Relevant costs meet 2 criteria
it differs between the alternatives and the differences will occur in the future
A cost that occurs only with the implementation of a particular alternative is
aviodable
Unaviodable
are incurred under all alternatives, thus they are irrelevant
A sunk cost
represents a cost that has been incurred in the past
The additional impact of one alternative over another is referred to as the
incremental analysis
A sunk and unavoidable cost
is an irrelevant cost
Which of the following is not required for an item to be considered relevant to a decision?
it is variable
Which of the following is unavoidable, and thus irrelevant, when deciding between two job offers in different cities?
monthly student loan payment
The simple rate of return is based on cash flows and not on accounting net income
false
Which of the techniques ignores cash flows or accounting income after a specified goal has been met?
payback period
The discount rate that equates the present value of cash outflows with the present value of the cash inflows is known as the internal rate of return
true
The net present value method takes into account:
cash flow over life of project: yes; time value of money: no
If the internal rate of return is used as the discount rate in computing net present value, the net present value will be:
zero
The length of time required initial cash outlay for a project is determined by using the:
the payback method
Which methods consider the time value of money?
net present value; internal rate of return
The rate of return management want or requires on each investment project is known as
discount rate
Relevant cost
a cost that differs between alternatives
Sunk costs
are NOT relevant costs
When you have a limited supply of a resource (constrained resource)
choose the alternative that generates the most profit per unit of the constrained resource
Present value of cash flow =
amount of cash flow x present value factor
If NPV is positive or equal to 0,
then the project is acceptable because it exceeds the required rate of return
IRR is equal to
the discount rate that provides a NPV of 0
IRR =
investment required/net annual cash flows
Payback period =
investment required / net annual cash flows
Payback period
ignore the time value of money!!
ROI =
net operating income/avg. assets
OR
margin x turnover
Margin =
NOI/sales
Turnover =
sales/avg. assets
Three ways to improve ROI
increase sales, reduce expenses, reduce assets
Residual income =
NOI - required income
A company that is seeking to increase ROI should attempt to decrease
avg. operating assets
Residual income is the:
net operating income of an investment center, less the required return on the average operating assets used by the center
A sunk cost is:
a past cost; a cost that cannot be avoided
The costs that should be included in an outsourcing decision are
the relevant costs
The only difference between outsourcing and offshoring is that the outsource provider is located in the home country and the offshore provider is located in a foreign country
false
Working capital:
should be treated as part of the initial investment; is considered an outflow; is considered an inflow when released
An annuity is
a constant amount that is received each period for a stated number of periods
Which of the following actions will not improve a company's ROI?
increase investments
Which of the following is true?
I. the playback period account for time value of money.
II. The payback period doesn't allow cash flows over the entire length of the project
II
The NPV takes into account:
Cash flow over the life of the project: yes; time value of money: yes
An increase in the discount rate is:
will reduce the present value of future cash flows