242107601 Introduction to Managerial Accounting

8/9/2019 242107601 Introduction to Managerial Accounting

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1 2. P

1

Net present value (2,399.00)$

2

Net cash flow 15,000.00$

Explanation:

1

Item Year(s) Cash flow 12 % Factor

Annual cost savings 1 to 10 $ 4,000 5.650 $ 22,600

Initial investment Now $(25,000) 1.000 $ (25,000)

Net present value $ (2,400)

2

Item Cash flow Years

Annual cost savings $ 4,000 10 $ 40,000

Initial investment $(25,000) 1 $ (25,000)

Net cash flow $ 15,000

Exercise 11-1 Net Present Value Method [LO1]

The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase o

machine that would reduce operating costs in its warehouse by $4,000 per year. At the end of the machine’s 1

life, it will have no scrap value. The company’s required rate of return is 12%. (Ignore income taxes.)

Determine the net present value of the investment in the machine.(Negative amoun

indicated by a minus sign. Round discount factor(s) to 3 decimal places, other inter

calculations and final answer to the nearest whole dollar.)

Present Value ofCash Flows

What is the difference between the total, undiscounted cash inflows and cash outfl

entire life of the machine?

Present Value of

Cash Flows

Required:


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a $25,000

-year useful

should be

ediate

ws over the


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2

A B C D

Investment required (85,000)$ (200,000)$ (90,000)$ (170,000)$Present value of cash 119,000$ 250,000$ 135,000$ 221,000$

Net present value 34,000$ 50,000$ 45,000$ 51,000$

Life of the prject 5 years 7 years 6 years 7 years

1

Proposal

Project

Profitability

Index

A 0.40

B 0.25

C 0.50

D 0.30

2

ABCD

DCBACADB

BCAD

Explanation:

1.

Proposal

A $34,000 $ 85,000 0.40B $50,000 $ 200,000 0.25

C $45,000 $ 90,000 0.50

D $51,000 $ 170,000 0.30

2

The ranking is:

Exercise 11-2 Preference Ranking [LO2]

Information on four investment proposals is given below:

Required:

Compute the project profitability index for each investment proposal. (Round your

answers to 2 decimal places.)

Rank the proposals in terms of preference.

Investment Proposal

The project profitability index for each proposal is:

Net Present

Value (a)

Investment

Rquired (b)

Project

Perofitability

Index (a)/b


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Proposal

Project

Profitability

Index

C 0.50

A 0.40

D 0.30

B 0.25

Note that proposals D and B have the highest net present values of the four proposals,

but they rank at the bottom of the list in terms of the project profitability index.


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3 2. P

Year Investment Cash Inflow1 38,000$ 2,000$

2 6,000$ 4,000$

3 8,000$

4 9,000$

5 12,000$

6 10,000$

7 8,000$

8 6,000$

9 5,000$

10 5,000$

1

Payback period 6 years

2

No

Yes

Explanation:

1

Investment

Cash

inflow

Unrecovered

Investment

1 $ 38,000 $ 2,000 $ 36,000

2 $ 6,000 $ 4,000 $ 38,000

3 $ 8,000 $ 30,0004 $ 9,000 $ 21,000

5 $ 12,000 $ 9,000

6 $ 10,000 $ -

7 $ 8,000 $ -

8 $ 6,000 $ -

9 $ 5,000 $ -

10 $ 5,000 $ -

Exercise 11-3 Payback Method [LO3]

The management of Weimar, Inc., a civil engineering design company, is considering an

investment in a high-quality blueprint printer with the following cash flows:

Required:

Would the payback period be affected if the cash inflow in the last year were several times

larger?

Determine the payback period of the investment. (Round your answer to the nearest whole number.)

The payback period is determined as follows:


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2

Because the investment is recovered prior to the last year, the amount of the cash inflow in the

last year has no effect on the payback period.

The investment in the project is fully recovered in the 6th year. To be more exact, the

payback period is approximately 5.9 years (5 years + (9,000 / 10,000)).


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4 2. P

Required:

Simple rate of return 20%

Explanation:

$ 33,000

$ 10,000

$ 8,000

$ 15,000

80,000

5,000

Initial investment 75,000$

$15,000

$75,000

Exercise 11-4 Simple Rate of Return Method [LO4]

The management of Wallingford MicroBrew is considering the purchase of an automated bottling machi

$80,000. The machine would replace an old piece of equipment that costs $33,000 per year to operate. T

machine would cost $10,000 per year to operate. The old machine currently in use could be sold now for

value of $5,000. The new machine would have a useful life of 10 years with no salvage value.

Compute the simple rate of return on the new automated bottling machine. Use straight-line

depreciation method.

= = 20%

The annual incremental net operating income is determined by comparing the operating cost of the old

operating cost of the new machine and the depreciation that would be taken on the new machine:

Operating cost of old machine

Less operating cost of new machine

Less annual depreciation on the new

machine ($80,000 ÷ 10 years)

Annual incremental net operating income

Cost of the new machine

Less scrap value of old machine


Initial investmentSimple rate of return =


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ne for

he new

a scrap

achine to the


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5 2. P

250,000$

40,000$

90,000$

27,000$

30,000$

187,000$

63,000$

1-a.

Payback period 5 years

1-b.

Yes No

6 2. P

2-a. Compute the simple rate of return promised by the new ride.

Simple rate of return 14%

2-b.

Yes No

Explanation:

1-a.

Exercise 11-5 Part 1

Required:

Compute the pay back period associated with the new ride.

Net operating income

Exercise 11-5 Payback Period and Simple Rate of Return [LO3, LO4]

[The following information applies to the questions displayed below.]

