SERIAL PROBLEM — SP 25
Serial Problem, Business Solutions (50 minutes)
COMPUTING NET CASH FLOWS FROM NET INCOME
Net income Cash flows
Sales……………………………………………………………………$375,000 $375,000
1. Payback period = = 2.7 years
2. Accounting rate of return = = 40.8%
*Average investment
Cost………………………………………………$300,000
Salvage………………………………………… 0
Sum………………………………………………$300,000
Average (Sum/2)……………………………$150,000
$300,000
$111,250
$61,250
$150,000*
Reporting in Action — BTN 25-1
1. The internal rate of return (given here as 10%) is the rate which yields a
For Apple’s initial investment of $2.12 billion to provide an internal rate
2. Answer depends on the information obtained.
Comparative Analysis — BTN 25-2
2. If we assume that the average product of Apple and Google sells for
around $400, then the contribution margin per product is about $80
(using the 20% stated assumption in the problem). This would mean
that the company would need to sell at least 100 additional products
3.
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
Primary points for discussion of the importance of effective
advertising:
Ethics Challenge — BTN 25-3
2. We need to be concerned about any project with expected long-term
The answer to part 1 shows that long-term cash inflows are small when
Communicating in Practice — BTN 25-4
Instructor note: Answers will vary, but responses should address the questions
asked and include some discussion of the following points for each method.
Payback Period Accounting Rate
of Return
Net Present
Value
Internal Rate
of Return
Measurement
basis
Cash flows Accrual income Cash flows
Profitability
Cash flows
Profitability
of project
Taking It to the Net — BTN 25-5
1. According to this website, business process outsourcing (BPO) is the
process of hiring another company to handle business activities for you.
2. Business processes typically outsourced payroll, employee benefits
3. Companies who outsource their business processes are able to recruit
Teamwork in Action — BTN 25-6
Instructor note: Answers will vary across students. Yet the examples, while
different, should capture similar qualitative factors.
SAMPLE SOLUTION
Project: Investment in an improved baggage handling system.
The new, improved baggage handling system is expected to increase both
customer satisfaction and likelihood of repeat business.
Qualitative Factors
Competition has a new, more efficient and effective system.
Entrepreneurial Decision — BTN 25-7
1. Limor could use payback period, accounting rate of return, net present
2. For these tools, Limor needs estimates of how much the manufacturing
facility and warehouse will cost, both upfront and for recurring (e.g.
3.
Payback Period Accounting Rate
of Return
Net Present
Value
Internal Rate
of Return
Advantages Easy to
understand
Easy to
understand
Reflects
time value
of money
Reflects
time value
of money
Disadvantages Ignores time
value of money
Ignores time
value of
money
Difficult to
compare
dissimilar
projects
Ignores
varying
risk levels
over life of
Hitting the Road — BTN 25-8
1. Answers will vary among students.
Sample Example
For illustrative purposes, one sample solution would appear as follows:
Lease terms—$400 per month for 35 months; plus $10,000 final
payment at the end of 35 months; 12% annual interest rate.
To compute the present value of the lease payments
Purchase terms—$16,500
2. In most cases the students will find it more costly to lease an automobile than to purchase
it outright. Also, getting the salesperson to negotiate the outright purchase of the
automobile is sometimes challenging once you’ve shown interest in leasing. This is because
of the usually higher profit margin associated with leasing.
Global Decision — BTN 25-9
There are probably several reasons why Samsung would take on this project.
One reason is that Samsung probably feels a responsibility to society to be a
good citizen. This also has the benefit that some customers may look upon the
company more favorably and be more inclined to buy Samsung’s products.