P2 - Advanced Management Accounting: CIMAPRO19-P02-1

A not-for-profit organization measures performance using the three Es. If the organization has been acquiring the resources it needs as cheaply as possible it should be described as having been:

A. Efficient

B. Effective

C. Economic

D. Enterprising

The following information is available for four investment projects:

A discount rate of 12% is appropriate for all four projects. The organization is subject to capital rationing and wishes to prioritise the projects using the profitability index (PI). Which project has the highest PI?

A. Project A

B. Project B

C. Project C

D. Project D

A company has recently developed a new lawnmower with an estimated market life of 5 years. Production and sale of the lawnmower will require investment in new production equipment costing $750,000. It is expected that this equipment

could be sold back to the original vendor for $50,000 at the end of five years.

Purchase of the equipment would be financed by a 5 year fixed rate bank loan at an interest rate of 6%.

A manager already employed by the company would be moved from their current position to manage production of the new lawnmower. Their original position would be filled by a new recruit on a fixed annual salary of $35,000.

Which of the following statements is NOT correct?

A. If the lawnmower is a failure then management can terminate the project early and sell the equipment, giving them an abandonment option.

B. The salary of the replacement manager is a relevant cash flow in the decision.

C. The interest costs on the bank loan are a relevant cash flow in the decision.

D. Launching a new lawnmower gives an opportunity to launch more new versions and provides a follow-on option.