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Accounting 23rd Edition Carl S. Warren - Solutions
=+c. If MVP has sufficient funds for only one of the machines and qualitative factors are equal between the two machines, in which machine should it invest?
=+b. Determine the present value index for the two machines. Round to two decimal places.
=+a. Determine the net present value for the two machines. Use the table of present values of an annuity of $1 in the chapter. Round to the nearest dollar.
=+EX 26-12 Present value index obj. 3✔ Location A, 1.07 MVP Sports Equipment Company is considering an investment in one of two machines.The sewing machine will increase productivity from sewing 150 baseballs per hour to sewing 270 per hour. The contribution margin is $0.48 per baseball. Assume
=+Determine the present value index for each proposal.
=+EX 26-11 Net present value method obj. 3✔a. $288,800,000 Hot on the Spot Doughnuts has computed the net present value for capital expenditure locations A and B, using the net present value method. Relevant data related to the computation are as follows:Location A Location B Total present value
=+b. Determine the net present value of this investment, assuming a 12% minimum rate of return. Use the present value tables provided in the chapter in determining your answer.
=+• The ship has a service life of 10 years, with a residual value of $120,000,000 at the end of 10 years.a. Determine the annual net cash flow from operating the cruise ship.
=+• The fixed expenses for running the ship, other than depreciation, are estimated to be$100,000,000 per year.
=+• The revenue per passenger is expected to be $450 per cruise day.
=+• The variable expenses per passenger are estimated to be $90 per cruise day.
=+EX 26-10 Net present value method—annuity obj. 3✔a. $69,000 Carnival Corporation has recently placed into service some of the largest cruise ships in the world. One of these ships, the Carnival Dream, can hold up to 3,600 passengers and cost $750 million to build. Assume the following
=+c. Should E & T invest in the bulldozer, based on this analysis?
=+b. Determine the net present value of the investment, assuming that the desired rate of return is 10%. Use the table of present values of an annuity of $1 in the chapter.Round to the nearest dollar.
=+EX 26-9 Net present value method—annuity obj. 3a. $24 million 1204 Chapter 26 Capital Investment Analysis E & T Excavation Company is planning an investment of $245,000 for a bulldozer. The bulldozer is expected to operate for 1,500 hours per year for five years. Customers will be charged $130
=+c. Does your analysis support construction of the new hotel?
=+b. Calculate the net present value of the new hotel using the present value of an annuity of $1 table found in Appendix A. Round to the nearest million dollars.
=+EX 26-8 Net present value method obj. 3✔a. 2011, $11,000 Hideaway Hotels is considering the construction of a new hotel for $150 million. The expected life of the hotel is 30 years with no residual value. The hotel is expected to earn revenues of $44 million per year. Total expenses, including
=+c. Is the additional truck a good investment based on your analysis?
=+b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the present value of $1 table appearing in Exhibit 1 of this chapter.
=+EX 26-7 Net present value method obj. 3✔a. NPV ($27,370)Rapid Delivery, Inc. is considering the purchase of an additional delivery vehicle for$38,000 on January 1, 2010. The truck is expected to have a five-year life with an expected residual value of $5,000 at the end of five years. The
=+b. Would management be likely to look with favor on the proposal? Explain.
=+a. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. Use the table of the present value of $1 appearing in Exhibit 1 of this chapter.
=+EX 26-6 Cash payback method obj. 2✔a. Liquid Soap: 3 years The following data are accumulated by Reynolds Company in evaluating the purchase of $104,000 of equipment, having a four-year useful life:Net Income Net Cash Flow Year 1 $38,000 $64,000 Year 2 23,000 49,000 Year 3 11,000 37,000 Year 4
=+b. Why is one product line preferred over the other, even though they both have the same total net cash flows through eight periods?
=+a. Recommend a product offering to Gentle Care Products Company, based on the cash payback period for each product line.
=+Determine the cash payback period for both location proposals.Gentle Care Products Company is considering an investment in one of two new product lines. The investment required for either product line is $500,000. The net cash flows associated with each product are as follows:Year Liquid Soap
=+EX 26-5 Cash payback period obj. 2✔ Location 1:6 years Chapter 26 Capital Investment Analysis 1203 Year 1 $120,000 Year 5 $30,000 Year 2 90,000 Year 6 30,000 Year 3 75,000 Year 7 30,000 Year 4 75,000 Year 8 30,000
=+EX 26-4 Calculate cash flows obj. 2 Year 1: ($102,900)Primera Banco is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $360,000 and each with an 8-year life and expected total net cash flows of $480,000. Location 1 is expected to provide equal
=+Direct labor $ 7.00 Direct materials 23.40 Fixed factory overhead—depreciation 1.60 Variable factory overhead 3.60 ______ Total $35.60 ______ ______ Determine the net cash flows for the first year of the project, Years 2–9, and for the last year of the project.
