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Solutions Manual, Chapter 13 31
Problem 13-16 (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)
No, the project should not be accepted; it has a negative net present value at a 20% discount rate. This
Note: The annual net cash receipts ($120,000) can also be discounted their present value using the
© The McGraw-Hill Companies, Inc., 2018
32 Managerial Accounting, 16th Edition
Problem 13-17 (20 minutes)
1. The net present value is computed as follows:
Now Years
1-5
Purchase of equipment …….. $(3,500,000)
Sales …………………………… $3,400,000
Variable expenses …………… (1,600,000)
2. The internal rate of return is computed as follows:
Investment required
Factor of the internal=
rate of return Annual net cash inflow
Looking in Exhibit 13B-2 and scanning along the five-period line, we can
see that the factor computed above, 3.182, is closest to 3.199, the factor
3. The simple rate of return is computed as follows:
A
nnual incremental net operatin
g
income
Simple rate of return = Initial investment
$3,500,000
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Solutions Manual, Chapter 13 33
Problem 13-17 (continued)
4. The company would want Casey to invest in the project because it has a
positive net present value of $101,400 and an internal rate of return of
17%. However, Casey might be inclined to reject the project because its
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34 Managerial Accounting, 16th Edition
Problem 13-18 (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)
Note: The sales ($250,000), variable expenses ($120,000), and fixed out-of-pocket costs ($70,000) can
© The McGraw-Hill Companies, Inc., 2018
Solutions Manual, Chapter 13 35
Problem 13-19 (30 minutes)
1. The income statement would be:
Sales ………………………………………………. $300,000
V
ariable expenses:
Cost of in
g
redients (20% × $300,000) …. $60,000
Commissions (12.5% × $300,000)………. 37,500 97,500
Contribution mar
g
in …………………………… 202,500
Fixed expenses:
Salaries ………………………………………… 70,000
Rent ($3,500 × 12) …………………………. 42,000
2. The formula for the simple rate of return is:
A
nnual incremental net operatin
g
income
Simple rate of return = Initial investment
–
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36 Managerial Accounting, 16th Edition
Problem 13-19 (continued)
3. The formula for the payback period is:
Investment required
Payback period =
A
nnual net cash inflow
*Net operating income + Depreciation = Annual net cash inflow
$43,200 + $16,800 = $60,000
According to the payback computation, the franchise would not be
© The McGraw-Hill Companies, Inc., 2018
Solutions Manual, Chapter 13 37
Problem 13-20 (30 minutes)
1. The annual net cost savings would be:
Reduction in labor costs………………………………….. $108,000
2. Using this cost savings figure, and other data from the text, the net present value analysis would be:
Now 1 2 3 4 5 6
Cost of machine ……….. $(250,000)
Software and installation (80,000)
Salvage value of old
equipment …………….. 12,000
No, the automated welding machine should not be purchased. Its net present value is negative.
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38 Managerial Accounting, 16th Edition
Problem 13-20 (continued)
3. The dollar value per year that would be required for the intangible
benefits is:
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Solutions Manual, Chapter 13 39
Problem 13-21 (30 minutes)
1. The formula for the project profitability index is:
Net present value of the project
Project profitability index = Investment required by the project
The indexes for the projects under consideration would be:
2. a., b., and c.
Net Present
Value
Project
Profitability
Index
Internal Rate
of Return
First preference .…… 4 1 2
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40 Managerial Accounting, 16th Edition
Problem 13-21 (continued)
3. Which ranking is best will depend on Revco Products’ opportunities for
reinvesting funds as they are released from the project. The internal
rate of return method assumes that any released funds are reinvested at
The project profitability index approach assumes that funds released
from a project are reinvested in other projects at a rate of return equal
The net present value is inferior to the project profitability index as a
ranking device because it looks only at the total amount of net present
value from a project and does not consider the amount of investment