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Problem 24-2A (55 minutes)
Part 1
PROJECT Y
Net income ..........................................................................................
$ 56,000
Depreciation expense* ......................................................................
87,500
Net cash flow ......................................................................................
$143,500
PROJECT Z
Net income ..........................................................................................
$ 36,400
Depreciation expense* ......................................................................
116,667
Net cash flow ......................................................................................
$153,067
Part 2
PROJECT Y
PROJECT Z
4 years
Problem 24-2A (Continued)
Part 3
PROJECT Y
Financial & Managerial Accounting, 5th Edition
1356
Problem 24-2A (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
Amount invested .........................................
(350,000)
Net present value ........................................
$125,286
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
Amount invested .........................................
(350,000)
Net present value ........................................
$ 44,469
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 24-3A (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 ............................
$66,000
$ 9,000
$57,000
$22,800
$43,200
Year 2 ............................
66,000
18,000
48,000
19,200
46,800
Year 3 ............................
66,000
18,000
48,000
19,200
46,800
Year 4 ............................
66,000
18,000
48,000
19,200
46,800
Year 5 ............................
66,000
18,000
48,000
19,200
46,800
Year 6 ............................
66,000
9,000
57,000
22,800
43,200
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
Year 3 ............................
66,000
17,280
48,720
19,488
46,512
Year 4 ............................
66,000
10,368
55,632
22,253
43,747
Year 5 ............................
66,000
10,368
55,632
22,253
43,747
Year 6 ............................
66,000
5,184
60,816
24,326
41,674
Financial & Managerial Accounting, 5th Edition
1358
Problem 24-3A (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
Year 3 ..........................................................
46,800
0.7513
35,161
Year 4 ..........................................................
46,800
0.6830
31,964
Year 5 ..........................................................
46,800
0.6209
29,058
Year 6 ..........................................................
43,200
0.5645
24,386
Totals ..........................................................
$273,600
198,518
Amount invested ........................................
(90,000)
Net present value .......................................
$108,518
Part 4
NET PRESENT VALUE OF ASSET USING MACRS DEPRECIATION
Present
Present
Value of
Net Cash
Flows
Value of
1 at 10%
Net Cash
Flows
Year 1 ..........................................................
$ 46,800
0.9091
$ 42,546
Year 2 ..........................................................
51,120
0.8264
42,246
Year 3 ..........................................................
46,512
0.7513
34,944
Year 4 ..........................................................
43,747
0.6830
29,879
Year 5 ..........................................................
43,747
0.6209
27,163
Year 6 ..........................................................
41,674
0.5645
23,525
Totals ..........................................................
$273,600
200,303
Amount invested ........................................
(90,000)
Net present value .......................................
$110,303
Part 5
Analysis: The net present value using MACRS depreciation is greater than the
net present value using straight-line depreciation because the cash flows are
Problem 24-4A (45 minutes)
Part 1
Alternative 1: Keep the old machine and have it overhauled
Item
Period
Cash
Flow
Present
Value Factor
at 10%
Present
Value of
Cash Flows
Revenues ................................
1 – 5
$95,000
3.7908
$360,126
Operating costs ......................
1 – 5
(42,000)
3.7908
(159,214)
Salvage value ..........................
5
15,000
0.6209
9,314
Total .........................................
210,226
Cost of overhaul .....................
(150,000)
Net present value ...................
$ 60,226
Part 2
Alternative 2: Sell the old machine and buy a new one
Item
Period
Cash
Flow
Present
Value Factor
at 10%
Present
Value of
Cash Flows
Revenues ..........................................
1 – 5
$100,000
3.7908
$379,080
Operating costs ................................
1 – 5
(32,000)
3.7908
(121,306)
Salvage value of new machine .........
5
20,000
0.6209
12,418
Salvage value of old machine ...........
now
29,000
29,000
Total ...................................................
299,192
Cost of new machine .......................
(300,000)
Net present value .............................
$ (808)
Part 3
Financial & Managerial Accounting, 5th Edition
1360
Problem 24-5A (40 minutes)
Part 1: Payback period
Period
Cash flow
Cumulative cash flow
0 .............................................................................
