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Accounting concepts and applications 11th Edition Albrecht Stice, Stice Swain - Solutions

What discount rate yields a net present value of zero? How is it determined?
What is a company’s hurdle rate? How is it used?
How do quality and time considerations affect capital budgeting decisions?
Identify several qualitative factors, other than quality and time considerations, that may affect strategic and capital investment decisions. Why are qualitative factors important?
Which one of the following is not a reason why a company should carefully plan its capital investment decisions?a. Capital investments usually require a large initial outlay of capital.b. Capital investments are usually tied to management bonus plans.c. Capital investment decisions affect earnings
Which one of the following statements is correct?a. Screening is the process of finding the best among available acceptable alternatives.b. Ranking is the process of determining whether an investment meets a minimum standard of financial acceptability.c. For the comparison of cash flows to be
Compute the following present values:a. Present value of $8,000 to be received 15 years from now. The appropriate interest rate is 12%.b. Present value of $3,000 to be received at the end of each year for the next seven years.The appropriate interest rate is 9%.
J.H. Physical Therapy Equipment, Inc., is deciding whether to invest in a certain capital investment. The investment requires an initial outlay of $55,000 and annual payments of $12,000 made at the end of the year for five years. J.H.’s discount rate is 14%. What is the present value of cash
Refer to the data in PE 23-4. J.H. expects the new investment will generate revenues of $24,000 per year for the five years of the investment’s life. At the end of the four years, the company expects the investment to have a salvage value of $20,000. What is the present value of cash inflows
Casper Company paid $25,000 cash for a capital investment. The company expects the investment to generate net cash inflows of $5,500 per year. What is the payback period of this investment?
Refer to the data in PE 23-6. What is the unadjusted rate of return on the investment? Note: The investment is expected to have a useful life of 10 years, and Casper uses straight-line depreciation with zero salvage value.Data from PE 23-6Casper Company paid $25,000 cash for a capital investment.
Thirty-five percent of R.B.H. Bicycle Corp.’s total capital is debt, 45% is from the issuance of stock, and 20% is equity from retained earnings. The company has determined that the cost of its debt capital is 8% and the cost of its equity capital is 18% from stock and 15% from retained earnings.
Which one of the following investment opportunities would be rejected by a company that accepts all projects with net present values greater than zero?a. Present value of inflows = $35,740; present value of outflows = $32,023.b. Present value of inflows = $452,800; present value of outflows =
Stephen’s Brewing Company (SBC) is required to install a new piece of safety equipment. SBC has two alternatives for the equipment. One alternative would cost $260,000 immediately but would not add to operating costs over the five-year life of the equipment. The second alternative costs $75,000
Privyet Company is considering an eight-year investment. The initial cost of the investment is $57,466. The investment will yield net cash inflows of $10,000 per year. What is the internal rate of return for this investment?
David’s Robotics, Inc., is considering whether to invest in a project with an initial cost of $538,000 that will provide annual net cash inflows of $82,500 for 10 years. Use interpolation to estimate the internal rate of return.
Patrick’s Army Supply is considering whether to invest in a piece of equipment that requires an investment of $250,000 today. The project will provide net cash flows of $50,000 per year for eight years, and it will have a salvage value of $51,509 at the end of eight years. Calculate the internal
Which one of the following is an important qualitative factor to consider when making strategic and capital investment decisions?a. Company image and prestige.b. Pollution control and environmental protection.c. Government regulation.d. Worker safety.e. All of the above are examples of important
Consider each part independently.1. Super-Fix Company would like to move its auto repair shop to a downtown location in order to attract more customers. What is the maximum Super-Fix should pay to purchase a building at the new location, assuming that the company needs to earn 12%? The new building
Your late, rich uncle left you $250,000. The executor of the estate has asked if you would rather receive the full amount now or $30,000 a year for the next 40 years. Which of these options would you take, assuming that your desired rate of return is1. 10%?2. 12%?
The manager of Simple Company must choose between two investments. Project A costs $125,000 and promises cash savings of $20,000 a year over a useful life of 10 years. Project B costs $60,000, and the estimated cash savings are $10,000 per year over a useful life of 11 years. Using the payback
Um Good, Inc., a candy maker, is thinking of purchasing a new machine. A marketing firm has estimated that the new machine could increase revenues by $25,000 a year for the next five years. The expenses (including depreciation) directly relating to the machine total $100,000 ($20,000 × 5 years).
