Student Name: _________________________________________ Foster School of Business Student Code of Conduct: By signing below you acknowledge that you are a part of a learning community at the Foster School of Business that is committed to the academic standards of honesty, respect, and integrity, and that you will adhere to these standards while completing this quiz. _____________________________ Student Signature Nabil Manji 10:30 11:30 Katrice Kubota-Teruya 1:30 2:30Accounting 225 A Quiz 6B – March 13, 2014 Name:__________________________________________ Score:________/15 Show ALL work on these pages, credit may not be given for correct answers with no support. Attempt all questions. True / False (0.5 point each, 2 points total) T/F 1. In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental (differential) cost approach. T 2. If a project’s internal rate of return is used as the discount rate when calculating the NPV of the project’s future cash flows, the project’s NPV would be zero. T 3. A project with NPV < zero exceeds the company’s minimum required rate of return. F 4. When there is a constraining resource, the product with the highest contribution margin per unit of the constraining resource should be produced first. T Multiple Choice (1 point each, 5 points total) 5. The net opportunity cost of accepting a special order when already operating at capacity is most precisely defined as: A. the forgone revenue of selling units to existing regular customers B. the incremental profit of accepting the special order C. the fixed overhead that could have been saved if the special order were not accepted D. the forgone contribution margin of selling units to existing regular customers 6. A particular product should be processed further if: A. the difference between the sales price before further processing and after further processing is greater than the cost of processing further B. the sales price after further processing covers both the previously allocated fixed costs and costs of further processing C. the costs of further processing are less than the allocated fixed costs D. the sales price after processing is more than the sales price before processing7. (Ignore income taxes). The company is debating whether to purchase new equipment costing $200,000. This new equipment will save the company $50,000 per year for the next 8 years. The new equipment will replace old equipment which would be sold for its salvage value of $20,000. The new equipment has a payback period closest to: A. 2.5 years B. 4.0 years C. 10.0 years D. 3.6 years (200,000 – 20,000) / 50,000 = 3.6 years 8. (Ignore income taxes). An investment made today will yield cash inflows of $5,000 and $3,000 at the end of the first and fourth years, respectively. If the discount rate for this investment is 10%, about how much would you be willing to pay for this investment today? Select the answer closest to your calculation. A. $6,143 B. $6,595 C. $7,049 D. $8,000 5,000/1.1 + 3,000/(1.1^4) = $6594.49  $6,595 9. (Ignore income taxes). Burchell Corporation is investigating buying a small aircraft for the use of its executives. The aircraft has a useful life of 8 years and the company uses a discount rate of 12%. The combined NPV of the initial investment cost and annual maintenance cash outflows is ($594,381). Ignoring any salvage value, about how large would the annual cash inflow/benefit have to be to make the investment in the aircraft financially attractive? Select the answer closest to your calculation. A. $594,381 B. $119,642 C. $240,061 D. $74,298 NPV must be at least zero, so NPV of annual cash flows must be $594,381 to offset ($594,381) of investment + maintenance outflows. If n=8, i=12% then annuity factor = 4.968 594,381/4.968= $119,641.91 per yr annual cash inflow to make NPV = 010. (5 points) Seahawk Company makes three products (jerseys, footballs, and helmets) and has provided the following information: Currently, Seahawk Company is struggling with employee turnover and only has 900 hours of direct labor available each month. A. How many direct labor hours would Seahawk Company require to fulfill monthly demand for all three products? (1 point) (500x1) + (1000x0.5) + (200x2) = 1,400 direct labor hours to satisfy demand B. Assume direct labor is Seahawk Company’s only constraining resource. Rank the order in which the company should produce these products in order to maximize profits. In other words, which product should be produced first, second, and third until each product’s monthly demand is met? (2 points) Jersey CM of $30 / 1 dl hours = ........................................... $30 per DLH [2nd] Football CM of $16 / 0.5 dl hours = .................................. $32 per DLH [1st] Helmet CM of $54 / 2 dl hours = ........................................ $27 per DLH [3rd] C. How much of a premium would Seahawk Company be willing to pay for an additional hour of direct labor assuming the existing 900 hours have already been used in the most profitable manner? (1 point) First priority to produce footballs: 1000 units x 0.5 hours = 500 hours used Second priority to produce jerseys: 400 units x 1 hour = 400 hours used Company needs 100 more direct labor hours to produce jersey to fulfill demand. If given opportunity to have another direct labor hour, they would pay a premium of up to $30 (CM per hour for Jerseys). D. Assuming Seahawk Company is trying to maximize profit, how many footballs will they produce this month? (1 point) They will produce 1,000 footballs (maximum demand). Jersey Football He lmetSelling price per unit $100.00 $50.00 $125.00Direct materials cost per unit $25.00 $12.00 $30.00Direct labor cost per unit $15.00 $7.50 $30.00Variable MOH $20.00 $12.00 $8.00Variable selling cost $10.00 $2.50 $3.00Direct labor hours per unit 1 0.5 2Monthly demand in units 500 1000 20011. (3 points) The following information is available on new equipment that a company is deciding whether to invest in or not: Cost of the Equipment $22,389 Salvage Value $0 Annual Cash Inflows $5,600 Internal Rate of Return (IRR) 13% Minimum Required Rate of Return 11% A. (Ignore income taxes). What is the useful life of the