BYP 12-3 (Continued)
value is calculated as follows:
Cash
Flows
X
9% Discount
Factor
=
Present
Value
Present value of net annual cash flows
Present value of salvage value
Capital investment
Net present value
c$ 460,000c
2,000,000
X
X
8.06069
.27454
=
=
$3,707,917
549,080
$4,256,997
(4,000,000)
$ 256,997
cNet annual cash flows = $4,000,000 – $3,540,000
Using the original estimates, but the lower discount rate, the net present
(d) If Bob is correct in either his belief that the estimated net annual cash
flows are too conservative, or that the discount rate being used is too
BYP 12-4 REAL-WORLD FOCUS
This disclosure, provided by the company’s management in its annual
report, suggests that the scroll compressor project has not achieved the
goals originally hoped for. In deciding whether to continue with this project,
management should undertake a post-audit. This would involve collecting
Answers to this problem will vary depending on the year chosen by the
student. The following solution is provided for the year ended August 1,
2010.
(a) The statement of cash flows indicates that capital expenditures
(b) The statement of cash flows indicates $400 million of long-term
(c) The internal rate of return on these capital expenditures is approximately
Note that the factor for n = 10, i = 6% is 7.36009. (Table A-4, n = 10, i = 6%)
BYP 12-6 COMMUNICATION ACTIVITY
To: Maria Fierro, Supervisor
From: , Assistant Chief Accountant
Subject: Recommendation for New Hoist
The quantitative analysis pertaining to this management decision is as
follows:
Cost of hoist: $35,000 + $3,300 + $700 = $39,000.
Net annual cash flows:
Number of extra mufflers 5 X 52 weeks (a) 260
These data indicate that the cash payback period is 78% of the new asset’s
useful life. This would generally be considered fairly high, indicating a less
desirable project.
The data also show a 8.3% annual rate of return. This is a low return and it
The quantitative data do not include any technique that considers the time
I believe that the information I have presented would indicate that, based
BYP 12-7 ETHICS CASE
(a) The stakeholders are:
Yourself.
Your spouse and children.
Employees of NuComp Company.
(b) The ethical issue is:
An employee’s personal interests and those of his co-workers
(c) The student should recognize a conflict of interest. The company
You should rise above the conflict of interest and perform an objective
BYP 12-8 ALL ABOUT YOU
Results will vary depending on article selected by the student. Some
common signals identified in articles are: bills more than two months in
BYP 12-9 YOUR COSTS AND BENEFITS
(a) The total cost of the installed solar panels was $80,000. The “out–of–
(b) Using the total annual electricity bill of $5,000 mentioned in the story, the
(c) The net present value of the project using the total cost is:
Cash
Flows
X
6% Discount
Factor
=
Present
Value
Present value of net annual
cash flows
$5,000
X
11.46992
=
$ 57,350
Capital investment
(80,000)
Net present value
$(22,650)
Cash
Flows
X
6% Discount
Factor
=
Present
Value
Present value of net annual
cash flows
$5,000
X
11.46992
=
$57,350
Capital investment
(27,000)
Net present value
$30,350
of the time the article was written.