SHOW ALL WORK AND COMPUTATIONS. STATE YOUR CONCLUSION

CLEARLY. NO CREDIT WILL BE GIVEN IF NO WORK IS SHOWN.

Questions 1 %u2013 5 are worth 2 pts. each. (Total 10 pts)

1. Suppose you have a winning sweepstakes ticket and you are given the option of accepting $250,000 three years from now or taking the present value of the $250,000 now. The sponsor of the prize uses a 7% discount rate. If you elect to receive the present value of the prize now what amount will you receive now?

2. The Norman Company has just signed a capital lease contract for equipment that requires annual lease payments of $5,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 14%. What is the present value of the lease payments?

3. Ann Terrell invests $14,973.80 now for a series of $2,000 annual returns (payments) beginning one year from now. Ann will earn 9% on the initial investment. How many annual payments will Ann receive?

4. You are the beneficiary of a trust fund established by your aunt. Your aunt has given you two options to choose from with respect to how you wish to receive the money. You can elect to receive either $8,000 per year for the next nine years or $6,000 per year for the next 15 years. You can invest the proceeds at an annual rate of 12%. If the trust fund monies will be received at the end of each year, which method should you choose in order to maximize your income from the trust? SHOW ALL COMPUTATIONS! State your conclusion clearly.

5. Alicia wants to have $20,000 in her granddaughter%u2019s savings account at the end of 20 years. How much must she deposit into this account each year if the account earns 6% interest compounded annually? (HINT: You will need the Future Value tables. You can google them on the internet or see me for a copy.)

EXTRA CREDIT (Total 13 pts possible). (Questions 6 %u2013 9 are worth 2 pts each):

6. Wet and Wild Water Company drills small commercial oil wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below:

Investment in new drill $160,000

Working capital needed 32,000

Operations (per year for 4 yrs):

Cash receipts $160,000

Cash expenditures 88,000

Salvage value of oil drill 16,000

Discount rate 20%

What is the net present value of the investment? Assume there is no recovery of working capital at the end of the investment life.

7. The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is:

Variable production cost: $4.60

Fixed production cost: 1.80

Variable selling expense: 1.00

If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. If Immanuel accepts this special order, what will be the change in the monthly net operating income?

8. Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs that would be allocated to this part amount to $300,000 per year.

If the company decides to make the component, the overall annual net operating income that would result from making the component, rather than buying it, would be:

9. The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam.

Sales (6,500 Tams at $130 each) $845,000

Variable cost of sales 390,000

Variable distribution costs 65,000

Fixed advertising expense 275,000

Salary of product line manager 25,000

Fixed manufacturing overhead 145,000

Net loss ($55,000)

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Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturing costs of the company.

Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines. If the company discontinues the Tam product line, the change in annual operating income (or loss) should be:

EXTRA CREDIT (Worth 5 pts):

10. Crane Company makes four products in a single facility. Data concerning these products appear below:

Product

A B C D

Selling price per unit $35.30 $30.20 $20.80 $26.00

Variable manuf. cost per unit $16.50 $15.80 $7.90 $8.50

Variable selling cost per unit $3.80 $1.60 $1.90 $3.30

Milling machine minutes per unit 3.30 1.70 2.10 2.50

Monthly demand in units 4,000 1,000 3,000 1,000

The milling machines are potentially the constraint in the production facility. A total of 22,600 minutes are available per month on these machines. Which product makes the MOST profitable use of the milling machines?

Determine the order of production and the amount of each product to be produced given the time available and the demand for each product.

What is the total contribution margin that can be earned given the order of production & demand?