Question : SHORT-ANSWER ESSAY QUESTIONS S-A E  194 Management uses several capital budgeting methods : 1311953

SHORT-ANSWER ESSAY QUESTIONS

S-A E  194

Management uses several capital budgeting methods in evaluating projects for possible investment.  Identify those methods that are more desirable from a conceptual standpoint, and briefly explain what features these methods have that make them more desirable than other methods.  Also identify the least desirable method and explain its major weaknesses.

S-A E  195

Manny Perez is trying to understand the term “cost of capital.” Define the term, and indicate its relevance to the decision rule under the annual rate of return technique.

S-A E  196(Ethics)

Sam Stanton is on the capital budgeting committee for his company, Canton Tile. Ed Rhodes is an engineer for the firm. Ed expresses his disappointment to Sam that a project that was given to him to review before submission looks extremely good on paper. “I really hoped that the cost projections wouldn’t pan out,” he tells his friend. “The technology used in this is pie in the sky kind of stuff. There are a hundred things that could go wrong. But the figures are very convincing. I haven’t sent it on yet, though I probably should.”

“You can keep it if it’s really that bad,”  assures Sam. “Anyway, you can probably get it shot out of the water pretty easily, and not have the guy who submitted it mad at you for not turning it in. Just fix the numbers. If you figure, for instance, that a cost is only 50% likely to be that low, then double it. We do it all the time, informally. Best of all, the rank and file don’t get to come to those sessions. Your engineering genius need never know. He’ll just think someone else’s project was even better than his.”

Required:

1.Who are the stakeholders in this situation?

2.Is it ethical to adjust the figures to compensate for risk? Explain.

3.Is it ethical to change the proposal before submitting it? Explain.

S-A E  197(Communication)

You are the general accountant for Word Systems, Inc., a typing service based in Los Angeles, California.  The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities.

Two options have emerged.  Option #1 is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well.

Option #2 would be for the company to invest in an entirely different computer system. The software for this system is impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software.  The net present value information for these options follows:

Option #1  Option #2

Initial Investment$(95,000)$(270,000)

ReturnsYear 155,00090,000

Year 230,00090,000

Year 310,00090,000

Net present value00

Required:

Prepare a brief report for management in which you make a recommendation for one system or the other, using the information given.