Midterm Quiz no.

1
Relevant Costing and Capital Budgeting

Name: Score: /50

True or False. Write T if the statement is True and F if the statement is False. NO ERASURES. 1 point each

1. A projects salvage value, realizable at the end of life of the project, is considered in the computation of the net
investments for decision-making purposes.
2. The payback period emphasizes the profitability of a capital project while the accounting rate of return, on the
other hand, emphasizes the project’s liquidity.
3. Annual cash inflows from the capital projects are measured in terms of income before depreciation but after
taxes.
4. Fixed factory overhead is generally considered irrelevant in decision making process.
5. An opportunity cost is usually relevant, but is not part of traditional accounting records.
6. The opportunity cost of making a component part in a factory with excess capacity for which there is no
alternative use is the fixed cost of the component.
7. If there is excess capacity, the minimum acceptable price for a special order must cover variable manufacturing
costs plus contribution margin foregone on lost regular units.
8. If the margin that will be lost by dropping a product line is more than the fixed costs that will be avoided, then
the line should be dropped.
9. If the IRR on an investment is Zero, its annual cash flows equal its required investment.
10. The net present value method assumes that the project’s cash flows are reinvested at the cost of capital.
11. A capital project with a positive NPV also has a profitability index greater than one.
12. As the discount rate increases, present value factors increases.
13. IRR, NPV and profitability index are the capital budgeting techniques that uses the time value of money.
14. Accounting rate of return is the technique that does not use cash flow for capital investment decisions.
15. If there are shut down costs, a company’s shutdown point is always below the breakeven point.

Multiple Choice. Write the letter of the correct answer before the number. NO ERASURES. 2 points each
1. An item whose entire amount is usually a differential cost is:
a. Factory Overhead b. Direct cost c. Conversion cost d. Period cost

2. What is the first step in decision-making process?

a. Specify the criteria by which the decision is to be made
b. Consider the strategic issues regarding the decision context
c. Perform an analysis in which the relevant information is developed and analyzed
d. Compare alternatives

3. In deciding whether to replace a machine, which of the following is not a sunk cost?
a. The expected resale price of the existing machine
b. The book value of the existing machine
c. The original cost of the existing machine
d. The depreciation cost of the existing machine
4. In computing the amount of initial investment for decision-making, taxes would be relevant for all of the
following, except:
a. Avoidable repairs of old asset
b. Profit on sale of old asset replaced by a new one
c. Increase in working capital required to support new capital investment
d. Loss on write-off of other assets disposed because of new capital investment

5. To approximate annual cash inflow, depreciation is:

a. Added back to net income because it is an inflow of cash
 b. Subtracted from net income because it is an outflow of cash
c. Subtracted from net income because it is an expense
d. Added back to net income because it is not an outflow of cash

Problem Solving. Box your final answer. NO SOLUTION NO POINT. 5 points each

1. NASAIYO Co. is considering the sale of machine with a book value of 80,000 and 3 years remaining in its useful
life. Straight-line depreciation of 25,000 annually is available. The machine has a current market value of
100,000. What is the cash flow from selling the machine if the tax rate is 40%?

2. A company is considering replacing a machine with one that will save 50,000 per year in cash operating costs
and has 20,000 more depreciation expense per year than the existing machine. The tax rate is 40%. Buying the
new machine will increase annual net cash flows by?

3. HetoSay Co. has 24,000 defective units of a product that cost P8.00 per unit to a manufacturer and can be sold
for P4.00 per unit. These units can be reworked for P2.00 per unit and sold at their full price of P12.00 each. If
HetoSay Co. reworks the defective units, how much is the incremental net income that will result?

4. IbahinMo Co. manufactures ballpoint pens. Another manufacturer has offered to supply it with the 5,000 ink
cartridges that it needs annually. The cost to buy the cartridges would be P15.00 each. In producing its own
cartridges, it has incurred P10.00 in fixed cost and P8.00 in variable costs. If IbahinMo Co. buys the cartridges,
what is the increment/decrement in net income?

5. A project costing 180,000 will produce the following annual cash benefits and salvage value:
End of Year Cash Benefits Salvage Value
1 50,000 70,000
2 50,000 60,000
3 50,000 50,000

What is the bail-out payback period?