Problem 13-30 (continued)
4. a. Several intangible benefits are usually associated with investments in
automated equipment. These intangible benefits include:
◼ Greater throughput.
◼ Greater variety of products.
Case 13-31 (continued)
3. The internal controls Fore Corporation could implement to prevent
unethical behavior include:
approval of all formal capital expenditure proposals by the Controller
and/or the Board of Directors.
Problem 13-32 (continued)
2. The net present value of the proposed investment would be:
Now
1
2
3
4
5
6
Cost of equipment …
$(315,000)
Working capital ……..
(60,000)
Yearly net cash
flows …………………..
$(85,000)
$35,000
$125,000
$235,000
$235,000
$235,000
Release of working
capital …………………
60,000
Salvage value of
equipment ……………
_______
______
______
______
______
______
15,000
Total cash flows (a) .
$(375,000)
$(85,000)
$35,000
$125,000
$235,000
$235,000
$310,000
Discount factor
(14%) (b) ……………
1.000
0.877
0.769
0.675
0.592
0.519
0.456
Present value
(a)×(b) ……………….
$(375,000)
$(74,545)
$26,915
$84,375
$139,120
$121,965
$141,360
Net present value ….
$64,190
© The McGraw-Hill Companies, Inc., 2015
56 Managerial Accounting, 15th Edition
Exercise 13A-1 (10 minutes)
Amount of Cash Flows
18%
Present Value of Cash
Flows
Year
Investment
A
Investment
B
Factor
Investment
A
Investment
B
1
$3,000
$12,000
0.847
$ 2,541
$10,164
2
$6,000
$9,000
0.718
4,308
6,462
3
$9,000
$6,000
0.609
5,481
3,654
4
$12,000
$3,000
0.516
6,192
1,548
$18,522
$21,828
Investment project B is best.
Exercise 13A-2 (10 minutes)
The present value of the first option is $150,000, since the entire amount
would be received immediately.
The present value of the second option is:
Annual annuity: $14,000 × 7.469 (Exhibit 13B-2) ……..
$104,566
Lump-sum payment: $60,000 × 0.104 (Exhibit 13B-1)
6,240
Total present value …………………………………………….
$110,806
Thus, Julie should accept the first option, which has a much higher present
value.
On the surface, the second option appears to be a better choice because it
promises a total cash inflow of $340,000 over the 20-year period ($14,000
× 20 = $280,000; $280,000 + $60,000 = $340,000), whereas the first
option promises a cash inflow of only $150,000. However, the cash inflows
under the second option are spread out over 20 years, causing the present
value to be far less.
Exercise 13A-4 (10 minutes)