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Chapter 25 - Capital Budgeting and Managerial Decisions
Problem 25-6B (Continued)
Part 2
ESME COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department Z
Sales...................................................................................................... $700,000
Cost of goods sold............................................................................... 461,300
Gross profit from sales........................................................................ 238,700
Operating expenses
Advertising.......................................................................................... 27,000
Store supplies used........................................................................... 5,600
Depreciation of store equipment...................................................... 21,000
* Office salary reassignment
Total Sales Office
Salaries Salaries Salary
Sales clerks........................................................................$46,800 $46,800
Office clerk.........................................................................26,000 $26,000
Part 3
ESME COMPANY
Reconciliation of Combined Income with Forecasted Income
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Education.
Chapter 25 - Capital Budgeting and Managerial Decisions
Combined net income ............................................................................$ 48,600
Less Dept. Z's lost sales........................................................................(175,000)
ANALYSIS
Department Z's avoidable expenses of $181,960 are $6,960 greater than its
revenues of $175,000. This means the company's annual net income would
be $6,960 higher from eliminating Department Z. This analysis suggests
management should probably go ahead with the elimination of the
department as planned.
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
Materials, labor & overhead..........................................(200,000) (200,000)
Depreciation*.................................................................. (50,000)
Selling and administrative............................................. (37,500) (37,500)
Pretax income................................................................. 87,500
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Chapter 25 - Capital Budgeting and Managerial Decisions
2. Accounting rate of return = = 40.8%
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
$300,000
$111,250
$61,250
$150,000*
Chapter 25 - Capital Budgeting and Managerial Decisions
Reporting in Action — BTN 25-1
1. The internal rate of return (given here as 10%) is the rate which yields a
net present value of zero for an investment. The annuity factor for 10
periods and a discount rate of 10% is 6.1446. This means we can solve
2. Answer depends on the information obtained.
Comparative Analysis — BTN 25-2
1. Answer depends on the newspaper selected and its price for advertising
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
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3.
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
1. Present value of $100 to be received in 10 years assuming a 12%
discount rate is approximately $32. This is computed as $100 x 0.322.
2. We need to be concerned about any project with expected long-term
cash inflows. This is especially the case if the larger cash inflows are
expected later rather than sooner in the asset’s life. This concern is tied
to the riskiness of long-term predictions and the likely biases of
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Chapter 25 - Capital Budgeting and Managerial Decisions
unit
Strengths Easy to
understand
Easy to
understand
Reflects
time value
of money
over
project’s life
Reflects
time value
of money
dissimilar
projects
Limitations Ignores time
value of money
payback period
Ignores time
value of
rates over life
of project
Difficult to
compare
Ignores
varying
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
more labor at lower prices than they otherwise could. This enables
these companies to lower their costs and generate higher profits.
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Chapter 25 - Capital Budgeting and Managerial Decisions
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.
Improves employee morale.
Safety concerns with the older system--both employees and customers.
Newer system is more environmentally responsible.
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
Easy to
Reflects
Reflects
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Chapter 25 - Capital Budgeting and Managerial Decisions
Disadvantages Ignores time
Ignores time
Difficult to
Ignores
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
2. In most cases the students will find it more costly to lease an
automobile than to purchase it outright. Also, getting the salesperson
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