Why is capital budgeting important? Anyone?

12 questions in accounting need completed by today. Questions are not related and should be answered separately with the correlating question number on top and correct citation below it. References are required!





Describe the three major influences on pricing. Give an example of one of them.




Thanks Willie! I am also thinking…is ABC costing useful in pricing decisions? How so, anyone? :-)




Hello everyone, in the final exam, you will be asked to prepare a pro-forma/budgeted income statement…since we have not practiced this budget much, let’s work problem 6-33 located in Chapter 6! Anyone?


Budgeted income statement. (CMA, adapted) Smart Video Company is a manufacturer of videoconferencing products. Maintaining the videoconferencing equipment is an important area of customer satisfaction. A recent downturn in the computer industry has caused the videoconferencing equipment segment to suffer, leading to a decline in Smart Video’s financial performance. The following income statement shows results for 2014:


Smart Video Company Income Statement for the Year Ended December 31, 2014 (in thousands)


  Equipment $8,000  
  Maintenance contracts  1,900  
    Total revenues   $9,900
Cost of goods sold    4,000
Gross margin   5,900
Operating costs    
    Marketing 630  
    Distribution 100  
    Customer maintenance 1,100  
    Administration   920  
    Total operating costs    2,750
Operating income   $3,150


Smart Video’s management team is preparing the 2015 budget and is studying the following information:


  • 1. Selling prices of equipment are expected to increase by 10% as the economic recovery begins. The selling price of each maintenance contract is expected to remain unchanged from 2014.
  • 2. Equipment sales in units are expected to increase by 6%, with a corresponding 6% growth in units of maintenance contracts.
  • 3. Cost of each unit sold is expected to increase by 5% to pay for the necessary technology and quality improvements.
  • 4. Marketing costs are expected to increase by $290,000, but administration costs are expected to remain at 2014 levels.
  • 5. Distribution costs vary in proportion to the number of units of equipment sold.
  • 6. Two maintenance technicians are to be hired at a total cost of $160,000, which covers wages and related travel costs. The objective is to improve customer service and shorten response time.
  • 7. There is no beginning or ending inventory of equipment.



    Hello everyone! Let’s begin by describing Discounted Cash Flow methods. Why is capital budgeting important? Anyone?



…Just thought of another question! How is the required rate of return (RRR) calculated? Is the RRR also known as the hurdle rate, the cost of capital? :-) How is it calculated/arrived at by management? Anyone?




FANTASTIC! We got these, thanks Hui and everyone! I got the same…the NPV is negative, NPV = ($4,920), Payback period = 2.86 years rounded, and discounted payback period = it would take more than 4 years! Let’s continue by calculating IRR using interpolation (we can always double check with the =IRR function of Excel too!) and the accounting rate of return for exercise 21-20! Anyone?




Capital budgeting with uneven cash flows, no income taxes. America Cola is considering the purchase of a special-purpose bottling machine for $65,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant manager estimates the following savings in cash operating costs:


Year Amount
1 $25,000
2 22,000
3 21,000
4  20,000
Total $88,000


Southern Cola uses a required rate of return of 18% in its capital budgeting decisions. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts.


Calculate the following for the special-purpose bottling machine:


  • 1. Net present value
  • 2. Payback period
  • 3. Discounted payback period
  • 4. Internal rate of return (using the interpolation method)
  • 5. Accrual accounting rate of return based on net initial investment (Assume straight-line depreciation. Use the average annual savings in cash operating costs when computing the numerator of the accrual accounting rate of return.)




    Discuss what you believe to be the appropriate level of involvement of an accountant in evaluating and selecting an AIS vendor and the AIS itself. What are some of the contributions an accountant might offer in this process?


    Class: Custom, canned, and modified canned software all have advantages and disadvantages. In this age of increasing computerization, which do you feel will become predominant? Will any of the methods be phased out? Does your response vary depending on the type of industry or company?


    Class: It is possible that after months of work and evaluation of a new AIS the decision is made to outsource the function. What are the advantages and disadvantages to outsourcing?


    Using the company for which you work or one in which you are interested, choose the conversion approach you would use if the company purchased a new AIS. Explain your choice, including the benefits. Discuss how you envision the testing process.


    Great exchanges here! You all made some important points about system conversion approaches.

    Class: Why is it important to understand the SDLC?


    Class: Some managers do not see the direct impact of an ERP on profitability. Do you agree or disagree? Explain.

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