978-0134474021 Chapter 20 Solutions Manual Part 2

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20.4 The controller of Tim’s Travel (TT) is deciding between upgrading the company’s existing

computer system or replacing it with a new one. Upgrading the four-year-old system will cost

$97,500 and extend its useful life for another seven years. The book value is $19,500, although

it would sell for $24,000. Upgrading will eliminate one employee at a salary of $19,400; the

new computer will eliminate two employees. Additional annual operating costs are estimated

at $15,950 per year. Upgrading is expected to increase profits 3.5% above last year’s level of

$553,000.

The BetaTech Company has quoted a price of $224,800 for a new computer with a useful life

of seven years. Annual operating costs are estimated to be $14,260. The average processing

speed of the new computer is 12% faster than that of other systems in its price range, which

would increase TT’s profits by 4.5%.

Tim’s present tax rate is 35%, and the cost of financing (minimum desired rate of return) is 11%.

After seven years, the salvage value, net of tax, would be $12,000 for the new computer and

$7,500 for the present system. For tax purposes, computers are depreciated over five full years

(six calendar years; a half year the first and last years), and the depreciation percentages are

as follows:

Year Percent (%)

1 20.00

2 32.00

3 19.20

4 11.52

5 11.52

6 5.76

Using a spreadsheet package, prepare an economic feasibility analysis to determine if Tim’s

Travel should rehabilitate the old system or purchase the new computer. As part of the

analysis, compute the after-tax cash flows for years 1 through 7 and the payback, NPV, and

IRR of each alternative.

As shown below, Tim’s Travel would be better off economically to purchase a new system rather

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20.5. Rossco is considering the purchase of a new computer with the following estimated costs:

initial systems design, $54,000; hardware, $74,000; software, $35,000, one-time initial

training, $11,000; system installation, $20,000; and file conversion, $12,000. A net reduction of

three employees is expected, with average yearly salaries of $40,000. The system will decrease

average yearly inventory by $150,000. Annual operating costs will be $30,000 per year.

The expected life of the machine is four years, with an estimated salvage value of zero. The

effective tax rate is 40%. All computer purchase costs will be depreciated using the

straight-line method over its four-year life. Rossco can invest money made available from the

reduction in inventory at its cost of capital of 11%. All cash flows, except for the initial

investment and start-up costs, are at the end of the year. Assume 365 days in a year.

Use a spreadsheet to perform a feasibility analysis to determine if Rossco should purchase the

computer. Compute the following as part of the analysis: initial investment, after-tax cash

flows for years 1 through 4, payback period, net present value, and internal rate of return.

Rossco should proceed with the purchase. The internal rate of return of 23.23% is higher than the

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20.6 A recently completed feasibility study to upgrade XYZ’s computer system shows the following

benefits. Compensation figures in parentheses include wages, benefits, and payroll taxes.

1. Production

a. Market forecasts, which take two $400 person-days a month, will be more accurate

2. Engineering

a. Computerized updating of bills of material and operations lists will save 40% of an

3. Sales. Improved reporting will enable the five-person sales staff to react more quickly to

4. Marketing. Revised reports and an improved forecasting system will increase net income

5. Accounting

a. Quickly determining new product costs will save 30% of the accountant’s ($100,000)

As a board member, which of the benefits can you defend as relevant to the system’s cost

justification? Calculate how much XYZ will save with the new system.

Adapted from the SMAC Exam

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Acceptable Items: Cost Savings

1 (a) More accurate market forecasts with software

making the calculations reduces costs

$ 9,600 ($400/day * 2 days/month * 12 months

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20.7 The following list presents specific project activities and their scheduled starting and completion

times:

Activity Starting Date Ending Date

A Jan. 5 Feb. 9

B Jan. 5 Jan. 19

a. Using a format similar to that in Figure 18-3, prepare a Gantt chart for this project. Assume

that each activity starts on a Monday and ends on a Friday.

Project Planning Chart

b. Assume today is February 16 and activities A and B have been completed, C is half

completed, F is a quarter completed, and the other activities have not yet commenced.

Record this information on your Gantt chart. Is the project behind schedule, on

schedule, or ahead of schedule? Explain.

Partially Completed Gantt chart

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Once the activity bars have been filled in to reflect the activities that have been fully or partially

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c. Discuss the relative merits of the Gantt chart and PERT as project planning and control

tools.

Advantages of PERT:

Indicates which activities are critical as well as how much slack is available in the

Advantages of GANTT Charts:

It is easier to prepare than a PERT chart.

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