ABC Manufacturing Has a Project That Requires an Initial Investment $$\begin{array} { c c } \text { Year } & \text { Annual cash flow } \\\hline 1 & \$ 80000 \\2 & \$ 60000 \\3 & \$ 20000\end{array}$$

question 77

Multiple Choice

ABC Manufacturing has a project that requires an initial investment of $100 000 and has the following expected stream of cash flows:
$$\begin{array} { c c } \text { Year } & \text { Annual cash flow } \\\hline 1 & \$ 80000 \\2 & \$ 60000 \\3 & \$ 20000\end{array}$$
Assuming the company's cost of capital is 12 per cent,what is the profitability index for the project?

• A) .749
• B) 1.335
• C) 1.600
• D) 2.985

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Definitions:

Direct Materials Purchases Variance

The difference between the actual cost of direct materials purchased and the expected cost at standard prices.

Standard Costs

Predetermined costs for materials, labor, and overhead that are used as benchmarks to measure actual performance and cost control.

Materials Quantity Variance

The difference between the actual quantity of materials used in production and the standard quantity expected to be used, multiplied by the standard cost per unit.

Direct Materials Purchases Variance

The difference between the actual costs of materials purchased and the expected (standard) costs.