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Solutions Manual, Chapter 13 51
Problem 13-28 (20 minutes)
1. The net present value of keeping the old truck is computed as follows:
Keep the old truck:
Now Years
1-5
Year
5
Overhaul needed now ……. $(7,000)
Annual operating costs ….. (10,000)
Salvage value (old) ……….. ______ _______ $1,000
2. The net present value of purchasing the new truck is computed as
follows:
Purchase the new truck:
Now Years
1-5
Year
5
Purchase new truck ………. $(30,000)
Salvage value (old) ……….. 9,000
Annual operating costs ….. (6,500)
3. The company should keep the old truck because the present value of
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52 Managerial Accounting, 16th Edition
Problem 13-29 (45 minutes)
1. A net present value computation for each investment follows:
Common stock:
Now
Years
1-3
Year
3
Purchase of the stock . $(95,000)
Sales of the stock ……. ________ ______ $160,000
Preferred stock:
Now
Years
1-3
Year
3
Purchase of the stock . $(30,000)
Annual cash dividend
($30,000 × 0.06) ……. $1,800
Bonds:
Now
Years
1-3
Year
3
Purchase of the bonds $(50,000)
Annual interest income $6,000
Linda earned a 16% rate of return on the common stock, but not on the
preferred stock or the bonds.
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Solutions Manual, Chapter 13 53
Problem 13-29 (continued)
2. Considering all three investments together, Linda did not earn a 16%
rate of return. The computation is:
Net
Present
Value
Common stoc
k
…………………….. $ 7,560
3. Investment required
Factor of the internal =
rate of return
A
nnual net cash inflow
Substituting the $239,700 investment and the factor for 14% for 12
periods into this formula, we get:
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54 Managerial Accounting, 16th Edition
Problem 13-30 (60 minutes)
1. Computation of the annual net cost savings:
Savin
g
s in labor costs (25,000 hours × $16 per hour).. $400,000
2. The net present value is computed as follows:
Now 1 2 3 4 5
Cost of the robot ….. $(1,600,000)
Installation &
software …………….. (450,000)
Annual net cost
savings ………………. $580,000
$580,000
$580,000
$580,000
$580,000
Inventory reduction . 400,000
Salvage value (old) .. _________ _______ _______ _______ _______ 70,000
g
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Solutions Manual, Chapter 13 55
Problem 13-30 (continued)
3. Recomputation of the annual net cost savings:
Savin
g
s in labor costs (22,500 hours × $16 per hour) $360,000
Savin
g
s in inventory carryin
g
costs……………………… 210,000
The revised present value computations are follows:
Now 1 2 3 4 5
Cost of the robot ….. $(1,600,000)
Installation &
software …………….. (525,000)
Annual net cost
savings ………………. $540,000
$540,000
$540,000
$540,000
$540,000
Inventory reduction . 400,000
Salvage value (old) .. _________ _______ _______ _______ _______ 70,000
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56 Managerial Accounting, 16th Edition
Problem 13-30 (continued)
4. a. Several intangible benefits are usually associated with investments in
automated equipment. These intangible benefits include:
Greater throughput.
Greater variety of products.
b. Negative net present value to be offset $149,060
= = $49,836
Present value factor, 5 years at 20% 2.991
© The McGraw-Hill Companies, Inc., 2018
Solutions Manual, Chapter 13 57
Case 13-31 (45 minutes)
1. Rachel Arnett’s revision of her first proposal can be considered a
violation of the IMA’s Statement of Ethical Professional Practice. She
discarded her reasonable projections and estimates after she was
questioned by William Earle. She used figures that had a remote chance
of occurring. By doing this, she violated the requirements to
2. Earle was clearly in violation of the Standards of Ethical Conduct for
Management Accountants because he tried to persuade a subordinate to
prepare a proposal with data that was false and misleading. Earle has
violated the standards of Competence (Provide decision support
information and recommendations that are accurate, clear, concise, and
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58 Managerial Accounting, 16th Edition
Case 13-31 (continued)
3. The internal controls Fore Corporation could implement to prevent
unethical behavior include:
approval of all formal capital expenditure proposals by the Controller
designating a non-accounting/finance manager to coordinate capital
requiring that all capital expenditure proposals be reviewed by senior
requiring the internal audit staff to review all capital expenditure
(Unofficial CMA Solution, adapted)
© The McGraw-Hill Companies, Inc., 2018
Solutions Manual, Chapter 13 59
Case 13-32 (45 minutes)
1. The net cash inflow from sales of the device for each year would be:
Year
1 2 3 4-6
Sales in units ………………….. 9,000 15,000 18,000 22,000
Sales in dollars
(@ $35 each) ……………….. $315,000 $525,000 $630,000 $770,000
V
ariable expenses
(@ $15 each) .………………. 135,000 225,000 270,000 330,000
Incremental contribution
A
–
–
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60 Managerial Accounting, 16th Edition
Case 13-32 (continued)
2. The net present value of the proposed investment would be:
Now 1 2 3 4 5 6
Cost of equipment .. $(315,000)
Working capital …… (60,000)
Yearly net cash
flows ………………… $(85,000) $35,000 $125,000 $235,000 $235,000 $235,000
Release of working
capital ………………. 60,000