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management accounting
Management Accounting 3rd Edition Anthony A. Atkinson, Robert S. Kaplan, S. Mark Young, Rajiv D. Banker, Pajiv D. Banker - Solutions
What are the major objectives in capital bud¬ geting? (LO 1,2)
What is an investment? (LO 3)
What does return mean? (LO 3)
What does time value of money mean? (LO 3)
Is it always true that money now is worth more than the same amount of money received a year from now? (LO 3)
What is future value? (LO 3)
What is the role of future value in capital bud¬ geting? (LO 3)
What does the compounding effect mean? (LO 3)
What is present value? (LO 3)
What is the significance and role of time zero in capital budgeting? (LO 3)
What is discounting? (LO 3)
Give an example of an annuity. (LO 3)
What is the cost of capital? (LO 3)
What is the most widely used approach to computing the cost of capital for evaluating new investments? (LO 3)
What is the discount rate? (LO 3)
What does payback period mean? (LO 4)
How is accounting rate of return defined? (LO 4)
What are inflows and outflows in capital bud- geting? (LO 4)
Why are incremental cash flows important in capital budgeting? (LO 4)
Why do planners compute the present value of a sum that will be received in the future? (LO 4)
What is net present value? (LO 4)
How is the idea of net present value used in capital budgeting? (LO 4)
What is internal rate of return? (LO 4)
How would you explain the idea of internal rate of return using nonfinancial terms? (LO 4)
How is profitability index defined? (LO 4)
How is economic value added computed? (LO 4)
Why are post-implementation audits useful? (LO 8)
Appendix What is the difference between the nominal and effective rate of interest? (LO 4)
Explaining capital budgeting How would you describe capital budgeting to someone who is intelligent but knows nothing about the time value of money or the concept of a required return on an investment?(LO 1)
Quantifying intangible benefits in capital budgeting Suppose that you work for a bank and are proposing a system that customers can access from their home computers to do their banking. Only about one-half of the estimated cost of this system can be recovered by decreased clerical time required in
Evaluating payment alternatives Which is a better deal: $1000 at the end of one year or $500 at the end of six months and another $500 at the end of 12 months? Why?(LO 1)
Explain compounding Explain the notion of compounding interest using an ex- ample.(LO 1)
Effect of compounding Quintin is now 22 years old and has just started a new job. He is trying to decide whether to start investing for retirement now or to wait several years. Verify that investing a 10% return per year yields approximately the same total accumulation at age 52 for Quintin under
The rule of 72 The "rule of 72" is that the number of periods n that it will take to double an investment whose rate of return is r percent is approximately 72/r. That is, nr is approximately equal to 72. Verify this approximation for r = 4, 6, 8, and 10.(LO 1)
Valuing an annuity You have won a lottery with an advertised prize of $1,000,000. The prize is to be paid in installments of $100,000 per year for the next 10 years. Is this prize really worth $1,000,000? Explain.(LO 1)
Choosing an annuity You have been offered the following two annuities for the same price. Annuity 1 pays $50,000 per year for 10 years. Annuity 2 pays $40,000 per year for 20 years. If your cost of capital is 10%, which of these two annuities is a better deal? Why?(LO 1)
Cost of capital determinants Would you expect the cost of capital to be higher for an electric utility or a genetics laboratory? Explain.(LO 1)
Weighted average cost of capital McDonough Corporation is financed 25% by debt with a pretax cost of 8%, 20% by preferred shares with a pretax cost of 12%, 35% by common equity with a pretax cost of 16%, and 20% by retained earnings with an estimated pretax cost of 14%. McDonough Corporation's
Net present value and profitability index Lebar Company is considering two mutually exclusive investment alternatives. Lebar has a 10% cost of capital. Cash flow information for the two alternatives appears below.(a) Compute the net present value for each alternative and determine which al¬
Taxes and capital budgeting Describe the effect of taxes in capital budgeting.(LO 1)
Branson Manufacturing is considering purchasing a piece of equipment costing$45,000. The new equipment would create a new cash inflow of $20,000 for five years. At the end of the five years, the equipment would have no salvage value. The company's cost of capital is 10% and the tax rate is 34%.
