Phoxco Would Like to Automate Its Calligraphy Operation

question 10

Multiple Choice

Phoxco would like to automate its calligraphy operation. The equipment will cost $150,000 plus freight, installation, and testing costs of $5,500. The expected life of the project is 8 years, with annual cost savings of $20,000. The minimum rate of return is 12% and estimated terminal value is $3,000. Ignore income taxes. The profitability index of the project is:

• A) 1.55
• B) 1.57
• C) 0.67
• D) 0.65

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Definitions:

Cost Recovery Method

An accounting technique where revenue is recognized only after the costs of the sold goods or services are recovered, deferring profit recognition.

IFRS

A collection of accounting guidelines formulated by the International Accounting Standards Board (IASB) to assist in the creation of financial statements for public companies worldwide, known as International Financial Reporting Standards.

Installment Sales

A sales method that allows customers to pay for goods or services over a period of time in installments.

Critical Event

A significant occurrence that has a profound impact on an entity's operations or financial performance, necessitating special consideration in accounting and financial reporting.