

2. The quantitative technique used to ascertain the average amount of change in one variable as it
relates to incremental amounts of another variable known as
a. Monte Carlo analysis c. PERT
b. Simplex method d. Regression analysis

3. The modeling technique to be used for situations involving a sequence of events with several
possible outcomes associated with each event is
a. queuing theory c. critical path method
b. linear programming d. decision tree analysis

4. A company is designing a new regional distribution warehouse. To minimize delays in loading

and unloading trucks, an adequate number of loading docks must be built. The most relevant
technique to assist in determining the proper number docks is
a. Decision Tree Analysis c. Linear programming
b. PERT/CPM analysis d. Queuing theory
3,000 x = 6,000 + 18,000 x33,000 x – 18,000 = 6,00015,000 x = 6,00015,000 15,000X = .40
5. Ron Bagley is contemplating whether to investigate a labor efficiency variance in the Assembly
Department. It will cost $6,000 to undertake the investigation and another $18,000 to correct
operations if the department is found to be operating improperly. If the department is operating
improperly and Bagley fails to investigate, operating costs from the various inefficiencies are
expected to amount to $33,000. Bagley will be indifferent between investigating and not
investigating the variance if the probability of improper operation is
a. 0.29 b. 0.40 c. 0.60 d. 0.71

6. A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now will
yield 100,000 bottles of wine netting P2 per bottle. If the wine maker waits and the weather
turns cold (probability 0.2), the yield will be cut in half but net P3 per bottle. If the weather does
not turn cold, the yield will depend on rain. With rain (probability 0.5), a full yield netting P4 per
bottle will result. Without rain (probability 0.5), there will still be a full 100,000-bottle yield, but
the net will be only P3 per bottle. Yield = 50,000 = (100,000 / 2)COLD WEATHER EV = 30,000 = (100,000 × 0.20 × 3)NOT COLD W RAIN
EV = 160,000 = (100,000 × 0.5 × 4 × 0.8)NOT COLD W/O RAIN EV = 120,000 = (100,000 × 0.5 × 3 × 0.8)OEV =
The optimal expected value is 30,000 + 160,000 + 120,000 = 310,000
a. P200,000 b. P310,000 c. P350,000 d. P400,000

7. Which of the following characteristics would best explain the use of probabilities and expected
values in a decision analysis?
a. Limited resources. c. Inflation.

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Clothing (50% × 2% =
1%)Hardware (30% × 5% ACC 115| Management Science
= 1.5%)Sundries (20% ×
2.5% = 0.5%)TOTAL: Module #26 Student Activity Sheet
3%1% / 3% = 33 %

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________
Clothing (50% × 2% = 1%)Hardware (30% × 5% = 1.5%)Sundries (20% × 2.5% = 0.5%)TOTAL: 3%1% / 3% = 33 %
b. Uncertainty. d. Multiple products and services.

8. Ulan Company has three sales departments, each contributing the following percentages of
total sales: clothing 50%; hardware 30%; and household sundries 20%. Each department has
had the following average annual damaged goods rates: clothing 2%; hardware 5%; and
household sundries 2.5%. A random corporate audit has found a weekly damaged goods rate of
sufficient magnitude to alarm Rain’s management. The probability that this rate occurred in the
Clothing Department is Clothing (50% × 2% = 1%)Hardware (30% × 5% = 1.5%)Sundries (20% × 2.5% = 0.5%)TOTAL: 3%1% / 3% = 33 %
Clothing (50% × 2% = 1%)Hardware (30% × 5% = 1.5%)Sundries (20% × 2.5% = 0.5%)TOTAL: 3%1% / 3% = 33 %
a. 50% b. 1% c. 25% d. 33 %
kaka
The next two questions are based on the following information
Fiery Corporation is in a condominium project and is deciding whether to construct a small, medium, or
large complex. If the demand is strong, Fiery is estimated to be able to have a profit of ₱8M with small
complex, ₱14M with medium complex, and ₱20M with large complex. If the demand is weak, the
company is estimated to be able to earn a profit of ₱7M with small complex, ₱5M with medium
complex, and a loss of ₱9M for large complex.

