CHAPTER 26
Special Business Decisions and Capital Budgeting
LEARNING OBJE C TIV E S
1. Identify the relevant information for a special business decision.
2. Make five types of short-term special business decisions.
3. Use payback and accounting rate of return models to make longer-
term decisions.
4. Use discounted cash flow models to make longer-term capital
budgeting decisions.
5. Compare and contrast the four capital budgeting methods.
TRUE/FALS E
1. Relevant information is future data that differs among alternatives.
True L.O. 1 Moderate Page: 1062
2. The main financial goals in a business are to earn profits and to build a strong financial
position.
True L.O. 1 Moderate Page: 1062
3. Costs that do not differ between alternatives are relevant.
False L.O. 1 Moderate Page: 1062
4. Special orders increase income if the revenue from the order exceeds the extra variable and
fixed costs incurred to fill the order.
True L.O. 2 Moderate Page: 1065
5. Fixed costs, while generally irrelevant in the decision-making process, may change and
become relevant.
True L.O. 2 Moderate Page: 1065
6. In deciding whether to accept a special sales order, any fixed costs that would remain
unchanged are considered relevant data.
False L.O. 2 Easy Page: 1065
7. Fixed costs are irrelevant to a special decision when those fixed costs differ between
alternatives.
False L.O. 2 Moderate Page: 1065
8. If the lost revenues from dropping a product exceed the cost savings from dropping the
product, it should be retained.
255
, True L.O. 2 Moderate Page: 1065
9. To maximize profits, produce the product with the highest contribution margin per unit of the
constraint.
True L.O. 2 Moderate Page: 1065
10. A constraint is a factor that restricts production or sale of a product.
True L.O. 2 Moderate Page: 1065
11. Make or buy decisions are often referred to as outsourcing decisions.
True L.O. 2 Easy Page: 1065
12. If the incremental costs of making a product exceed the incremental costs of outsourcing the
product, it should be outsourced.
True L.O. 2 Moderate Page: 1065
13. A sunk cost is a past cost that cannot be changed regardless of which future action is taken.
True L.O. 2 Easy Page: 1065
14. Investments with longer payback periods are more desirable, all else being equal.
False L.O. 3 Easy Page: 1077
15. The payback method can only be used when net cash inflows are the same for each period.
False L.O. 3 Easy Page: 1077
16. The accounting rate of return method of analyzing capital budgeting decisions measures the
average rate of return from using the asset over its entire life.
True L.O. 3 Moderate Page: 1077
17. The accounting rate of return is a measure of profitability computed by dividing the average
annual cash flows from an asset by the average amount invested in the asset.
False L.O. 3 Easy Page: 1077
18. Net present value and the payback period are examples of discounted cash flow models used
in capital budgeting decisions.
False L.O. 4 Moderate Page: 1082
19. In calculating the net present value of an investment in equipment, the required investment
and its terminal residual value should be subtracted from the present value of all future cash
inflows.
256
,CHAPTER 26
Special Business Decisions and Capital Budgeting
False L.O. 4 Moderate Page: 1082
257
, 20. The payback and accounting rate of return models are conceptually better than the discounted
cash flow models because they are based on cash flows, and they consider both profitability
and the time value of money.
False L.O. 5 Moderate Page: 1088
258
Special Business Decisions and Capital Budgeting
LEARNING OBJE C TIV E S
1. Identify the relevant information for a special business decision.
2. Make five types of short-term special business decisions.
3. Use payback and accounting rate of return models to make longer-
term decisions.
4. Use discounted cash flow models to make longer-term capital
budgeting decisions.
5. Compare and contrast the four capital budgeting methods.
TRUE/FALS E
1. Relevant information is future data that differs among alternatives.
True L.O. 1 Moderate Page: 1062
2. The main financial goals in a business are to earn profits and to build a strong financial
position.
True L.O. 1 Moderate Page: 1062
3. Costs that do not differ between alternatives are relevant.
False L.O. 1 Moderate Page: 1062
4. Special orders increase income if the revenue from the order exceeds the extra variable and
fixed costs incurred to fill the order.
True L.O. 2 Moderate Page: 1065
5. Fixed costs, while generally irrelevant in the decision-making process, may change and
become relevant.
True L.O. 2 Moderate Page: 1065
6. In deciding whether to accept a special sales order, any fixed costs that would remain
unchanged are considered relevant data.
False L.O. 2 Easy Page: 1065
7. Fixed costs are irrelevant to a special decision when those fixed costs differ between
alternatives.
False L.O. 2 Moderate Page: 1065
8. If the lost revenues from dropping a product exceed the cost savings from dropping the
product, it should be retained.
255
, True L.O. 2 Moderate Page: 1065
9. To maximize profits, produce the product with the highest contribution margin per unit of the
constraint.
True L.O. 2 Moderate Page: 1065
10. A constraint is a factor that restricts production or sale of a product.
True L.O. 2 Moderate Page: 1065
11. Make or buy decisions are often referred to as outsourcing decisions.
True L.O. 2 Easy Page: 1065
12. If the incremental costs of making a product exceed the incremental costs of outsourcing the
product, it should be outsourced.
True L.O. 2 Moderate Page: 1065
13. A sunk cost is a past cost that cannot be changed regardless of which future action is taken.
True L.O. 2 Easy Page: 1065
14. Investments with longer payback periods are more desirable, all else being equal.
False L.O. 3 Easy Page: 1077
15. The payback method can only be used when net cash inflows are the same for each period.
False L.O. 3 Easy Page: 1077
16. The accounting rate of return method of analyzing capital budgeting decisions measures the
average rate of return from using the asset over its entire life.
True L.O. 3 Moderate Page: 1077
17. The accounting rate of return is a measure of profitability computed by dividing the average
annual cash flows from an asset by the average amount invested in the asset.
False L.O. 3 Easy Page: 1077
18. Net present value and the payback period are examples of discounted cash flow models used
in capital budgeting decisions.
False L.O. 4 Moderate Page: 1082
19. In calculating the net present value of an investment in equipment, the required investment
and its terminal residual value should be subtracted from the present value of all future cash
inflows.
256
,CHAPTER 26
Special Business Decisions and Capital Budgeting
False L.O. 4 Moderate Page: 1082
257
, 20. The payback and accounting rate of return models are conceptually better than the discounted
cash flow models because they are based on cash flows, and they consider both profitability
and the time value of money.
False L.O. 5 Moderate Page: 1088
258