=+EX 26-3 Average rate of return—new product obj. 2✔ Average annual income, $138,000 Out of Eden, Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 9,000 units at $42 each. The new
=+EX 26-2 Average rate of return—cost savings obj. 2 Pocket Pilot Inc. is considering an investment in new equipment that will be used to manufacture a mobile communications device. The device is expected to generate additional annual sales of 6,000 units at $280 per unit. The equipment has a
=+EX 26-1 Average rate of return obj. 2✔ Testing equipment, 5.5%Master Fab Inc. is considering an investment in equipment that will replace direct labor.The equipment has a cost of $115,000 with a $10,000 residual value and a 10-year life.The equipment will replace one employee who has an average
=+The following data are accumulated by Eco-Labs, Inc. in evaluating two competing capital investment proposals:Testing Equipment Vehicle Amount of investment $80,000 $28,000 Useful life 6 years 8 years Estimated residual value 0 0 Estimated total income over the useful life $13,200 $14,000
=+PE 26-5B Net present value—unequal lives obj. 4 EE 26-5 p. 1194 Chapter 26 Analyzing Transactions 1201 1202 Chapter 26 Capital Investment Analysis Exercises
=+(a) Determine the net present value of Project A over a six-year life with residual value, assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value?
=+PE 26-5A Net present value—unequal lives obj. 4 EE 26-5 p. 1194 Project A requires an original investment of $125,000. The project will yield cash flows of $24,000 per year for nine years. Project B has a calculated net present value of $2,400 over a six-year life. Project A could be sold at
=+(a) Determine the net present value of Project 1 over a four-year life with residual value, assuming a minimum rate of return of 20%. (b) Which project provides the greatest net present value?
=+PE 26-4B Internal rate of return obj. 3 EE 26-4 p. 1192 Project 1 requires an original investment of $10,000. The project will yield cash flows of$3,000 per year for seven years. Project 2 has a calculated net present value of $2,500 over a four-year life. Project 1 could be sold at the end of
=+PE 26-4A Internal rate of return obj. 3 EE 26-4 p. 1192 A project is estimated to cost $56,434 and provide annual net cash flows of $14,000 for nine years. Determine the internal rate of return for this project, using Exhibit 2.
=+PE 26-3B Net present value obj. 3 EE 26-3 p. 1189 A project is estimated to cost $427,779 and provide annual net cash flows of $87,000 for six years. Determine the internal rate of return for this project, using Exhibit 2.
=+determine (1) the net present value of the project and (2) the present value index, rounded to two decimal places.
=+PE 26-2B Cash payback period obj. 2 EE 26-2 p. 1183 A project has estimated annual net cash flows of $9,000 for four years and is estimated to cost $30,050. Assume a minimum acceptable rate of return of 10%. Using Exhibit 2,
=+Determine the cash payback period. Round to one decimal place.
=+PE 26-1B Average rate of return obj. 2 EE 26-1 p. 1182 Practice Exercises A project has estimated annual net cash flows of $8,400. It is estimated to cost $37,800.
=+PE 26-1A Average rate of return obj. 2 EE 26-1 p. 1182 Determine the average rate of return for a project that is estimated to yield total income of $136,000 over five years, has a cost of $380,000, and has a $20,000 residual value.Round to one decimal place.
=+What qualitative and quantitative considerations do you believe Monsanto would have considered in its strategic evaluation of these investments?
=+merely on cost savings but was also justified on the basis of qualitative considerations. Monsanto management viewed the investment as a critical element toward achieving its vision of the future.
=+16. Monsanto Company, a large chemical and fibers company, invested $37 million in state-of-the-art systems to improve process control, laboratory automation, and local area network (LAN) communications. The investment was not justified
=+15. Give an example of a qualitative factor that should be considered in a capital investment analysis related to acquiring automated factory equipment.
=+14. What are the major advantages of leasing a fixed asset rather than purchasing it?
=+13. What method can be used to place two capital investment proposals with unequal useful lives on a comparable basis?
=+12. What provision of the Internal Revenue Code is especially important to consider in analyzing capital investment proposals?
=+11. What are the major disadvantages of the use of the internal rate of return method of analyzing capital investment proposals?
=+10. What are the major disadvantages of the use of the net present value method of analyzing capital investment proposals?
=+9. Two projects have an identical net present value of $9,000. Are both projects equal in desirability?
=+8. A net present value analysis used to evaluate a proposed equipment acquisition indicated a $7,900 net present value. What is the meaning of the $7,900 as it relates to the desirability of the proposal?
=+7. Why would the use of the cash payback period for analyzing the financial performance of theatrical releases from a motion picture production studio be supported over the net present value method?
=+6. Why would the cash payback method understate the attractiveness of a project with a large residual value?
=+5. Your boss has suggested that a one-year payback period is the same as a 100%average rate of return. Do you agree?
=+4. What information does the cash payback period ignore that is included by the net present value method?
=+3. Why would the average rate of return differ from the internal rate of return on the same project?
=+2. Discuss the principal limitations of the cash payback method for evaluating capital investment proposals.
=+1. What are the principal objections to the use of the average rate of return method in evaluating capital investment proposals?