The payoff table is as follows:

Decision Alternative Strong Demand Weak Demand
Small Complex ₱8M ₱7M
Medium Complex ₱14M ₱5M
Large Complex ₱20M (₱9M)

9. Applying minimax, which project should be chosen?

a. Small b. Medium c. Large. d. the project should not pursued.

10. Applying laplace, which project should be chosen?

a. Small b. Medium c. Large. d. the project should not pursued.

11. Moss Point Manufacturing recently completed and sold an order of 50 units that had the
following costs:
Direct materials P 1,500
Direct labor (1,000 hours @ P8.50) 8,500
Variable overhead (1,000 hours at P4.00) 4,000
Fixed overhead 1,400
P15,400
*Applied on the basis of direct labor hours.
*Applied at the rate of 10% of variable cost.
The company has now been requested to prepare a bid for 150 units of the same product.
If an 80 percent learning curve is applicable, Moss Point’s total cost on this order would be
estimated at
a. P26,400 b. P37,950 c. P31,790 d. P38,500

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ACC 115| Management Science

Module #26 Student Activity Sheet

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

12. CBA Company expects a 90% learning curve. The first batch of a new product required 100
hours. The second batch should take
a. 100 hours. b. 90 hours. c. 80 hours. d. 95 hours

13. A construction company has just completed a bridge over the Visayan area. This the first bridge
the company ever built and it required 100 weeks to complete. Now having hired a bridge
construction crew with some experience, the company would like to continue building bridges.
Because of the investment in heavy machinery needed continuously by this crew, the company
believes it would have to bring the average construction time to less than one year (52 weeks)
per bridge to earn a sufficient return on investment. The average construction time will follow an
80% learning curve. To bring the average construction time (over all bridges constructed) below
one year per bridge, the crew would have to build approximately
a. 2 additional bridges. c. 3 additional bridges.
b. 7 additional bridges. d. 8 additional bridges.

14. Which of the following variables is associated with the "less than or equal to" constraints?
Surplus Slack
a. yes yes
b. yes no
c. no yes
d. no no

15. AJ Construction Inc. is considering a three-phase research project. The time estimates for
completion of Phase 1 of the project are:
Pessimistic 29 weeks
Most likely 25 weeks
Optimistic 15 weeks
Using the program evaluation and review technique (PERT), the expected time for completion of
Phase 1 should be
a. 20 weeks b. 19 weeks c. 18 weeks d. 24 weeks

16. The network below describes the interrelationships of several activities necessary to complete a
project. The arrows represent the activities. The numbers between the arrows indicate the
number of months to complete each activity.
2
2
4 4
4
Start 1 6 5 End
2
6 3 4 5

The shortest time to complete the project is

a. 10 months b. 12 months c. 16 months d. 28 months

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ACC 115| Management Science

Module #26 Student Activity Sheet

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

17. A 200-bed hospital serves 500 meals per day. An analytic tool that would help management
plan meals to meet nutrition goals at minimum cost is:
a. Monte Carlo simulation c. material requirements planning
b. linear programming d. Markov analysis

18. Pleasant Valley Company makes two ceramic products, vases (V) and bowls (B). Each vase
requires two pounds of material and three hours of labor. Each bowl requires two pounds of
material and one hour of labor. During the next production week, there will be 100 pounds of
material and 60 hours of labor available to make vases and bowls. Each pound of material
costs $4 and each hour of labor costs $10. All factory overhead is fixed; it is estimated to be
$200 for this production process for a week. Pleasant Valley sells vases for $50 each and
bowls for $35 each. The objective function for Pleasant Valley would be:
a. maximize Z = $50V + $35B c. minimize Z= $38V + $18B
b. maximize Z = $12V + $17B d. maximize Z = $12V + $17B = $200

19. If there is one unique optimal solution to a linear programming problem, that solution would be
found at:
a. the highest point on the y-axis c. the origin
b. the objective function d. a corner point

