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Solutions Manual, Chapter 8 21
Exercise 8-12 (10 minutes)
Note: All present value factors in the computation below have been taken
Amount of the investment ............................
$104,950
Less present value of Year 1 and Year 2
cash inflows:
Year 1: $30,000 × 0.893 ...........................
$26,790
Year 2: $40,000 × 0.797 ...........................
31,880
58,670
Present value of Year 3 cash inflow ...............
$ 46,280
Therefore, the expected cash inflow for Year 3 is:
22 Managerial Accounting for Managers, 4th Edition
Exercise 8-13 (15 minutes)
2. The simple rate of return would be computed as follows:
Annual cost savings ...............................................
$90,000
Less annual depreciation ($432,000 ÷ 12 years) ......
36,000
Annual incremental net operating income ...............
$54,000
Annual incremental net operating income
Simple rate of return = Initial investment
$54, 000
= = 12.5%
$432,000
No, the equipment would not be purchased because its 12.5% rate of
return is less than the company’s 14% required rate of return.
Solutions Manual, Chapter 8 23
Exercise 8-14 (10 minutes)
Project X:
Now
1
2
3
4
5
6
Initial investment ..............
$(35,000)
Annual cash inflows ..........
________
$12,000
$12,000
$12,000
$12,000
$12,000
$12,000
Total cash flows (a) ..........
$(35,000)
$12,000
$12,000
$12,000
$12,000
$12,000
$12,000
Discount factor (18%) (b) .
1.000
0.847
0.718
0.609
0.516
0.437
0.370
Present value (a)×(b) .......
$(35,000)
$10,164
$8,616
$7,308
$6,192
$5,244
$4,440
Net present value .............
$6,964
Project Y:
Now
1
2
3
4
5
6
Initial investment ..............
$(35,000)
Single cash inflow .............
_______
______
______
______
______
______
90,000
Total cash flows (a) ..........
$(35,000)
$0
$0
$0
$0
$0
$90,000
Discount factor (18%) (b) .
1.000
0.847
0.718
0.609
0.516
0.437
0.370
Present value (a)×(b) .......
$(35,000)
$0
$0
$0
$0
$0
$33,300
Net present value .............
$(1,700)
negative net present value.
Note: The annual cash inflows related to Project X can also be discounted to their present value using
the appropriate discount factor from Exhibit 8B-2 in Appendix 8B.
24 Managerial Accounting for Managers, 4th Edition
2. The machine’s net present value is computed as follows:
Now
1
2
3
4
5
Purchase of machine ...
$(137,280)
Annual cash inflows ....
__________
$40,000
$40,000
$40,000
$40,000
$40,000
Total cash flows (a) ....
$(137,280)
$40,000
$40,000
$40,000
$40,000
$40,000
Discount factor (b) ......
1.000
0.877
0.769
0.675
0.592
0.519
Present value (a)×(b) .
$(137,280)
$35,080
$30,760
$27,000
$23,680
$20,760
Net present value .......
$0
zero net present value.
Solutions Manual, Chapter 8 25
26 Managerial Accounting for Managers, 4th Edition
Problem 8-16 (20 minutes)
Now
1
2
3
4
Purchase of equipment ..........
$(275,000)
Working capital investment ...
(100,000)
Annual net cash receipts .......
$120,000
$120,000
$120,000
$120,000
Road construction .................
(40,000)
Working capital released .......
100,000
Salvage value of equipment ...
__________
________
_______
_______
65,000
Total cash flows (a) ..............
$(375,000)
$120,000
$120,000
$80,000
$285,000
Discount factor (20%) (b) .....
1.000
0.833
0.694
0.579
0.482
Present value (a)×(b) ...........
$(375,000)
$99,960
$83,280
$46,320
$137,370
Net present value .................
$(8,070)
20%.
Solutions Manual, Chapter 8 27
Problem 8-17 (20 minutes)
Now
1
2
3
4
5
Purchase of
equipment ................
$(3,500,000)
Sales ........................
$3,400,000
$3,400,000
$3,400,000
$3,400,000
$3,400,000
Variable expenses .....
(1,600,000)
(1,600,000)
(1,600,000)
(1,600,000)
(1,600,000)
Out-of-pocket costs ...
__________
(700,000)
(700,000)
(700,000)
(700,000)
(700,000)
Total cash flows (a) ..
$(3,500,000)
$1,100,000
$1,100,000
$1,100,000
$1,100,000
$1,100,000
Discount factor (b) ....
1.000
0.862
0.743
0.641
0.552
0.476
Present value
(a)×(b) ....................
$(3,500,000)
$948,200
$817,300
$705,100
$607,200
$523,600
Net present value .....
$101,400
3. The simple rate of return is computed as follows:
Annual incremental net operating income
Simple rate of return = Initial investment
$400,000
= = 11.4%
$3,500,000
4. The company would want Casey to invest in the project because it has a
implementing this project would lower his ROI and his next pay raise.
Solutions Manual, Chapter 8 29
Problem 8-18 (20 minutes)
The net present value is computed as follows:
Now
1
2
3
4
Purchase of equipment ..........
$(130,000)
Working capital investment ...
(60,000)
Sales ....................................
$250,000
$250,000
$250,000
$250,000
Variable expenses .................
(120,000)
(120,000)
(120,000)
(120,000)
Fixed out-of-pocket costs ......
(70,000)
(70,000)
(70,000)
(70,000)
Overhaul of equipment ..........
(8,000)
Working capital released .......
60,000
Salvage value of equipment ...
__________
________
_______
_______
12,000
Total cash flows (a) ..............
$(190,000)
$60,000
$52,000
$60,000
$132,000
Discount factor (15%) (b) .....
1.000
0.870
0.756
0.658
0.572
Present value (a)×(b) ...........
$(190,000)
$52,200
$39,312
$39,480
$75,504
Net present value .................
$16,496
Problem 8-19 (30 minutes)
1. The income statement would be:
Sales ........................................................
$300,000
Variable expenses:
Cost of ingredients (20% × $300,000) .....
$60,000
Commissions (12.5% × $300,000) ...........
37,500
97,500
Contribution margin ...................................
202,500
Selling and administrative expenses:
Salaries ..................................................
70,000
Rent ($3,500 × 12) .................................
42,000
Depreciation* .........................................
16,800
Insurance ...............................................
3,500
Utilities ...................................................
27,000
159,300
Net operating income ................................
$ 43,200
*
$270,000 – $18,000 = $252,000
$252,000 ÷ 15 years = $16,800 per year.
2. The formula for the simple rate of return is:
Annual incremental net operating income
Simple rate of return = Initial investment
$43,200
= = 16.0%
$270,000