The Carroll Broom Company is thinking of purchasing a new automatic straw-binding machine. The company president, Joan Carroll, has determined that such a machine would save the company $10,000 per year in labor costs. The machine would cost $46,500 and would have a useful life of 10 years and a
The local fire department has determined that the Sleep-Eazy Mattress Company is not in full compliance with local fire regulations. To comply, Sleep-Eazy has two alternatives: It may install an automatic sprinkler system, or it may hire a fire safety expert to make weekly fire safety checks. The
Juan Gonzales, the president of Nogales Corporation, is trying to decide whether he should buy a new machine that will improve production efficiency. The machine will increase cash inflows $5,000 a year for five years. It will cost $18,000, and there will be no salvage value. What is the internal
Daphney Corporation has raised $150,000 in equity financing through the issuance of shares. Stockholders expect to earn an average of 15% per year on their equity investment in Daphney. In addition, the corporation has issued $70,000 of 10% bonds. The corporation has also accumulated $25,000 in
A real estate investment requires an initial outlay of $200,000 in cash. The investment will return a single sum cash payment of $438,490 after five years. The rate of return required on projects as risky as this one is 18%.1. What is the net present value of this real estate investment?2. What is
A retired person has $700,000 in a retirement account. An insurance company is offering to give the retired person an annuity of $61,029 at the end of each year for the next 20 years in exchange for the $700,000. The retired person requires a rate of return of 8% on investments; this is the rate
Tucker Yard Service Company is contemplating purchasing a new riding lawnmower for its business. One particular model has special features that enhance the cutting and collecting of the mowed grass, but that mower is quite expensive. Another model is more basic and costs $1,000 less. The payback
The Upscale Department Store has been plagued with shoplifting. The president, Hector Conrad, has suggested that the store hire a security force to “frisk” all customers as they leave the store. It is estimated that annual shoplifting losses are $100,000. Expenses associated with the security
A fast-food establishment is thinking of buying a new cooking grill and refrigeration unit. The costs of these new machines are $12,500 and $9,000, respectively. The installation costs of the new equipment will run about $800. It is estimated that 10% more customers can be served with the new
Southside Junk Yard needs to buy a car smasher. The machine would add the following revenues to the business over the next three years:Year 1 Cash savings = $25,000Year 2 Cash savings plus additional scrap sales = $40,000Year 3 Cash savings plus additional scrap sales = $45,000The initial cost of
You have been offered the opportunity to purchase a franchise of Sunshine Juice Stores. You will have to pay $258,635 for the initial investment in the store and its equipment, plus $30,000 per year for the lease payments and the franchise fee. The franchise contract obligates you for 10 years.
Nina Roberts has the opportunity to invest in a timber forest. She would have to invest $100,000. Revenues of $20,000 per year are projected for 20 years. However, these revenues will not begin coming in for five years because the timber must be seasoned before cutting and selling can begin. Ms.
Nucore Company is thinking of purchasing a new candy-wrapping machine at a cost of $370,000.The machine should save the company approximately $70,000 in operating costs per year over its estimated useful life of 10 years. The salvage value at the end of 10 years is expected to be $15,000. (Ignore
The manager of Soft & Creamy Ice Cream is thinking of buying a new soft ice cream machine. The machine will cost $25,000 and will last 10 years. Soft ice cream sales are expected to generate $4,500 in income per year.Required:What is the internal rate of return on this project?
Tom Thurlow wants to buy a boat but is short of cash. Two alternatives are available: Tom can accept $5,000 per year from his brother for partial ownership in the boat, or he can earn money by renting the boat to others. Rental income would be $7,500 per year. Under either alternative, the boat
A small sales company is committed to supplying three sales representatives with new cars. The company has two alternatives. It can either buy the three cars and sell them after two years, or it can lease the cars for two years. The company uses a 16% discount rate. The information for each
As one aspect of its business, New Lawn Company currently rents a ditch-digging machine for an average of $35 per job. A used machine is available for $995 but would cost $200 to repair. The machine, if purchased, would cost $700 a year to maintain and in two years would need a new chain costing
Clarence Gleason has inherited an apartment complex. He is now faced with the decision of whether to sell or to rent the property. A real estate adviser believes that Clarence should rent the property, because he could receive $65,000 per year for 10 years and then could sell the property for
Julie Kowalis, an investment analyst, wants to know if her investments during the past four years have earned at least a 12% return. Four years ago, she had the following investments:a. She purchased a small building for $50,000 and rented space in it. She received rental income of $8,000 for each
The management of Kitchen Shop is thinking of buying a new drill press to aid in adapting parts for different machines. The press is expected to save Kitchen Shop $16,000 per year in costs. However, Kitchen Shop has an old drill press that isn’t worth anything on the market and that will probably
Campus Print Shop is thinking of purchasing a new, modern copier that automatically collates pages. The machine would cost $22,000 cash. A service contract on the machine, considered a must because of its complexity, would be an additional $200 per month. The machine is expected to last eight years
Yoshika Landscaping is contemplating purchasing a new ditch-digging machine that promises savings of $5,600 per year for 10 years. The machine costs $21,970, and no salvage value is expected.The company’s cost of capital is 12%. You have been asked to advise Yoshika relative to this capital
Which measurement is more important when making a capital budgeting decision, net present value or improved customer satisfaction?Your company is considering purchasing a server to host the company Web site, which customers use to place their orders. When deciding on this new capital investment,
Should a project be accepted or rejected if the project has an internal rate of return that is less than the company’s hurdle rate?You are the CFO for an automobile manufacturer. The board of directors is considering expanding the current product line to include sports utility vehicles. As you
The section of Microsoft’s Form 10-K relating to management’s discussion and analysis provides detail as to factors that might affect Microsoft’s future and, as a result, the company’s long-term decisions. Review the financial statements and the “Management Discussion and Analysis’’
As you probably know, Boeing builds airplanes. While most famous for its big 747, Boeing is continually developing newer models. Over the past several years, Boeing has been developing the 787 Dreamliner, which is scheduled to be released in 2010. In 1996, Boeing formed a joint venture with General
DaimlerChrysler disclosed the following information relating to its long-term debt in its 2008 annual report:• 5.18% notes/bonds• 5.63% commercial paper• 5.72% liabilities to financial institutionsGeneral Motors also provides information relating to its debt in the notes to its annual report.