Simpson Corporation has taxable income of $300,000 and an income tax rate of 34%. Simpson is considering selling an asset whose original cost is $20,000, with $12,000 of it depreciated. How much total after-tax cash will be generated from the sale of the asset for $18,000?(LO 1)
Sensitivity analysis and capital budgeting Suppose that you are advising some¬one who is using capital budgeting to evaluate the purchase of a clothing store. What role might sensitivity analysis play in this evaluation?(LO 1)
Capital budgeting and risk Suppose that you are using capital budgeting to evaluate two alternative business opportunities. Both require comparable invest¬ ments and have comparable average cash flows. However, the cash flows of one business appear to be more volatile than those of the other; that
Valuing a bond A company issues a bond with the following characteristics:(a) Semiannual interest payments of $45 for 10 years(b) A lump-sum repayment of the $1000 face value of the bond after 10 years If the bond market requires 10% interest compounded semiannually for the debt issued by this
Valuing zero coupon bonds A government issues a savings bond that will pay the holder $1000 in 10 years. (This is called a zero coupon bond.) If the bond market is now requiring 5% annual interest on government debt, what will be the issue price (present value) of this bond?(LO 1)
Revaluing a bond Review the data in question 8-50. Suppose that you purchase that bond. It is now one year later and the bond market now requires 7% interest on government debt. What will you receive for this bond if you sell it today?(LO 1)
Capital budgeting and sensitivity analysis Ritchie's Trucking hauls logs from wood lots to pulp mills and saw mills. Ritchie now operates a single truck and is considering buying a second truck. The total required investment in the truck and trailer would be $130,000. The equipment would have a
Capital budgeting with taxes and strategic consideration Ronnie's Welding uses welding equipment mounted in the bed of a pickup truck to provide on-site welding services. The expected life of his existing equipment is five more years, after which the equipment will be worthless and scrapped for
Net present value, payback, internal rate of return, and accounting rate of re¬turn Consider the following two mutually exclusive projects, each of which re¬ quires an initial investment of $100,000 and has no salvage value. This organization, which has a cost of capital of 15%, must choose one
Capital budgeting and sensitivity analysis Magic Mountain Enterprises runs a ski center. Its 14 downhill runs vary in difficulty from beginner to expert. To at¬ tract more customers, Maria Jasper, the owner/manager, is considering develop¬ ing cross-country ski trails. The cross-country ski
Allocating capital funds and post-implementation audit You are the general LO 8 manager of a consumer products company. One of your major tasks is to ap¬ prove new product proposals brought to you by the product managers who re¬ port to you. The product managers are primarily an aggressive lot
Effective rate of interest Compute the effective annual rate of interest in each LO 3 of the following cases:(a) A bank promises 8% interest compounded annually.(b) A bank promises 8% interest compounded semiannually.(c) A bank promises 8% interest compounded quarterly.(d) A bank promises 8%
Finding the interest rate You want to borrow $10,000 and repay the loan with LO 3 equal monthly payments for five years. The bank has advised you that the re¬ quired monthly payment will be $222.45. What is the monthly rate of interest and the effective annual rate of interest that the bank is
Accumulating a target level of wealth Carolyn Martin, who is now 30, wants LO 3 to retire at age 60 with $2.5 million in an investment account. If funds can be in¬ vested to earn 12% per year compounded annually, what equal annual amount must she invest? What will the required amount be if the
Accumulating a retirement fund Review the data in question 8-59. Suppose LO 3 that Carolyn decides that it is unrealistic to invest an equal annual amount in her retirement fund. Instead she decides to invest increasing amounts each year. If the amount that she invests each year is 5% more than the
Value in the face of risk Return to the data in question 8-39. Suppose that you are 65 years old and are deciding which of these two annuities to buy. The pro¬ posal is that the annuity will cease upon your death; that is, in the event of your death, the balance of the annuity that you buy will
Capital budgeting and sensitivity analysis You work for an automobile com¬pany that is considering developing a new car. The product development costs for this new car will be $500 million per year for three years. During the third year of product development, the company will incur $1 billion for
Capital budgeting and uncertainty Jane Eby, the chief financial officer of Baden Discount Enterprises, is faced with choosing between two machines. A new machine is needed to replace an existing machine that makes plastic mop handles for one of the company's most popular products. Jane is not sure
