Final Exam

Question 1

flexible budget step 1

Answer 1

Identify the relevant activity levels. They could be expressed in units, machine hours, direct labor hours, or some other activity base.

Question 2

flexible budget step 2

Answer 2

Identify the fixed and variable cost components of the costs being budgeted.

Question 3

flexible budget step 3

Answer 3

Prepare the budget for each activity level by multiplying the variable cost per unit by the activity level and then adding the fixed costs.

Question 4

what is better the flexible budget or static budget

Answer 4

The flexible budget is more accurate and useful than the static budget because the flexible budget adjusts for changes in the level of activity.

Question 5

compute cash payback period (equal)

Answer 5

Cash payback period = Initial cost / Annual net cash inflows

Question 6

compute cash payback period (unequal)

Answer 6

Payback Period = Years before full recovery + (Unrecovered cost at the start of the final year / Cash flow during the final year)

Question 7

Advantages of the net present value method

Answer 7

It considers the cash flows of the investment.
It considers the time value of money.
It can rank projects with equal lives using the present value index.

Question 8

Disadvantages of the net present value method

Answer 8

It has more complex calculations than methods that don’t use present value.
It assumes that the cash flows can be reinvested at the minimum desired rate of return, which
may not be valid.

Question 9

compute NPV equal cash flows & unequal cash flows

Answer 9

NPV = (Cash flows * annuity factor rates for each year): sum those and then - (subtract) the initial investment

Question 10

when do you accept or reject the project based on NPV

Answer 10

positive NPV accept
negative NPV reject
BOTH positive accept both whichever is higher is more preferrable