20. An iterative, stepwise procedure that is used to solve linear programming problems is the:
a. graphical technique c. simplex method
b. cost minimization problem d. matrix algebra approach

21. In early July, Jim Lopez purchased a $70 ticket to the December 15 game of the Chicago
Titans. (The Titans belong to the Midwest Football League and play their games outdoors on
the shore of Lake Michigan.) Parking for the game was expected to cost approximately $22,
and Lopez would probably spend another $15 for a souvenir program and food. It is now
December 14. The Titans were having a miserable season and the temperature was expected
to peak at 5 degrees on game day. Jim therefore decided to skip the game and took his wife to
the movies, with tickets and dinner costing $50. The amount of sunk cost that should influence
Jim’s decision to take his wife to the movies and dinner is:
a. $0. b. $20. c. $50. d. $70.

22. What is the opportunity cost of making a component part in a factory given no alternative use of
the capacity?
a. The variable manufacturing cost of the component.
b. The total manufacturing cost of the component.
c. The total variable cost of the component.
d. Zero.

23. If a cost is irrelevant to a decision, the cost could not be

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Module #26 Student Activity Sheet

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a. a sunk cost. b. a future cost. c. a variable cost. d. an incremental cost.

24. In a make or buy decision, the opportunity cost of capacity could

a. be considered to decrease the price of units purchased from suppliers.
b. be considered to decrease the cost of units manufactured by the company.
c. be considered to increase the price of units purchased from suppliers.
d. not be considered since opportunity costs are not part of the accounting records.

25. Which of the following is NOT relevant in a make-or-buy decision about a part the entity uses in
some of its products?
a. The reliability of the outside supplier.
b. The alternative uses of owned equipment used to make the part.
c. The outside supplier’s per-unit variable cost to make the part.
d. The number of units of the part needed each period.

26. When only differential manufacturing costs are taken into account for special-order pricing, an
essential assumption is that
a. Manufacturing fixed and variable costs are linear.
b. Selling and administrative fixed and variable costs are linear.
c. Acceptance of the order will not affect regular sales.
d. Acceptance of the order will not cause unit selling and administrative variable costs to
increase.

27. Picnic Items, Inc. manufactures coolers of 10,000 units that contain a freezable ice bag. For an
annual volume of 10,000 units, fixed manufacturing costs of P500,000 are incurred. Variable
costs per unit amount are direct materials–P80; direct labor–P15, and variable factory
overhead–P20

Bags Corp. offered to supply the assembled ice bag for P40 with a minimum order of 5,000
units. If Picnic accepts the offer, it will be able to reduce variable labor and overhead by 50%.
The direct materials for the freezable bag will cost Picnic P20 if it will produce it. Considering
Bags Corp. offer, Picnic should

a. Buy the freezable ice bag due to P150,000 advantage.

b. Produce the freezable ice bag due to P25,000 advantage.
c. Produce the freezable ice bag due to P50,000 advantage.
d. Buy the freezable bag due to P50,000 advantage.

28. Browning Company has 15,000 units in inventory that had a production cost of $3 per unit.
These units cannot be sold through normal channels due to a significant technology change.
These units could be reworked at a total cost of $23,000 and sold for $28,000. Another
alternative is to sell the units to a junk dealer for $8,500. The relevant cost for Browning to
consider in making its decision is

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ACC 115| Management Science

Module #26 Student Activity Sheet

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a. $45,000 of original product costs. c. $68,000 for reworking the units.

b. $23,000 for reworking the units. d. $28,000 for selling the units to the junk dealer.

