Gabriel Griego
1.
(Ignore income taxes in this problem.) A newly developed device is being considered by
Fairway Foods for use in processing and canning peaches. The device, which is available only
on a royalty basis, is reported to be a great labor saver. Fairway’s production manager has
gathered the following data:
The new device must be obtained through a licensing arrangement with the developer. The
license period lasts for only 8 years. Fairway Foods’ required rate of return is 10%.
Required:
By use of the incremental cost approach, compute the net present value of the proposed
licensing of the new device. Show all computations in good form. Should the company enter
into a licensing arrangement to use the new device?
(40,000-5,000)+(0-20,000) = 15,000
NPV approach = 100,000 + 15,000/(1+10%)^1 + 15,000/(1+10%)^2 + 15,000/(1+10%)^3 +
15,000/(1+10%)^4 + 15,000/(1+10%)^5 + 15,000/(1+10%)^6 + 15,000/(1+10%)^7 +
15,000/(1+10%)^8 = $ -19,976.
Since the NPV is negative the company shouldn’t enter into a licensing arrangement.
2. Capp Corporation is a wholesaler of industrial goods. Data regarding the store’s operations follow:
ο Sales are budgeted at $350,000 for November, $360,000 for December, and $340,000 for January.
ο Collections are expected to be 60% in the month of sale, 39% in the month following the sale, and
1% uncollectible.
ο The cost of goods sold is 75% of sales.
ο The company desires an ending merchandise inventory equal to 40% of the following month’s cost
of goods sold. Payment for merchandise is made in the month following the purchase.
ο The November beginning balance in the accounts receivable account is $70,000.
ο The November beginning balance in the accounts payable account is $257,000.
Required:
a. Prepare a Schedule of Expected Cash Collections for November and December.
b. Prepare a Merchandise Purchases Budget for November and December.
A.)
Capp Corporation
Schedule of Expected Cash Collections
November
December
Sales
$350,000
$360,000
Accounts Receivable
November Sales
$70,000
December Sales
$210,000
$136,500
Total cash collections
$216,000
$280,000
$352,000
November
December
Cost of Goods sold
$262,500
$270,00
108,000
102,000
Less
105,000
108,000
Required Purchases
$265,500
$264,000