The Heritage Amusement Park would like to construct a new ride called the Sonic Boom, which the

Ticket revenues

Less operating expenses:

Maintenance

Salaries

Depreciation

Insurance

Total operating expenses

If Heritage Amusement Park requires a simple rate of return of at least 12%, does the Sonic Boom ride

meet this criterion?

Assume that the Heritage Amusement Park will not construct a new ride unless the ride provides a

payback period of six years or less. Does the Sonic Boom ride satisfy this requirement?

Computation of the annual cash inflow associated with the new ride:


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$ 63,000

$ 27,000

$ 90,000

$450,000

$90,000 per

year

1-b.

Explanation:

2-a.

$63,000

$450,000

2-b.

= 5 years

Add: Noncash deduction for

Net operating income

Annual net cash inflow

Yes, the new ride satisfies the criterion. Its 14% return exceeds the Park’s requirement of a

12% return.

The payback computation would be:

Yes, the new ride meets the requirement. The payback period is less than the maximum 6

years required by the Park.

Simple rate of return =

= = 14%

The simple rate of return would be:


Initial investment

Payback period =Investment required

Net annual cash inflow

=


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7 2. P

Investment required 15,000$ 15,000$

Annual cash inflows -$

60,000$

Life of the project 10 years 11 years

Required:

a.

Net Present Value

Project A 4,332.00$

Project B (1,380.00)$

b.

Project A

Project B

Explanation:

a.

Project A: Investment required Now (15,000)$ 1.000 (15,000)$

Annual cash inflows 1 to 10 4,000$ 4.833 19,332$

Net present value 4,332$

Project B:

Investment Now (15,000)$ 1.000 (15,000)$

Determine the net present value. (Negative amounts should be indicated by a minus sign.

Round discount factor(s) to 3 decimal places, other intermediate calculations and final

answers to the nearest whole dollar.)

Which investment would you recommend that the company accept?

Exercise 11-6 Comparison of Projects Using Net Present Value [LO1]

Sharp Company has $15,000 to invest. The company is trying to decide between two alternativ

the funds as follows:

Single cash inflow at the end of 10 years

Invest inProject A

Invest inProject B

Sharp Company uses a 16% discount rate. (Ignore income taxes.)

16 %

Factor

Amount of

cash flow

Present

Value ofItem Year(s)


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Cash inflow 10 60,000$ 0.227 13,620$

Net present value (1,380)$

b.

Project A should be selected. Project B does not provide the required 16% return, as shown by

negative net present value.


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uses of


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ts


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8 2. P

A B300,000$ -$

-$ 300,000$

80,000$ 60,000$

20,000$ -$

7 years 7 years

a.

Net Present Value

Project A (6,020.00)$

Project B -$

b.

Project A

Project B

Explanation:

a.

Project A:

Cost of the equipment Now (300,000)$ 1.000 (300,000)$

Annual cash inflows 1 to 7 80,000$ 3.605 288,400$

Salvage value of the eq. 7 20,000$ 0.279 5,580$Net present value 0.279 (6,020)$

Project B:

Working capital Investment Now (300,000)$ 1.000 (300,000)$

Annual Cash inflow 1 to 7 60,000$ 3.605 216,300$

Working capital Release 7 300,000$ 0.219 83,700$

Net present value -$

b.

Life of the project

The working capital needed for project B will be released for investment elsewhere at the end of seven years. Wristo

uses a 20% discount rate. (Ignore income taxes.)

Calculate net present value for each project. (Negative amounts should be indicated by a minus sign. Leave no cells benter "0" wherever required. Round discount factor(s) to 3 decimal places, other intermediate calculations and final a

whole dollar.)

Which investment alternative (if either) would you recommend that the company accept?

Exercise 11-8 Net Present Value Analysis of Two Alternatives [LO1]

Wriston Company has $300,000 to invest. The company is trying to decide between two alternative uses of the funds.

as follows:

Cost of equipment required

Working capital investment required

Annual cash inflows

Salvage value of equipment in seven years

Item Year(s)Amount of

cash flow 20 % Factor

Present Value of

Cash flows


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The $300,000 should be invested in Project B rather than in Project A. Project B has a zero net present

value, which means that it promises exactly a 20% rate of return. Project A is not acceptable at all, since


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Company

lank - be certain toswers to the nearest

The alternatives are


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9 2. P

Required:

a.

Net present value (1,503)$

b.

Yes No

Item Year(s)

Purchase of the stock now $ (18,000) 5.650 $ (18,000)

Annual dividends 1 to 4 $ 720 1.000 $ 2,187

Sale of the stock 4 $ 22,500 0.636 $ 14,310

Net present value $ (1,503)

b.

*900 shares × $0.80 per share per year = $720 per year.

No, Mr. Critchfield did not earn a 12% return on the stock. The negative net present value indicates thatthe rate of return on the investment is less than the discount rate of 12%.

Exercise 11-9 Basic Net Present Value Analysis [LO1]

On January 2, Fred Critchfield paid $18,000 for 900 shares of the common stock

Critchfield received an $0.80 per share dividend on the stock at the end of each ye

four years, he sold the stock for $22,500. Mr. Critchfield has a goal of earning a

his investments. (Ignore income taxes.)

Determine the net present value. (Negative amount should be indicated by a mi

decimal places, other intermediate calculations and final answer to the neare

Did Mr. Critchfield earn a 12% return on the stock?

Present Valueof Cash Flows

Amount Cashflow

12 %Factor


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f Acme Company. Mr.

ar for four years. At the end of

inimum return of 12% on all of

nus sign.Round discount factor(s) to 3

t whole dollar.)

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242107601 Introduction to Managerial Accounting