29. Thomas Company is currently operating at a loss of $15,000. The sales manager has received
a special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated
with the product are: direct material, $6; direct labor, $10; variable overhead, $3; applied fixed
overhead, $4; and variable selling expenses, $2. The special order would allow the use of a
slightly lower grade of direct material, thereby lowering the price per unit by $1.50 and selling
expenses would be decreased by $1. If Thomas wants this special order to increase the total
net income for the firm to $10,000, what sales price must be quoted for each of the 5,000 units?
a. $23.50 b. $24.50 c. $27.50 d. $34.00

30. Pixie Co. produces Component 6417 for use in one of its electronic gadgets. Normal annual
production for the item is 100,000 units. The cost per unit lot of the part are as follows:
Direct material P520
Direct labor 200
Manufacturing overhead
Variable 240
Fixed 320
Total manufacturing costs per 100 units P1,280

Bobbie Inc. has offered to sell Pixie all 100,000 units it will need during the coming year for
P1,200 per 100 units. If Pixie accepts the offer from Bobbie, the facilities used to manufacture
Component 6417 could be used in the production of Component 8275. This change would save
Pixie P180,000 in relevant costs. In addition, a P200,000 cost item included in fixed overhead is
specifically related to Part 6417 and would be eliminated. Pixie should

a. Buy Component 6417 because of P300,000 savings.

b. Buy Component 6417 because of P140,000 savings.
c. Continue producing Component 6417 because of P40,000 savings.
d. Continue producing Component 6417 because of P60,000 savings.

The next two questions are based on the following information.

The Chip Division of Computer Solutions, Inc. produces a high-quality computer chip. Unit production
costs (based on capacity production of 100,000 units per year) follow:
Direct material $50
Direct labor 20
Overhead (20% variable) 10
Other information:
Sales price 100
SG&A costs (40% variable) 15

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ACC 115| Management Science

Module #26 Student Activity Sheet

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Section: ____________ Schedule: ________________________________ Date: ________________

31. Assume, for this question only, that the Chip Division is producing and selling at capacity. What
is the minimum selling price that the division would consider on a "special order" of 1,000 chips
on which no variable period costs would be incurred?
a. $100 b. $72 c. $81 d. $94

32. Assume, for this question only, that the Chip Division is operating at a level of 70,000 chips per
year. What is the minimum price that the division would consider on a "special order" of 1,000
chips to be distributed through normal channels?
a. $78 b. $95 c. $100 d. $81

33. Assume, for this question only, that the Chip Division is presently operating at a level of 80,000
chips per year. Accepting a "special order" on 2,000 chips at $88 will
a. increase total corporate profits by $4,000.
b. increase total corporate profits by $20,000.
c. decrease total corporate profits by $14,000.
d. decrease total corporate profits by $24,000.

34. PQR Company expects to incur the following costs at the planned production level of 10,000
units:
Direct materials P100,000
Direct labor 120,000
Variable overhead 60,000
Fixed overhead 30,000
The selling price is P50 per unit. The company currently operates at full capacity of 10,000
units. Capacity can be increased to 13,000 units by operating overtime. Variable costs
increase by P14 per unit for overtime production. Fixed overhead costs remain unchanged
when overtime operations occur. PQR Company has received a special order from a
wholesaler who has offered to buy 2,000 units at P45 each.
What is the incremental cost associated with this special order?
a. P84,000 b. P31,000 c. P62,000 d. P42,000

35. Somerset Corporation is composed of five divisions, and each division is allocated a share of
Somerset overhead to make divisional managers aware of the cost of running the corporate
headquarters. The following information relates to the Metro Division:
Sales $7,500,000
Variable operating costs 5,100,000
Traceable fixed operating costs 1,900,000
Allocated corporate overhead 300,000

If the Metro Division is closed, 100% of the traceable fixed operating costs can be eliminated.
What will be the impact on Somerset's overall profitability if the Metro Division is closed?
a. Decrease by $200,000. c. Decrease by $2,100,000.
b. Decrease by $500,000. d. Decrease by $2,400,000.

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ACC 115| Management Science

Module #26 Student Activity Sheet

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

36. A firm that decides to emphasize those goods with the highest contribution margin per unit may
have made an incorrect decision when the company:
a. is highly automated. c. has capacity constraints in the form of limited resources.
b. has excess capacity. d. has a high fixed-cost structure.

