© The McGraw-Hill Companies, Inc., 2018
Solutions Manual, Chapter 13 41
Problem 13-22 (20 minutes)
1. The annual net cash inflows would be:
Reduction in annual operatin
g
costs:
Operatin
g
costs, present hand method…. $30,000
Operatin
g
costs, new machine……………. 7,000
2. The net present value is computed as follows:
Now 1 2 3 4 5
Purchase of machine …… $(120,000)
Annual net cash inflows . $32,000 $32,000 $32,000 $32,000 $32,000
Replacement parts ……… (9,000)
Salvage value of machine ________ ______ ______ _______ ______ 7,500
Note: The annual net cash inflows ($32,000) can also be discounted to their present value using the
© The McGraw-Hill Companies, Inc., 2018
42 Managerial Accounting, 16th Edition
Problem 13-23 (45 minutes)
1. The payback periods for Products A and B are calculated using a two-
step process. First, the annual net cash inflows are calculated as
follows:
Product
A
Product B
Sales revenues …………………………… $250,000 $350,000
The second step is to compute each product’s payback period as
follows:
Product
A
Product B
© The McGraw-Hill Companies, Inc., 2018
Solutions Manual, Chapter 13 43
Problem 13-23 (continued)
2. The net present values for Products A and B are computed as follows:
Product A:
Now
Years
1-5
Purchase of equipment ………….. $(170,000)
Sales …………..…………………….. $250,000
Variable expenses ………………… (120,000)
Product B:
Now
Years
1-5
Purchase of equipment ………….. $(380,000)
Sales …………..…………………….. $350,000
Variable expenses ………………… (170,000)
© The McGraw-Hill Companies, Inc., 2018
44 Managerial Accounting, 16th Edition
Problem 13-23 (continued)
3. The internal rate of return for each product is calculated as follows:
Product
A
Product B
A
Looking in Exhibit 13B-2 and scanning along the 5-period line, a factor of
2.833 falls right between 22% and 23%, so we’ll estimate an internal rate
4. The project profitability index for each product is computed as follows:
Product
A
Product B
Net present value (a) …………………………… $26,440 $45,620
5. The simple rate of return for each product is computed as follows:
Product
A
Product B
A
nnual net cash inflow …………………………. $60,000 $130,000
A
g
Product
A
Product B
A
nnual incremental net operatin
g
income (a) $26,000 $54,000
6. The net present value calculations suggest that Product B is preferable
to Product A. However, the project profitability index reveals that
Product A is the preferred choice. The payback period, internal rate of
return, and simple rate of return all favor Product A over Product B.
However, it bears emphasizing that Lou Barlow may be inclined to reject
both products because the simple rate of return for each product is
lower than his division’s historical return on investment of 18%.
© The McGraw-Hill Companies, Inc., 2018
Solutions Manual, Chapter 13 45
Problem 13-24 (45 minutes)
1. Present cost of transient workers …………………….. $40,000
Less out-of-pocket costs to operate the cherry picker:
Cost of an operator and assistant ………………….. $14,000
Insurance …………………………………………….….. 200
2. The first step is to determine the annual incremental net operating
income:
A
nnual savin
g
s in cash operatin
g
costs ………… $21,000
A
A
3. The formula for the payback period is:
Investment required
Payback period =
A
nnual net cash inflow
in cash operating costs.
Yes, the cherry picker would be purchased. The payback period is less
than 5 years. Note that this answer conflicts with the answer in Part 2.
A
g
g
© The McGraw-Hill Companies, Inc., 2018
46 Managerial Accounting, 16th Edition
Problem 13-24 (continued)
4. The formula for the internal rate of return is:
Investment required
Factor of the internal=
rate of return
A
nnual net cash inflow
© The McGraw-Hill Companies, Inc., 2018
Solutions Manual, Chapter 13 47
Problem 13-25 (30 minutes)
1. The present value of the purchase alternative is computed as follows:
Purchase Alternative:
Now 1 2 3
Purchase of cars …….. $(170,000)
Annual servicing costs $(3,000) $(3,000) $(3,000)
Repairs …………………. (1,500) (4,000) (6,000)
2. The present value of the lease alternative is computed as follows:
Lease Alternative:
Now 1 2 3
Security deposit ……… $(10,000)
Annual lease payments $(55,000) $(55,000) $(55,000)
Refund of deposit ….... _______ _______ _______ 10,000
Note: The annual servicing costs ($3,000) and the annual lease payments
3. The company should lease the cars because this alternative has the
lowest present value of total costs.
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48 Managerial Accounting, 16th Edition
Problem 13-26 (30 minutes)
1. The annual incremental net operating income can be determined as
follows:
T
icket revenue (50,000 × $3.60)…………… $180,000
Sellin
g
and administrative expenses:
Salaries ………………………………………… $85,000
Insurance ……………………………………… 4,200
T
2. The simple rate of return is:
A
nnual incremental net operating income
Simple rate=
of return Initial investment (net of salvage from old equipment)
3. The payback period is:
Investment required (net of salvage from old equipment)
Payback =
period Annual net cash inflow
$40,500 + $27,500 = $68,000
Yes, the water slide would be constructed. The payback period is within
the 5-year payback required by Mr. Sharkey.
© The McGraw-Hill Companies, Inc., 2018
Solutions Manual, Chapter 13 49
Problem 13-27 (30 minutes)
1. Average weekly use of the auto wash and the vacuum will be:
$1,350
A
uto wash: = 675 uses
$2.00
Vacuum: 675 × 60% = 405 uses
The expected annual net cash receipts from operations would be:
A
uto wash cash receipts ($1,350 × 52)……….. $70,200
V
acuum cash receipts (405 × $1.00 × 52) …… 21,060
T
otal cash receipts ……………………………….. 91,260
Less cash disbursements:
T
A
© The McGraw-Hill Companies, Inc., 2018
50 Managerial Accounting, 16th Edition
Problem 13-27 (continued)
2. The net present value is computed as follows:
Now
Years
1-5
Year
5
Purchase of equipment …… $(200,000)
Working capital …………….. (2,000)
Annual net cash flows …….. $49,434
Working capital released …. $2,000
Salvage value ($200,000 ×
No, Mr. Duncan should not open the auto wash. The negative net present