978-0077633059 Chapter 24 Solution Manual Part 4

Unlock access to all the studying documents.

View Full Document

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.

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

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