37. Barrie, Inc., produces three products: A, B, and C. Two machines are used to produce the
products. The contribution margins, sales demands, and time on each machine (in minutes) is
as follows:

Demand CM time on M1 time on M2

A 100 $12 5 10
B 80 18 10 5
C 100 25 15 5
There are 2,400 minutes available on each machine during the week. How many units should
be produced and sold to maximize the weekly contribution?
A B C
a. 100 80 100
b. 20 80 100
c. 100 40 100
d. 100 80 73

38. High Class Townhouse, Inc. manages five upscale townhouse in Makati, Ortigas, and
Greenhills area. Shown below are the summary income statements for each complex:
In Thousand Pesos
One Two Three Four Five
Rent Income 10,000 12,100 23,470 18,780 10,650
Expenses 8,000 13,000 26,000 24,000 13,000
Profit 2,000 (900) (2,530) (5,220) (2,350
Included in the expenses is P12,000,000 of corporate overhead allocated to the townhouse
based on rental income. The complex that the company should consider selling is (are)
a. Three, Four & Five. c. Two, Three, Four & Five.
b. Four & Five. d. Four.

39. The Table Top Model Corp. produces three products. “Tic,” “Tac.”, and “Toc.” The owner
desires to reduce production load to only one product line due to prolonged absence of the
production manager. Depreciation expense amounts to P600,000 annually. Other fixed
operating expenses amount to P660,000 per year. The sales and variable cost data of the three
products are (000’s omitted)
Tic Tac Toc
Sales P6,600 P5,300 P10,800
Variable costs 3,900 1,700 8,900

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Which product must be retained and what is the opportunity cost of selecting such product line?
a. Retain product “Tac”; opportunity cost is P4.6 million.
b. Retain product “Tac”; opportunity cost is P3.14 million.
c. Retain product “Tic”; opportunity cost is P4.04 million.
d. Retain product “Toc”; opportunity cost is P4.84 million.

40. Julius International produces weekly 15,000 units of Product JI and 30,000 units of JII for which
P800,000 common variable costs are incurred. These two products can be sold as is or
processed further. Further processing of either product does not delay the production of
subsequent batches of the joint products. Below are some information:

JI JII
Unit selling price without further processing P24 P18
Unit selling price with further processing P30 P22
Total separate weekly variable costs of further processing P100,000 P90,000
To maximize Julius’ manufacturing contribution margin, the total separate variable costs of
further processing that should be incurred each week are
a. P95,000 b. P90,000 c. P100,000 d. P190,000

41. Genco Company produces three products from a joint process costing $100,000. The following
information is available:
Selling Price Costs to Selling Price After
Units at Split-off Process Further Further Processing
A 2,000 $25 $60,000 $50
B 3,000 $30 $60,000 $45
C 5,000 $40 $80,000 $60
Which products should be sold without further processing?
a. A only. b. B only. c. C only d. B and C.

42. Consider the following statements about absorption-cost pricing formulas:

I. Absorption-cost formulas consider a company's fixed manufacturing costs when establishing a
selling price.
II. Absorption-cost formulas are often justified on the grounds that a company must cover all of
its costs in the long run.
III. Absorption-cost data are the type that managers need when facing certain pricing decisions,
such as whether or not to accept a special order.

Which of the above statements is (are) true?

a. I and II. b. I and III. c. II and III. d. I, II, and III.

43. Patterson and Clay Companies both use cost-plus pricing formulas and arrived at a selling price
of $1,000 for the same product. Patterson uses absorption manufacturing cost as the basis for
computing its dollar markup whereas Clay uses total cost. Which of the following choices

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correctly denotes the company that would have (1) the higher cost basis for deriving its dollar
markup and (2) the higher markup percentage?
Cost Basis Markup Percentage
a. Patterson Patterson
b. Patterson Clay
c. Clay Patterson
d. Clay Clay

The next two questions are based on the following information.

The Razooks Company, which manufactures office equipment, is ready to introduce a new line of
portable copiers. The following copier data are available:
Variable manufacturing cost $180
Applied fixed manufacturing cost 90
Variable selling and administrative cost 60
Allocated fixed selling and administrative cost 75

44. What price will the company charge if the firm uses cost-plus pricing based on total variable cost
and a markup percentage of 160%?
a. $150. b. $384. c. $390. d. $624.