$(250,000)
$(250,000)
1 .............................................................................
47,000
(203,000)
2 .............................................................................
52,000
(151,000)
3 .............................................................................
75,000
(76,000)
4 .............................................................................
94,000
18,000
5 .............................................................................
125,000
143,000
$76,000 / $94,000 = 0.8 (rounded)
The payback period is about 3.8 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 ...................
$(250,000)
1.0000
$(250,000)
$(250,000)
1 ...................
47,000
0.9091
42,728
(207,272)
2 ...................
52,000
0.8264
42,973
(164,299)
3 ...................
75,000
0.7513
56,348
(107,951)
4 ...................
94,000
0.6830
64,202
(43,749)
5 ...................
125,000
0.6209
77,613
33,864
$43,749 / $77,613 = 0.6 (rounded)
The break-even time is about 4.6 years.
Part 3: Net present value
Part 4
If the company requires a payback period of 3 years for any project, this
project fails that test. However, a case could be made for the project as the
Problem 24-6A (40 minutes)
Part 1: Payback period
Period
Cash flow
Cumulative cash flow
0 .............................................................................
$(250,000)
$(250,000)
1 .............................................................................
125,000
(125,000)
2 .............................................................................
94,000
(31,000)
3 .............................................................................
75,000
44,000
4 .............................................................................
52,000
96,000
5 .............................................................................
47,000
143,000
$31,000 / $75,000 = 0.4 (rounded)
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 ...................
$(250,000)
1.0000
$(250,000)
$(250,000)
1 ...................
125,000
0.9091
113,638
(136,362)
2 ...................
94,000
0.8264
77,682
(58,680)
3 ...................
75,000
0.7513
56,348
(2,332)
4 ...................
52,000
0.6830
35,516
33,184
5 ...................
47,000
0.6209
29,182
62,366
$2,332 / $35,516 = 0.1 (rounded)
The break-even time is about 3.1 years.
Part 3: Net present value
Part 4
If the company requires a payback period of 3 years for any project, this
Financial & Managerial Accounting, 5th Edition
1362
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
Selling and administrative expenses ........................
100,000
100,000
Income before taxes ......................................................
50,000
Income taxes (30%) .......................................................
15,000
15,000
Net income ......................................................................
$ 35,000
Net cash flow* ................................................................
$ 105,000
*Alternatively, annual net cash flow can be computed as:
Net income + Depreciation = $35,000 + $70,000 = $105,000
4 years
Financial & Managerial Accounting, 5th Edition
1364
Problem 24-1B (Continued)
Part 3
Part 4
*Average investment
Asset cost ............................................................
$300,000
Final year’s book value .......................................
20,000
Sum .......................................................................
$320,000
Average (Sum /2) .................................................
$160,000
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
Totals ..............................................................
$440,000
$ 370,915
Amount invested ...........................................
(300,000)
Net present value ..........................................
$ 70,915
* Year 4’s cash flow includes the $20,000 salvage value.
Problem 24-2B (55 minutes)
Part 1
PROJECT A
Net income ...............................................................................................
$39,900
Depreciation expense* ...........................................................................
60,000
Net cash flow ...........................................................................................
$99,900
PROJECT B
Net income ...............................................................................................
$ 25,900
Depreciation expense* ...........................................................................
80,000
Net cash flow ...........................................................................................
$105,900
Part 2
PROJECT A
Payback Period = = 2.4 years
$240,000
$ 99,900
Problem 24-2B (Continued)
Part 3
PROJECT A
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
Amount invested ..........................................
(240,000)
Net present value .........................................
$ 90,879
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
Amount invested ..........................................
(240,000)
Net present value .........................................
$ 32,915
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 & Managerial Accounting, 5th Edition
1368
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
Year 4 ............................
12,000
6,000
6,000
2,400
9,600
Year 5 ............................
12,000
6,000
6,000
2,400
9,600
Year 6 ............................
12,000
3,000
9,000
3,600
8,400
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
Year 4 ............................
12,000
3,456
8,544
3,418
8,582
Year 5 ............................
12,000
3,456
8,544
3,418
8,582
Year 6 ............................
12,000
1,728
10,272
4,109
7,891