=+5. A project is estimated to generate cash flows of$40,000 per year for 10 years. The cost of the project is $226,009. What is the internal rate of return for this project?A. 8% C. 12%B. 10% D. 14%
=+4. A project that will cost $120,000 is estimated to generate cash flows of $25,000 per year for eight years. What is the net present value of the project, assuming an 11% required rate of return?(Use the present value tables in Appendix A.)A. ($38,214) C. $55,180 B. $8,653 D. $75,000
=+3. The expected period of time that will elapse between the date of a capital investment and the complete recovery of the amount of cash invested is called the:A. average rate of return period.B. cash payback period.C. net present value period.D. internal rate of return period.
=+2. Management is considering a $100,000 investment in a project with a five-year life and no residual value. If the total income from the project is expected to be $60,000 and straight-line depreciation is used, the average rate of return is:A. 12%. C. 60%.B. 24%. D. 75%.
=+1. Methods of evaluating capital investment proposals that ignore present value include:A. average rate of return.B. cash payback.C. both A and B.D. neither A nor B.
=+3. Prepare a summary for the capital investment committee, advising it on the relative merits of the two investments.
=+2. Why is the net present value of the equipment greater than the truck, even though its average rate of return is less?
=+b. The net present value for each investment. Use the present value of $1 table appearing in this chapter.
=+a. The average rate of return for each investment.
=+The capital investment committee of Hopewell Company is currently considering two investments. The estimated income from operations and net cash flows expected from each investment are as follows:Truck Equipment Income from Net Cash Income from Net Cash Year Operations Flow Operations Flow 1 $
=+b. Which of the three products do you believe has the largest markup on variable cost?
=+4. Whether the costs identified in part (3) are fixed costs or variable costs.
=+3. A list of costs that are required to produce and sell the product selected in part (1)as listed in the annual report on SEC Form 10-K.
=+1. A product (or service) description.2. A product price.
=+a. In groups of three, assign each person in your group to one of the Internet sites listed above. For each site, determine the following:
=+SA 25-4 Cost-plus and target costing concepts Internet Project Chapter 25 Differential Analysis and Product Pricing 1177 Many businesses are offering their products and services over the Internet. Some of these companies and their Internet addresses are listed below.Company Name Internet Address
=+b. How might target costing be used to help solve this pricing dilemma?
=+a. If you were Alan, how would you respond to Cam’s solution to the pricing problem?
=+Cam: Don’t worry about it. We’ll just mark our product cost up by 25% and it will all work out. I know we’ll make money at those markups. By the way, what does the estimated product cost look like?Alan: Well, there’s the rub. The product cost looks as if it’s going to come in at around
=+SA 25-3 Accept business at a special price The following conversation took place between Cam Hudson, vice president of marketing, and Alan Attawry, controller of Digi-Comp Computer Company:Cam: I am really excited about our new computer coming out. I think it will be a real market success.Alan:
=+SA 25-2 Decision on accepting additional business If you are not familiar with Priceline.com Inc., go to its Web site. Assume that an individual “names a price” of $70 on Priceline.com for a room in Dallas, Texas, on August 24.Assume that August 24 is a Saturday, with low expected room
=+What are some considerations in accepting or rejecting this order?
=+SA 25-1 Product pricing A manager of Fairways and Greens Sporting Goods Company is considering accepting an order from an overseas customer. This customer has requested an order for 20,000 dozen golf balls at a price of $24 per dozen. The variable cost to manufacture a dozen golf balls is $18 per
=+Would it be ethical for Lucinda to attend the meeting and share the relevant cost data?
=+PR 25-6B Product pricing and profit analysis with bottleneck operations objs. 1, 3✔ 1. High Grade,$30 1176 Chapter 25 Differential Analysis and Product Pricing Special Activities Lucinda Lopez is a cost accountant for Northern Apparel Inc. Marcus Murry, vice president of marketing, has asked
=+3. Assume that management wishes to improve profitability by increasing prices on selected products. At what price would High and Good grades need to be offered in order to produce the same relative profitability as Regular Grade steel?
=+2. Provide an analysis to determine the relative product profitabilities, assuming that the furnace is a bottleneck.
=+Direct materials cost per unit $120 $100 $78 The furnace operation is part of the total process for each of these three products.Thus, for example, 5 of the 15 hours required to process High Grade steel are associated with the furnace.Instructions
=+Each of these products (grades) has high demand in the market, and Gemini is able to sell as much as it can produce of all three. The furnace operation is a bottleneck in the process and is running at 100% of capacity. Gemini wants to improve steel operation profitability. The variable conversion
=+Gemini Steel Company produces three grades of steel: high, good, and regular grade.
=+a. Prepare a differential analysis report of the proposed sale to Vision Systems Inc.
=+6. Assume that as of August 1, 2010, 5,000 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 4,000 additional units are expected to be sold during the remainder of the year at the normal product price determined under
=+5. Comment on any additional considerations that could influence establishing the selling price for flat panel displays.
=+4. Assuming that the variable cost concept is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays.
=+3. Assuming that the product cost concept is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays.
=+PR 25-5B Product pricing using the cost-plus approach concepts;differential analysis report for accepting additional business objs. 1, 2✔ 3.b. Markup percentage, 30%Chapter 25 Differential Analysis and Product Pricing 1175 HD Labs Inc. is currently considering establishing a selling price for
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