45. What price will the company charge if the firm uses cost-plus pricing based on total cost and a
markup percentage of 40%?
a. $462. b. $513. c. $567. d. $594.

46. In capital budgeting decisions, the following items are considered among others:
1. Cash outflow for the investment.
2. Increase in working capital requirements.
3. Profit on sale of old asset
4. Loss on write-off of old asset.
For which of the above items would taxes be relevant?
a. Items 1 and 3 only. c. All items.
b. Items 3 and 4 only. d. Items 1, 3 and 4 only.

47. When a profitable corporation sells an asset at a loss, the after-tax cash flow on the sale will
a. exceed the pre-tax cash flow on the sale.
b. be less than the pre-tax cash flow on the sale.
c. be the same as the pre-tax cash flow on the sale.
d. increase the corporation's overall tax liability.

48. A company had made the decision to finance next year’s capital projects through debt rather
than additional equity. The benchmark cost of capital for these projects should be
a. The before-tax cost of new-debt financing. c. The cost of equity financing.
b. The after-tax cost of new-debt financing. d. The weighted-average cost of capital.

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49. Which of the following best represents a screening decision?

a. determining which project has the highest net present value
b. determining if a project's internal rate of return exceeds the firm's cost of capital
c. determining which projects are mutually exclusive
d. determining which are the best projects

50. Frostfell Airlines is expected to pay an upcoming dividend of $3.29. The company's dividend is
expected to grow at a steady, constant rate of 5% well into the future. Frostfell currently has
1,600,000 shares of common stock outstanding. If the required rate of return for Frostfell is
12%, what is the best estimate for the current price of Frostfell's common stock?
a. $65.80 b. $62.51 c. $47.00 d. $27.41

51. Stock J has a beta of 1.2 and an expected return of 15.6%, and stock K has a beta of 0.8 and
an expected return of 12.4%. What must be the expected return on the market and the risk-free
rate of return, to be consistent with the capital asset pricing model?
a. Market is 14%; risk-free is 6%. c. Market is 14%; risk-free is 4%.
b. Market is 12.4%; risk-free is 0%. d. Market is 14%; risk-free is 1.6%.

52. Company X is interested in calculating it weighted-average cost of capital. Company X has a

current financial structure that is composed of 50% debt, 40% common stock, and 10%
preferred stock. Ignore the effects of cost of retained earnings. The beta of Company X stock
is 0.7, and the current risk-free rate of return is 4%. The market risk premium is 6%. The
preferred dividend on Company X preferred stock is set at $2.25, and the net issuance price per
share (which happens to be the same as the current price per share) of preferred stock is $30.
Debt issued by Company X yields an 11% stated interest rate to investors. The marginal tax
rate for Company X is 40%. What is the weighted-average cost of capital for Company X?
a. 0.0743 b. 0.0820 c. 0.0660 d. 0.0733

53. Key Corp. plans to replace a production machine that was acquired several years ago.
Acquisition cost is P450,000 with salvage value of P50,000. The machine being considered is
worth P800,000 and the supplier is willing to accept the old machine at a trade-in value of
P60,000. Should the company decide not to acquire the new machine, it needs to repair the old
one at a cost of P200,000. Tax-wise, the trade-in transaction will not have any implication but
the cost to repair is tax-deductible. The effective corporate tax rate is 35% of net income
subject to tax. For purposes of capital budgeting, the net investment in the new machine is
a. P540,000 b. P610,000 c. P660,000 d. P800,000

54. Great Value Company is planning to purchase a new machine costing P50,000 with freight and
installation costs amounting to P1,500. The old unit is to be traded-in will be given a trade-in
allowance of P7,500. Other assets that are to be retired as a result of the acquisition of the new
machine can be salvaged and sold for P3,000. The loss on retirement of these other assets is
P1,000 which will reduce income taxes of P400. If the new equipment is not purchased, repair

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of the old unit will have to be made at an estimated cost of P4,000. This cost can be avoided by
purchasing the new equipment. Additional gross working capital of P12,000 will be needed to
support operation planned with the new equipment.

