FINAL

Question 1

Return on Investment (ROI)

Answer 1

NOI / Avg. Operating assets

OR

Margin * Turnover

Question 2

operating assets include

*does not include

Answer 2

cash, A/R, inventories, current assets, plant and equip, inventory.

*NOT investment assets: idle land, or investments in other companies

Question 3

NOI is

*Does not include:

Answer 3

income before interest and taxes
Sales less:
variable op. exp
fixed op. exp

*Does NOT include non operating income:
investment income (interest & dividend income)
interest expense
unrealized and realized gains/losses on sales of capital assets

Question 4

Most companies use Net Book Value: __________ of depreciable assets to calculate avg. op. costs

Answer 4

(acquisition costs - accumulated depreciation)

Question 5

avg. operating assets:

Answer 5

(Beg Asset + ending asset) / 2

Question 6

margin

Answer 6

NOI / Sales

Question 7

Turn over

Answer 7

Sales/ Avg. Op. Assets

Question 8

Any increase in ROI must involve

Answer 8

increased sales
reduced op. expense
reduced op. assets

Question 9

Sales and NOI remain the same, ROI (increase/decrease) if turnover decreases.

Answer 9

decrease

Question 10

Used in evaluating segments

Answer 10

ROI and residual income

Question 11

Residual income

Answer 11

NOI - (AOA * min required rate of return)

Question 12

drawback of residual income

Answer 12

cannot be used to compare the performance of divisions of different sizes

Question 13

relevant costs are

Answer 13

incremental, differential, marginal
& therefore, AVOIDABLE
opp. costs are relevant, but hard to measure

Question 14

Irrelevant costs are UNAVOIDABLE

Answer 14

sunk costs

future costs

Question 15

differential approach
vs
total cost approach

Answer 15

-only relevant costs are considered
vs
- All the revenue and costs are displayed on the income statement, then the difference in NOI between two alternatives is compared.

Question 16

drop or retain a segment decision rule

Answer 16

drop segment if its avoidable fixed costs exceed its CM

Question 17

vertically integrated

Answer 17

when company is involved in more than one activity in the value chain

Question 18

make or buy decision

Answer 18

alternative that has the greater net incremental revenue over incremental costs

Question 19

Accept a special order decision

Answer 19

accept a special order if its incremental revenue exceeds the incremental expense of producing it
*assume fixed costs are unaffected by the order and that variable marketing costs must be incurred on special order.

Question 20

utilization of constrained resources

Answer 20

given a bottleneck, emphasize the products w/ the greatest CM per unit of contained resource.

Question 21

contraint

bottleneck

Answer 21

anything that prevents an organization from satisfying demand.
when a constraint resource is a machine or work center

Question 22

joint product

Answer 22

continue to process a joint product after the split-off point if the incremental revenue after further processing exceeds the incremental costs of more processing.

Question 23

Capital budgeting decisions:
screening decision-
preference decision-

Answer 23

does project meet or exceed hurdle rate

for projects that do meet/exceed hurdle rate, which one is best

Question 24

considers time value of money:

does not consider time value of money:

Answer 24

• NPV, IRR, Profitability index

- payback period, accounting rate of return

Question 25

Net present value (NPV)

Answer 25

pv of cash inflows - pv of cash outflows

Question 26

profitability index

Answer 26

NPV / investment *higher the index, the more desirable the project

Question 27

least cost decision

Answer 27

choose the investment with the lowest NPV

Question 28

``` IRR factor (internal rate of return) *rate of return promised by an investment project over its useful life ```

Answer 28

investment / net annual cash flow * accept proposal if the IRR is greater than the minimum required rate of return * greater IRR factor = less return annually

Question 29

payback period | *ignores the time value of cash flows

Answer 29

investment required / net annual cash inflow

Question 30

simple rate of return *ignores time value of cash flows *Numerator: cash inflow - outflow - depreciation

Answer 30

annual incremental net operating income / initial investment ***reduce initial investment by any salvage value from the sale of the old equipment and then divide by years to get DEPRECIATION

Question 31

how to get depreciation how to get salvage value

Answer 31

- initial investment - salvage / life of investment | - initial investment / useful life

Question 32

After-Tax Cost of any tax-deductible cash expense | net cash outflow

Answer 32

After - Tax Cost = (1 - tax rate) * tax-deductible cash expense

Question 33

Depreciation acts as a tax shield by doing what

Answer 33

reducing net income, so less income is taxed trigging a savings

Question 34

tax shield =

Answer 34

tax * deductible expense

Question 35

w/ tax | w/o tx

Answer 35

- use depreciation (inflow) | - don't use depreciation