The city council of Wheeler, Nevada, is faced with an important decision: whether or not to rezone a parcel of property and allow ChemStor, Inc., to purchase the land and build a chemical waste storage facility on the property. Several factors enter into the decision.a. The property is currently
How can we deal with uncertainties involved in capital budgeting?
Distinguish between the screening and ranking functions of capital budgeting.
Of what value is a profitability index in capital budgeting?
How do income taxes influence capital budgeting decisions?
Brendon Entertainment, Inc., is considering an investment that costs $785,000 today and has a salvage value in 10 years of $137,714, but the company is not sure how much net annual cash inflow will be provided by the investment. Brendon has a discount rate of 7%. Compute the net amount of annual
Lee Rex Company is considering an investment that costs $250,000 today and will provide $40,000 each year in net cash inflow, but the company is not sure how long the investment will last. The company has a discount rate of 10%. Compute the number of years of useful life required for this
Kellman Company is considering eight capital investment projects. Kellman has a minimum required internal rate of return of 13%. Screen and rank the eight capital investment projects using the internal rate of return.Project Expected Rate of ReturnS . . . . . . . . . . . . . . . . 14%T . .
RM Company is considering a project with a present value of net cash inflows of $2,345,000 and an initial investment cost of $1,250,000. What is the profitability index of this investment?
Screen and rank the following projects using the profitabilityindex.
Vonnegut Corporation has decided to invest in some equipment that costs $50,000 today and will generate cash inflows of $20,000 per year for the five-year life of the equipment. At the end of the five years, the equipment will have no salvage value. The company will depreciate the equipment using
Karabekian Company has decided to invest in new factory machinery that will decrease labor costs by $50,000 per year. The new machinery will cost the company $200,000 and has an expected salvage value of $20,000 after nine years. The corporate tax rate is 35%, and the company’s discount rate is
You have accumulated $55,000 in a mutual fund account that pays 10% interest. You are offered the opportunity to buy 220 ounces of gold at $250 per ounce. The price of gold is expected to rise to $650 per ounce by the end of five years. You realize, however, that this is only an estimate.To what
Your company’s cost of capital was determined to be 12%. Several investment alternatives are being considered, and the discounted cash flows have given the following results:Net present value:1. A new machine was analyzed, and a Net present value of zero resulted.2. A new product line was
Using net present value (NPV) analysis, a manager can select those projects that will maximize the present value of future cash flows. NPV analysis is a powerful tool; however, surveys of current practice indicate that the internal rate of return (IRR) method enjoys considerable popularity among
California Company is trying to determine the relative profitability of two alternative color laser printers. Printer A requires an initial cash outlay of $6,000 and has a net present value of $500. Printer B requires an initial cash outlay of $4,000 and has a net present value of $250. Compute the
Kade Corporation is considering the purchase of a new piece of equipment. The equipment will cost $135,000 and is expected to have a useful life of five years. The gross cash flow savings is estimated to be $50,000 per year. The company will depreciate the cost of the asset for tax purposes using a
Falcon Manufacturing is a leading manufacturer of airframe components for small aircraft. Heidi Saxton, Falcon’s operations manager, has submitted a request for a new piece of production equipment. Using the new machine, the company will be able to reduce expenses for both maintenance and labor.