The net investment assigned to the new machine for decision analysis is
a. P50,200 b. P52,600 c. P53,600 d. P57,600

The next two questions are based on the following information:

The Wortham Corporation has recently evaluated a proposal to invest in cost-reducing production
technology. According to the evaluation, the project would require an initial investment of $17,166 and
would provide equal annual cost savings for five years. Based on a 10 percent discount rate, the project
generates a net present value of $1,788. The project is not expected to have any salvage value at the
end of its five-year life.

55. What are the expected annual cost savings of the project?
a. $3,500 b. $4,000 c. $4,500 d. $5,000

56. What is the project's expected internal rate of return?

a. 10% b. 11% c. 13% d. 14%

57. For a profitable company, an increase in the rate of depreciation on a specific project could
a. increase the project's profitability index.
b. increase the project's payback period.
c. decrease the project's net present value.
d. increase the project's internal rate of return.

58. Two new products, X and Y, are alike in every way except that the sales of X will start low and
rise throughout its life, while those of Y will be the same each year. Total volumes over their
five-year lives will be the same, as will selling prices, unit variable costs, cash fixed costs, and
investment. The NPV of product X
a. will be less than that of product Y. c. will be greater than that of product Y.
b. will be the same as that of product Y. d. none of the above.

59. Which of the following is true?

I. Payback period is the length of time it will take a company to recoup its outlay for an
investment.
II. If the IRR on a capital project is positive, its NPV will be positive.

a. I only b. II only c. Both I and II d. Neither I nor II

60. The Hills Company, a calendar company, purchased a new machine for P280,000 on January
1. Depreciation for tax purposes will be P35,000 annually for eight years. The accounting
(book value) rate of return (ARR) is expected to be 15% on the initial increase in required

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investment. On the assumption of a uniform cash inflow, this investment is expected to provide
annual cash flow from operations, net of income taxes, of
a. P35,000 b. P40,250 c. P42,000 d. P77,000

61. Orlando Corporation is considering an investment in a new cheese-cutting machine to replace

its existing cheese cutter. Information on the existing machine and the replacement machine
follow:
Cost of the new machine P400,000
Net annual savings in operating costs 90,000
Salvage value now of the old machine 60,000
Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 50,000
Estimated life of the new machine 8 years
What is the bail-out period for the new machine?
a. 4.44 years b. 8.50 years c. 2.67 years d. 3.89 years

62. Paz Insurance Company’s management is considering an advertising program that would
require an initial expenditure of P165,500 and bring in additional sales over the next five years.
The cost of advertising is immediately recognized as expense. The projected additional sales
revenue in Year 1 is P75,000, with associated expenses of P25,000. The additional sales
revenue and expenses from the advertising program are projected to increase by 10 percent
each year. Paz Insurance Company’s tax rate is 40 percent.
The payback period for the advertising program is
a. 4.6 years b. 1.9 years c. 3.0 years d. 2.5 years

63. Your company is purchasing a transport equipment as part of its territorial expansion strategy.
The technical services department indicated that this equipment needs overhauling in year 4 or
year 5 of its useful life. The overhauling cost will be expected during the year the overhauling is
done. The finance officer insists that the overhauling be done in year 4, not in year 5. The most
likely reason is
a. The finance officer knows that the tax rate is higher in year 4 than in year 5.
b. The finance officer knows that the tax rate is higher in year 5 than in year 4.
c. The time value of money is considered.
d. Due statements A and C above.

64. Zap Manufacturing has an investment opportunity to embark on a project where yearly revenues
for five years are to be P400,000 and operating costs of P104,800. The equipment costs P1
million, and straight-line depreciation will be used for book and tax purposes. No salvage value
is expected at the end of the project’s life. The company has a 40 percent marginal tax rate and
a 10 percent cost of capital. The equipment manufacturer has offered a delayed payment plan
of P560,500 per year at the end of the first and second years. There will be no changes in
working capital.
The present value of annuity of 1 for 5 periods is 3.7908 at 10 percent.

