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