Taglioni's Pizza Company has to choose a new delivery car from among three alternatives. Assume that gasoline costs $3 per gallon and that the firm's cost of capital is 12%. The car will be driven 12,000 miles per year.Required:1. Which car should the company purchase?2. How would your answer
Sunshine Corporation is considering several long-term investments. Management wants to accept the two best projects, given the following data:Required:1. Determine the net present value and the profitability index for each project.2. Which projects are acceptable using the profitability index as a
Get Rich Corporation has to choose between two investment opportunities. Investment A requires an immediate cash outlay of $100,000 and provides after-tax income of $20,000 per year for 10 years. Investment B requires an immediate cash outlay of $1,000 and generates after-tax income of $350 per
Dino Corporation is trying to decide which of five investment opportunities it should undertake.The company's cost of capital is 16%. Owing to a cash shortage, the company has a policy that it will not undertake any investment unless it has a payback period of less than three years. The company
Sylvania Manufacturing Company is considering the purchase of new equipment to perform operations currently being performed on less efficient equipment. The purchase price is $142,000 delivered and installed. A company engineer estimates that the new equipment will save $29,000 in labor and other
Franklin Bakery is considering buying a new doughnut-making machine. The cost of the machine is $10,000. The machine will last for 10 years and is expected to be worth $1,000 as scrap at that time. It is expected that the new machine will increase doughnut sales by 15,000 doughnuts per year. Each
Sanchez Company prepares reversing entries. If the adjusting entry for interest payable is reversed, what type of an account balance, if any, will there be in Interest Payable and Interest Expense after the reversing entry is posted?
Texaco Oil Company issues its own credit cards. Assume that Texaco charges you $40 on an unpaid balance. Prepare the journal entry that Texaco makes to record this revenue.
Condensed financial data of Arma Inc. follow. Additional information: 1. New plant assets costing $85,000 were purchased for cash during the year. 2. Old plant assets having an original cost of $57,500 were sold for $1,500 cash. 3. Bonds matured and were paid off at face value for cash. 4. A
What are the three functions of an accounting system?
What are the essential elements in decision making, and how does accounting fit into the process?
What types of personal decisions have required you to use accounting information?
What does the term “business” mean to you?
Why is accounting often referred to as the “language of business”?
In what ways are the needs of internal and external users of accounting information the same? In what ways are they different?
What are generally accepted accounting principles (GAAP)? Who currently develops and issues GAAP? What is the purpose of GAAP?
Why is it important for financial statements and other external reports to be based on generally accepted accounting principles?
What are the respective roles of the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS) in the setting of accounting standards?
For you as a potential investor, what is the problem with different countries having different accounting standards? For you as the president of a multinational company, what is the problem with different countries having different accounting standards?
Ethical considerations affect all society. Why are ethical considerations especially important for accountants?
Given significant technological advances, can we expect to see less demand for accountants and accounting-type services?
Other than that it is a requirement for your major or that your mom or dad is making you, why should you study accounting?
Assume that you are applying for a part-time job as an accounting clerk in a retail clothing establishment. During the interview, the store manager asks how you expect to contribute to the business. How would you respond?
Describe how bookkeeping is applied in each of the following settings:a. Your college English classb. The National Basketball Associationc. A hospital emergency roomd. Jury selection for a major murder triale. Four college roommates on a weekend skiing trip
You are the owner of Automated Systems, Inc., which sells Apple computers and related data processing equipment. You are currently trying to decide whether to continue selling the Apple computer line or to distribute Windows-based computers instead. What information do you need to consider in order
Assume you are a small business owner trying to increase your company’s profits. How can accounting information help you efficiently allocate your limited resources to maximize your business profit?
Users of Financial InformationWhy might each of the following individuals or groups be interested in a firm’s financial statements?a. The current stockholders of the firmb. The creditors of the firmc. The management of the firmd. The prospective stockholders of the firme. The IRSf. The SECg. The
You work in a small convenience store. The store is very low-tech; you ring up the sales on an old-style cash register that merely records the amount of the sale. The store owner uses this cash register tape at the end of each day to verify that the correct amount of cash is in the cash register
Assume your grandparents have just given you $20,000 on the condition that you invest the money in the stock market. As you contemplate making your investment choices, what accounting information do you want to help identify companies that will have high future rates of return?
Contrast management and financial accounting with respect to the following:• Overall purpose• Type of financial reports used (i.e., external, internal, or both)• Users of the informationAlso, in what ways are these two fields of accounting similar?
It is not often that the federal government has allowed the private sector to govern itself, but that is exactly what has happened with the field of accounting. The SEC has delegated the responsibility of rule making to the FASB, a group of five individuals who are hired full time to discuss
This coming April, you will be faced with preparing your first tax return since mom and dad said “you are now on your own.” As you review the IRS regulations, you notice several differences from what you learned in your accounting class. It appears that businesses must keep two sets of books:
You are scheduled to graduate from college with a degree in accounting and your mother would like to know what you plan to do with the rest of your life. She assumes that your only option is to be a bookkeeper like Bob Cratchit in the story A Christmas Carol. What can you tell Mom regarding the

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