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The present values of 1 end of each period at 10 percent are:

Period 1 0.9091
Period 2 0.8264
Period 3 0.7513
Period 4 0.6830
Period 5 0.6209
The net present value if the equipment were purchased is
a. P (87,977) b. P (25,310) c. P 1,922 d. P (61,094)

65. Perpetual Foundation, Inc., a nonprofit organization, has one of its activities, the production of
cookies for its snack food store. Several years ago, Perpetual Foundation, Inc. purchased a
special cookie-cutting machine. As of December 31, 2006, this machine will have been used for
three years. Management is considering the purchase of a newer, more efficient machine. If
purchased, the new machine would be acquired on December 31, 2006. Management expects
to sell 300,000 dozen cookies in each of the next six years. The selling price of the cookies is
expected to average P1.15 per dozen.

Perpetual Foundation, Inc. has two options: continue to operate the old machine, or sell the old
machine and purchase the new machine. No trade-in was offered by the seller of the new
machine. The following information has been assembled to help management decide which
option is more desirable.

Old Machine New Machine

Original cost of machine at acquisition P80,000 P120,000
Remaining useful life as of 12/31/06 6 years 6 years
Expected annual cash operating
expenses:
Variable cost per dozen P0.38 P0.29
Total fixed costs P21,000 P 11,000
Estimated cash value of machines:
December 31, 2006 P40,000 P120,000
December 31, 2012 P 7,000 P 20,000
Assume all operating revenues and expenses occur at the end of the year.

The net advantage in present value of the better alternative is:

a. Retain Old Machine, P61,675. c. Retain Old Machine, P16,345.
b. Buy New Machine, P61,675. d. Buy New Machine, P16,345.

66. An asset is purchased for P120,000. It is expected to provide an additional P28,000 of annual
net cash inflows. The asset has a 10-year life and an expected salvage value of P12,000. The
hurdle rate is 10%. The present value of an annuity factor of 10% for 10 years is 6.1446, and
the present value of P1, discounted for 10 years at 10% is 0.3855.
Given the data provided, the minimum amount of annual cash inflows that would provide the
10% time-adjusted return is approximately

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a. P18,776 b. P26,600 c. P24,400 d. P22,535

67. The Caravan Company is contemplating to purchase a machine that costs P800,000. The
machine is expected to last for 5 years with a salvage value of P50,000 at the end of the fifth
year. If the machine were purchased, before-tax annual cash savings on operating expenses
will be realized. Caravan Company will depreciate the machine using straight-line depreciation
for 5 years, with the salvage value considered in the computation.
The company has a 12 percent cost of capital and is subject to 40 percent tax rate.

The present values using 12 percent are:

Annuity of 1 for 5 periods 3.60478
Present value of 1, end of 5 periods 0.56743

The initial analysis indicated a net present value of P7,003. You believe the estimated before-
tax cash savings are fairly determined but you are in doubt of the expected salvage value of the
machine.

How much is the estimated salvage value required if the investment has to yield an IRR of 12
percent?
a. P41,800 b. P24,900 c. P25,100 d. P44,600

68. A company is considering putting up P50,000 in a three-year project. The company’s expected
rate of return is 12%. The present value of P1.00 at 12% for one year is 0.893, for two years is
0.797, and for three years is 0.712. The cash flow, net of income taxes will be P18,000 (present
value of P16,074) for the first year and P22,000 (present value of P17,534) for the second year.
Assuming that the internal rate of return is exactly 12%, the cash flow, net of income taxes, for
the third year would be
a. P7,120 b. P10,000 c. P16,392 d. P23,022

69. Which of the following combinations is NOT possible?

Profitability Index NPV IRR
a. Greater than 1 Positive More than cost of capital
b. Equals 1 Zero Equals cost of capital
c. Less than 1 Negative Less than cost of capital
d. Less than 1 Positive Less than cost of capital

70. Five mutually exclusive projects had the following information:

A B C D
NPV $500 $(200) $200 $1,000
IRR 12% 8% 13% 10%
Which project is preferred?
a. A b. B c. C d. D

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