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Exercise 25-26 (20 minutes)
ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine..........................................................................$(115,000)
ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine..........................................................................$(125,000)
The company should replace the machine with alternative machine B. This
will increase net income by $32,000.
Exercise 25-27 (15 minutes)
1. Recovery time computation
2. The advantage of break-even time is that it considers the time value of
3. When (1) the interest rate is very low, 1% for example, and (2) the
PROBLEM SET A
Problem 25-1A (50 minutes)
Part 1
Annual straight-line depreciation = = $115,000
Part 2
Net Net Cash
Income Flow
Expected annual sales of new product..................$1,840,000 $1,840,000
Expected costs of new product
Direct materials..................................................... (480,000) (480,000)
* Alternatively, annual net cash flow can be computed as
Part 3
$480,000 - $20,000
4 years
Problem 25-1A (Continued)
Part 4
Accounting rate of return = = 21.56%
* Average investment
Asset cost......................................................................................$480,000
Final year’s book value................................................................ 20,000
Sum................................................................................................$500,000
Average (Sum /2)..........................................................................$250,000
Part 5
Present Value of Net Cash Flows
Present Present
Net Cash Value of Value of Net
Flows 1 at 7% Cash Flows
Year 1.........................................................$168,900 0.9346 $ 157,854
Year 2.........................................................168,900 0.8734 147,517
Year 3.........................................................168,900 0.8163 137,873
Year 4*........................................................ 188,900 0.7629 144,112
Totals.........................................................$695,600 587,356
Amount invested....................................... (480,000)
Net present value...................................... $ 107,356
* Year 4’s cash flow includes the $20,000 salvage value.
$250,000*
Problem 25-2A (55 minutes)
Part 1
PROJECT Y
Net income....................................................................................... $ 56,000
PROJECT Z
Net income....................................................................................... $ 36,400
Part 2
PROJECT Y
PROJECT Z
4 years
3 years
$350,000
$143,500
$350,000
Problem 25-2A (Continued)
Part 3
PROJECT Y
*Average investment
PROJECT Z
*Average investment
Asset cost...................................................$350,000
Average (Cost/2).........................................$175,000
$56,000
$175,000*
$36,400
$175,000*
Problem 25-2A (Continued)
Part 4
PROJECT Y
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..................................................... $143,500 3.3121 $475,286
PROJECT Z
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..................................................... $153,067 2.5771 $394,469
Part 5
Recommendation to management is to pursue Project Y. This is because
Project Y has a positive net present value, which means that we expect it to
Problem 25-3A (60 minutes)
Part 1
RESULTS USING STRAIGHT-LINE DEPRECIATION
(a)
Income
Before
Deprec.
(b)
Straight-Li
ne Deprec.
(c)
Taxable
Income
(a) - (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) - (d)
Year 1............................$66,000 $ 9,000 $57,000 $22,800 $43,200
Year 2............................66,000 18,000 48,000 19,200 46,800
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............................$66,000 $18,000 $48,000 $19,200 $46,800
Year 2............................66,000 28,800 37,200 14,880 51,120
Problem 25-3A (Continued)
Part 3
NET PRESENT VALUE OF ASSET USING STRAIGHT-LINE DEPRECIATION
Present
Present Value of
Net Cash
Flows
Value of
1 at 10%
Net Cash
Flows
Year 1......................................................... $ 43,200 0.9091 $ 39,273
Year 2......................................................... 46,800 0.8264 38,676
Problem 25-4A (45 minutes)
JONES PRODUCTS
COMPARATIVE INCOME STATEMENTS
(1) (2) (3)
Normal New
Volume Business Combined
Sales..........................................................$2,400,000 $260,000 $2,660,000
Costs and expenses
Direct materials.......................................576,000 72,000 648,000
Supporting computations
Normal direct materials cost......................................... $576,000
Units of output................................................................ 400,000
Cost per unit................................................................... $ 1.44
New business variable overhead cost.......................... $ 30,000
Problem 25-5A (55 minutes)
Part 1
Product G Product B
Selling price per unit.................................................... $120 $160
Part 2
Sales Mix Recommendation. To the extent allowed by production and
Contribution Margin at Recommended Sales Mix
Contribution margin = 440 units x $80 per unit = $35,200 per month
0.4 hrs. per unit
