51.

A project produces annual net income of $9,500, $12,500, and $15,500 over the three
years of its life, respectively. The initial cost of the project is $260,400. This cost is
depreciated straight-line to a zero book value over three years. What is the average
accounting rate of return if the required discount rate is 7 percent?

9.60 percent
) 0 400 , 260 ($ 5 .
3 ) 500 , 15 $ 500 , 12 $ 500 , 9 ($
AAR


= 9.60 percent

52. The Winston Co. is considering two mutually exclusive projects with the following
cash flows. The crossover rate is _____ and if the required rate is higher than the
crossover rate then project _____ should be accepted.

Project A Project B
Year Cash Flow Cash Flow
0 -$75,000 -$60,000
1 $30,000 $25,000
2 $35,000 $30,000
3 $35,000 $25,000

13.94 percent; B
Year Project A Cash Flow Project B Cash Flow Difference
0 -$75,000 -$60,000 -$15,000
1 $30,000 $25,000 $ 5,000
2 $35,000 $30,000 $ 5,000
3 $35,000 $25,000 $10,000

Cash flows for (A-B): Cash flows for A: Cash flows for B:
CF
0
-$15,000 CF
0
-$75,000 CF
0
-$60,000
C0
1
$ 5,000 C0
1
$30,000 C0
1
$25,000
F0
1
1 F0
1
1 F0
1
1
C0
2
$ 5,000 C0
2
$35,000 C0
2
$30,000
F0
2
1 F0
2
1 F0
2
1
C0
3
$10,000 C0
3
$35,000 C0
3
$25,000
F0
3
1 F0
3
1 F0
3
1
IRR CPT I = 15 I = 15
13.94 percent NPV CPT NPV CPT
$565.05 $861.35

The crossover rate is 13.94 percent. At a rate higher than the crossover rate, such
as 15 percent, Project B will have the higher NPV and should be accepted.


53. Which of the following are examples of an incremental cash flow?
I. an increase in accounts receivable
II. a decrease in net working capital
III. an increase in taxes
IV. a decrease in the cost of goods sold

e. I, II, III, and IV

54. The book value of an asset is primarily used to compute the:

amount of tax due on the sale of an asset.


55. Jamestown Ltd. currently produces boat sails and is considering expanding its operations
to include awnings for homes and travel trailers. The company owns land beside its current
manufacturing facility that could be used for the expansion. The company bought this land ten
years ago at a cost of $250,000. Today, the land is valued at $425,000. The grading and
excavation work necessary to build on the land will cost $15,000. The company currently has
some unused equipment which it currently owns valued at $60,000. This equipment could be
used for producing awnings if $5,000 is spent for equipment modifications. Other equipment
costing $780,000 will also be required. What is the amount of the initial cash flow for this
expansion project?

$1,285,000
CF
0
= $425,000 + $15,000 + $60,000 + $5,000 + $780,000 = $1,285,000

56. Sun Lees Furniture just purchased some fixed assets classified as 5-year property for
MACRS. The assets cost $24,000. What is the amount of the depreciation expense for the
third year?
MACRS 5-year property
Year Rate
1 20.00%
2 32.00%
3 19.20%
4 11.52%
5 11.52%
6 5.76%

$4,608
Depreciation for year 3 = $24,000 .1920 = $4,608

57. An analysis of what happens to the estimate of the net present value when you consider
the best case and the worst case situations is called _____ analysis.

scenario

58. The degree to which a firm relies on fixed production costs is called its:
operating leverage.


59. Sensitivity analysis is conducted by:

changing the value of a single variable and computing the resulting change in the
current value of a project.


60. Which of the following statements are correct concerning the accounting break-even
point?
I. The net income is equal to zero at the accounting break-even point.
II. The net present value is equal to zero at the accounting break-even point.
III. The quantity sold at the accounting break-even point is equal to the total fixed costs
plus depreciation divided by the contribution margin.
IV. The quantity sold at the accounting break-even point is equal to the total fixed costs
divided by the contribution margin.
I and III only