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    Accounting problems: Net present value, make or buy,

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    34. Assume that dropping Product K will have no effect on the sale of other product lines. If the company drops Product K, the change in annual net operating income due to this decision will be a:
    A) $10,000 decrease
    B) $150,000 increase
    C) $160,000 decrease
    D) $310,000 decrease
    E) None of the above

    35. Assume that dropping Product K would result in a $15,000 increase in the contribution margin of other product lines. If Bayshore chooses to drop Product K, then the change in net operating income next year due to this action will be a:
    A) $150,000 increase
    B) $150,000 decrease
    C) $5,000 increase
    D) $140,000 increase
    E) None of the above

    38.(Ignore income taxes in this problem.) Stratford Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of $9,000 each year over the next seven years. If the machine has no salvage value at the end of seven years, and assuming the company's discount rate is 10%, what is the purchase price of the machine if the net present value of the investment is $17,000?
    A) $43,812
    B) $26,812
    C) $17,000
    D) $22,195
    E) None of the above

    39.(Ignore income taxes in this problem.) Anthony operates a part time auto repair service. He estimates that a new diagnostic computer system will result in increased cash inflows of $1,500 in Year 1, $2,100 in Year 2, and $3,200 in Year 3. If Anthony's required rate of return is 10%, then the most he would be willing to pay for the new computer system would be:
    A) $4,599
    B) $5,501
    C) $5,638
    D) $5,107
    E) None of the above

    40.(Ignore income taxes in this problem.) Fossa Road Paving Company is considering an investment in a curb-forming machine. The machine will cost $240,000, will last 10 years, and will have a $40,000 salvage value at the end of 10 years. The machine is expected to generate net cash inflows of $60,000 per year in each of the 10 years. Fossa's discount rate is 18%. What is the net present value of this machine?
    A) $5,840
    B) $37,280
    C) $(48,780)
    D) $69,640
    E) None of the above

    41.(Ignore income taxes in this problem.) Apnea Video Rental Store is considering the purchase of an almost new minivan to use as a vehicle to deliver and pick up video tapes for customers. The minivan will cost $18,000 and is expected to last 8 years but only if the engine is overhauled at a cost of $3,000 at the end of year 3. The minivan is expected to have a $1,000 salvage value at the end of 8 years. This delivery service is expected to generate net cash inflows of $6,000 per year in each of the 8 years. Apnea's discount rate is 14%. What is the net present value of this investment opportunity?
    A) $(2,826)
    B) $(3,801)
    C) $7,185
    D) $8,160
    E) None of the above

    42.(Ignore income taxes in this problem.) In an effort to reduce costs, Pontic Manufacturing Corporation is considering an investment in equipment that will reduce defects. This equipment will cost $420,000, will have an estimated useful life of 10 years, and will have an estimated salvage value of $50,000 at the end of 10 years. Pontic's discount rate is 22%. What amount of cost savings will this equipment have to generate per year in each of the 10 years in order for it to be an acceptable project?
    A) $50,690 or more
    B) $41,315 or more
    C) $105,315 or more
    D) $94,316 or more
    E) None of the above

    43.(Ignore income taxes in this problem.) Naomi Corporation has a capital budgeting project that has a negative net present value of $36,000. The life of this project is 6 years. Naomi's discount rate is 20%. By how much would the annual cash inflows from this project have to increase in order to have a positive net present value?
    A) $1,200 or more
    B) $2,412 or more
    C) $6,000 or more
    D) $10,824 or more
    E) None of the above

    45.Beaver Company (a multi-product firm) produces 5,000 units of Product X each year. Each unit of Product X sells for $8 and has a contribution margin of $5. If Product X is discontinued, $18,000 of fixed overhead would be eliminated. As a result of discontinuing Product X, the company's overall operating income would:
    A) decrease by $25,000
    B) increase by $43,000
    C) decrease by $7,000
    D) increase by $7,000
    E) None of the above

    46.ABD Realty manages five apartment complexes in its region. Shown below are summary income statements for each apartment complex:

    U V W X Y
    Rental income $1,000 $1,210 $2,347 $1,878 $1,065
    Expenses 800 1,300 2,600 2,400 1,300
    Operating income $ 200 ($ 90) ($ 253) ($ 522) ($ 235)

    Included in the expenses is $1,200 of common corporate expenses that have been allocated to the apartment complexes based on rental income. These common corporate expenses would have to be incurred regardless of how many apartment complexes ABD Realty manages. The apartment complex(es) that ABD Realty should consider dropping is (are):
    A) V, W, X, Y
    B) W, X, Y
    C) X, Y
    D) X
    E) None of the above

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    Solution Summary

    The problem set deals with issues in accounting: Net present value, make or buy etc

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