Capital budgeting and inflation Inflation is a general increase in the price level. For example, if the annual cash flows and salvage value in Exhibit 8-17 were subject to inflation at the annual rate of 4%, the cash flows would be those shown in Exhibit 8-26. (Note that, under these conditions,
Changing the payment frequency Suppose that you are buying a house and re- LO 3 quire a $200,000 mortgage. You have told the bank that you want to repay your mortgage over 30 years. The bank has indicated that, whatever payment option you consider, you will be charged an effective annual interest
Sensitivity and what-if analysis Your instructor has an Excel spreadsheet for LO 4, 6 the Shirley's Doughnut Hole example used in the chapter. You will need it to answer this question. The file shows how easily capital budgeting calculations can be done on a computer. (Knowledge and judgment are
Evaluating an investment proposal under uncertainty Serge Martin, general 7 manager of the hapless Hogtown Flyers, is considering the acquisition of Mario Flanagan to bolster his team's sagging fortunes. Mario has played the last two seasons in Europe, so there would be no compensation paid to an¬
Evaluating a new technology National Courier Company picks up and deliv- LO 3, 4, 5, ers packages across the country and, through its relationships with couriers in 6, 7 other countries, provides international package delivery services. Each after¬ noon couriers pick up packages. In late
apply the concept of control LO1
identify the characteristics of well-designed management accounting and control systems (MACS)LO1
describe the total-life-cycle costing approach to managing product costs over the value chain LO1
explain target costing LO1
explain Kaizen costing LO1
identify environmental costing issues LO1
apply the process of benchmarking the best practices of other organizations LO1
What does "control" refer to in the context of a management accounting and control system? (LOI)
What are the five steps involved in keeping an organization in control? (LO 1)
What two broad technical considerations must designers of management and control systems address? (LO 2)
What four components should management ac¬ counting and control systems designers con¬ sider when addressing the relevancy of the system's information? (LO 2)
What is the total-life-cycle costing approach? Why is it important? (LO 3)
What are the three major cycles of the total- life-cycle costing approach in a manufacturing situation? (LO 3)
What is the difference between committed costs and incurred costs? (LO 3)
What are the three stages of the research devel¬ opment and engineering cycle? (LO 3)
What is the post-sale service and disposal cycle? (LO 3)
What is target costing? (LO 4)
What are the two essential elements needed to arrive at a target cost? (LO 4)
What is value engineering? (LO 4)
In which stage of the total life cycle of a prod¬ uct is target costing most applicable? (LO 4)
What roles do cross-functional teams and sup¬ ply chain management play in target costing? (LO 4)
What is Kaizen costing? (LO 5)
When is a cost-variance investigation under¬ taken under Kaizen costing? (LO 5)
Why is it said that a Kaizen costing system op¬ erates "outside of the standard costing system"? (LO 5)
What are some examples of explicit and im¬ plicit environmental costs? (LO 6)
What is benchmarking and why is it used? (LO 7)
What are the five stages of the benchmarking process? (LO 7)
What are the three broad classes of information on which firms interested in benchmarking can focus? Describe each. (LO 7)
What stage of the benchmarking process is the most important for benchmarking management accounting methods? Why? (LO 7)
What are the two general methods of informa¬ tion gathering and sharing when undertaking a benchmarking exercise? (LO 7)
What are the three types of sharing and gather¬ ing information under the cooperative form of benchmarking? (LO 7)
Achieving relevancy in MACS design Identify the four components that MACS LO 2 designers should consider when addressing the relevancy of the system's infor¬ mation, and explain why each component is important.
Total life cycle in service firm Refer to the In Practice entitled "Aligning IT with LO 3 the Value Chain in Financial Services" on p. 370. Explain how information tech¬ nology personnel can play an important role in the total life cycle of products or services that financial services firms offer.
Total-life-cycle costing Explain how the total-life-cycle costing approach differs LO 3 from traditional product costing.
Benefits of total-life-cycle costing Explain the benefits of using a total-life- LO 3 cycle costing approach to product costing.
Problems with traditional accounting focus What is the traditional accounting LO 3 focus in managing costs over the total life cycle of a product? What is the prob¬ lem with this focus?
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