Reference: 10-09
Lambert Manufacturing Has $120,000 to Invest in Either

question 76

Multiple Choice

Reference: 10-09
Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: $$\begin{array} { | l | l | l | } \hline & \text { Project A } & \text { Project } B \\\hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\\hline \text { Working capital investment needed now } & - & \$ 50,000 \\\hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\\hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\\hline\end{array}$$ Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.
-The following data pertain to an investment proposal: $$\begin{array} { | l | l | } \hline \text { Cost of the investment } & \$ 20,000 \\\hline \text { Annual cost savings } & \$ 5,000 \\\hline \text { Estimated salvage value } & \$ 1,000 \\\hline \text { Life of the project } & 8 \text { years } \\\hline \text { Discount rate } & 16 \% \\\hline\end{array}$$ The net present value of the proposed investment is:

• A)$2,025.
• B)$6,064.
• C)$2,154.
• D)$1,720.

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Definitions:

Variable Costing

An accounting method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product cost calculations, excluding fixed manufacturing overhead.

Absorption Costing

A method of costing that includes all manufacturing costs - direct materials, labor, and both variable and fixed overhead - in the cost of a product.

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period, ending with net profit or loss.

Variable Manufacturing Costs

Expenses that change in proportion to the amount of goods produced, including direct labor and raw materials.