Chapter 9 – Capital Budgeting
9-27
SOLUTIONS TO C&C CONTINUING CASE
Case 9-30
a.
Cash Flow
Timing
Amount
12% PV
Factor
Present
Value
Sales revenue
Years 1-9
625,000
5.3282
$3,330,125.00
Direct materials
Years 1-9
(500,000)
5.3282
(2,664,100.00)
Direct labor
Years 1-9
(57,600)
5.3282
(306,904.32)
Variable overhead
Years 1-9
(37,500)
5.3282
(199,807.50)
Variable selling
Years 1-9
(12,500)
5.3282
(66,602.50)
Net present value
$ 92,710.68
b. With a net present value of $92,710.68, C&C Sports could spend that
9-28
SOLUTIONS TO CASES
Case 9-31
a. Option 1
Cash Flow
Timing
Amount
Sale of plant
Year 0
$9,000,000
Option 2
Cash Flow
Timing
Amount
Lease revenue
Years 1-4
$2,400,000
Fabric savingsa
Years 1-4
474,000
Sale of plant
Year 4
2,000,000
a 2,370,000 yards × $2/yard × 10% discount
Option 3
Cash Flow
Timing
Amount
Equipment purchase
Year 0
($1,500,000)
Operating incomea
Year 1
1,600,000
Operating income
Year 2
2,500,000
Operating income
Year 3
3,400,000
Operating income
Year 4
700,000
Sale of plant
Year 4
3,000,000
a The jackets have a contribution margin of $9 each ($42 – $33). Annual income is the
Chapter 9 – Capital Budgeting
9-29
b. Option 1
Cash Flow
Timing
Amount
12% PV
Factor
Present
Value
Sale of plant
Year 0
$9,000,000
1.0000
$9,000,000
Option 2
Cash Flow
Timing
Amount
12% PV
Factor
Present
Value
Lease revenue
Years 1-4
$2,400,000
3.0373
$7,289,520
Fabric savings
Years 1-4
474,000
3.0373
1,439,680
Sale of plant
Year 4
2,000,000
.6355
1,271,000
Net present value
$10,000,200
Option 3
Cash Flow
Timing
Amount
12% PV
Factor
Present
Value
Equipment purchase
Year 0
($1,500,000)
1.0000
($1,500,000)
Operating income
Year 1
1,600,000
.8929
1,428,640
Operating income
Year 2
2,500,000
.7972
1,993,000
Operating income
Year 3
3,400,000
.7118
2,420,120
Operating income
Year 4
700,000
.6355
444,850
Sale of plant
Year 4
3,000,000
.6355
1,906,500
Net present value
$6,693,110
in the following equation.
Recall that the definition of internal rate of return is the discount rate
rate of return.
Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
9-30
value.
Chapter 9 – Capital Budgeting
9-31
Case 9-32
is made based on the incorrect information.
b. No, the committee will not be able to discern the full nature of the
improper information without knowing the source of the concerns.
president and CEO.
c. Amy should not make Tony’s requested changes. The IMA’s
Statement of Ethical Professional Practice requires a responsibility to
“provide decision support information and recommendations that are
The IMA’s statement also requires that members “abstain from
both of these requirements.
9-32
Case 9-32, continued
harmed at this point.
As suggested by the IMA Statement on Ethical Professional Practice,