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Problem 24-6A (Concluded)
Part 5
While the total cash flows are identical to those in Problem 24-5A, the cash
flows are reversed, with the largest cash flows coming in the early years of
PROBLEM SET B
Problem 24-1B (50 minutes)
Part 1
Part 2
Net Net Cash
Income Flow
Expected annual sales of new product........................$1,150,000 $1,150,000
Expected annual costs of new product
Direct materials........................................................... 300,000 300,000
Direct labor.................................................................. 420,000 420,000
Overhead excluding depr. on new asset................... 210,000 210,000
Depreciation on new asset......................................... 70,000
*Alternatively, annual net cash flow can be computed as:
Net income + Depreciation = $35,000 + $70,000 = $105,000
Financial and Managerial Accounting, 6th Edition
$300,000 - $20,000
4 years
Problem 24-1B (Continued)
Part 3
Part 4
Accounting rate of return = = 21.88%
*Average investment
Asset cost.............................................................$300,000
Part 5
Present Value of Net Cash Flows
Present
Present Value of
Net Cash
Flows
Value of
1 at 7%
Net Cash
Flows
Year 1............................................................... $105,000 0.9346 $ 98,133
Year 2............................................................... 105,000 0.8734 91,707
Year 3............................................................... 105,000 0.8163 85,712
Year 4*............................................................. 125,000 0.7629 95,363
* Year 4’s cash flow includes the $20,000 salvage value.
©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 24
$300,000
$105,000
$35,000
$160,000*
1417
Problem 24-2B (55 minutes)
Part 1
PROJECT A
Net income...............................................................................................$39,900
*Annual depreciation = = $60,000
PROJECT B
Net income...............................................................................................$ 25,900
*Annual depreciation = = $80,000
Part 2
PROJECT A
PROJECT B
Payback Period = = 2.27 years
Financial and Managerial Accounting, 6th Edition
$240,000 - $0
4 years
$240,000 - $0
3 years
$240,000
$105,900
1418
Problem 24-2B (Continued)
Part 3
PROJECT A
*Average investment
Asset cost.................................................. $240,000
Average (Cost/2)........................................ $120,000
PROJECT B
Accounting rate of return = = 21.6%
*Average investment
Asset cost.................................................. $240,000
Average (Cost/2)........................................ $120,000
©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 24
$39,900
$120,000*
$25,900
$120,000*
1419
Problem 24-2B (Continued)
Part 4
PROJECT A
Present Value of Net Cash Flows
Present Present
Value of Value of
Net Cash
Flows
1 at 8%
Annuity
Net Cash
Flows
Years 1-4........................................................ $99,900 3.3121 $330,879
PROJECT B
Present Value of Net Cash Flows
Present Present
Value of Value of
Net Cash
Flows
1 at 8%
Annuity
Net Cash
Flows
Years 1-3........................................................ $105,900 2.5771 $272,915
Part 5
Recommendation to management is to pursue Project A. This is because
although both projects have a positive net present value, Project A has a
Financial and Managerial Accounting, 6th Edition
1420
Problem 24-3B (60 minutes)
Part 1
RESULTS USING STRAIGHT-LINE DEPRECIATION
(a)
Income
Before
Deprec.
(b)
Straight-
Line
Deprec.
(c)
Taxable
Income
(a) - (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) - (d)
Year 1.............................$12,000 $3,000 $ 9,000 $3,600 $8,400
Year 2.............................12,000 6,000 6,000 2,400 9,600
Year 3.............................12,000 6,000 6,000 2,400 9,600
Part 2
RESULTS USING MACRS DEPRECIATION
(a)
Income
Before
Deprec.
(b)
MACRS
Deprec.
(c)
Taxable
Income
(a) - (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) - (d)
Year 1.............................$12,000 $6,000 $ 6,000 $2,400 $ 9,600
Year 2.............................12,000 9,600 2,400 960 11,040
Year 3.............................12,000 5,760 6,240 2,496 9,504
Problem 24-3B (Continued)
Part 3
NET PRESENT VALUE OF ASSET USING STRAIGHT-LINE DEPRECIATION
Present Present
Net Cash Value of Value of Net
Flows 1 at 10% Cash Flows
Year 1............................................................ $ 8,400 0.9091 $ 7,636
Year 2............................................................ 9,600 0.8264 7,933
Year 3............................................................ 9,600 0.7513 7,212
Year 4............................................................ 9,600 0.6830 6,557
Part 4
NET PRESENT VALUE OF ASSET USING MACRS DEPRECIATION
Present Present
Net Cash Value of Value of Net
Flows 1 at 10% Cash Flows
Year 1............................................................ $ 9,600 0.9091 $ 8,727
Year 2............................................................ 11,040 0.8264 9,123
Year 3............................................................ 9,504 0.7513 7,140
Year 4............................................................ 8,582 0.6830 5,862
Part 5
Analysis: The net present value using MACRS depreciation is greater than the
Financial and Managerial Accounting, 6th Edition
Problem 24-4B (45 minutes)
Part 1
Alternative 1: Keep the old freezer and have it repaired
Item Period Cash Flow
Present
Value Factor
at 10%
Present
Value of
Cash Flows
Revenues................................ 1 – 8 $63,000 5.3349 $ 336,099
Operating costs...................... 1 – 8 (55,000) 5.3349 (293,420)
Salvage value......................... 8 3,000 0.4665 1,400
*Note that the cost of the old machine is irrelevant because it is a sunk cost.
Part 2
Alternative 2: Sell the old freezer and buy a new one
Item Period Cash Flow
Present
Value Factor
at 10%
Present
Value of
Cash Flows
Revenues................................ 1 – 8 $68,000 5.3349 $ 362,773
Operating costs...................... 1 – 8 (30,000) 5.3349 (160,047)
Salvage value of new freezer 8 8,000 0.4665 3,732
Salvage value of old freezer. now 5,000 5,000
Part 3
Archer should sell the old freezer and buy a new one. The operating costs
of the old freezer are so much higher than that of the new freezer, even
Problem 24-5B (40 minutes)
Part 1: Payback period
Period Cash flow Cumulative cash flow
0.............................................................................$(800,000) $(800,000)
1.............................................................................300,000 (500,000)
2.............................................................................350,000 (150,000)
$150,000 / $400,000 = 0.4
The payback period is about 2.4 years.
Part 2: Break-even time
Period Cash Flow
Present Value
of 1 at 10%
Present Value
of Cash Flows
Cumulative
Present Value
of Cash Flows
0.................... $(800,000) 1.0000 $(800,000) $(800,000)
1.................... 300,000 0.9091 272,730 (527,270)
$238,030 / $300,520 = 0.8
Part 3: Net present value
From the chart in part 2, we can see that the net present value of the
investment is $369,840.
Part 4
If the company requires a payback period of 2 years for any project, this
project fails that test. However, a case could be made for the project as the
Financial and Managerial Accounting, 6th Edition
