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68 Managerial Accounting, 16th Edition
Exercise 13C-2 (20 minutes)
1. The annual income tax expense is computed as follows:
Years
1-5
Annual tax expense
:
Sales ……………………………….. $250,000
Variable expenses ………………. (120,000)
2. The net present value is computed as follows:
Now
Years
1-5
Net present value
:
Purchase equipment ……………. $(130,000)
Sales ……………………………….. $250,000
Variable expenses ………………. (120,000)
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Solutions Manual, Appendix 13C 69
Problem 13C-3 (30 minutes)
1. and 2. The annual income tax expense for each year and the net present value are computed as
follows:
Now 1 2 3 4 5
Annual tax expense
:
Sales ……………………. $350,000 $350,000 $350,000 $350,000 $350,000
Variable expenses …… (180,000) (180,000) (180,000) (180,000) (180,000)
Out-of-pocket costs …. (80,000) (80,000) (80,000) (80,000) (80,000)
Net present value
:
Purchase equipment … $(250,000)
Working capital ………. (60,000)
Sales ……………………. $350,000 $350,000 $350,000 $350,000 $350,000
Variable expenses …… (180,000) (180,000) (180,000) (180,000) (180,000)
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70 Managerial Accounting, 16th Edition
Problem 13C-4 (30 minutes)
1. and 2. The annual income tax expense and net present value are computed as follows:
Now 1 2 3 4 5
Annual tax expense
:
Sales ……………………. $410,000 $410,000 $410,000 $410,000 $410,000
Variable expenses …… (175,000) (175,000) (175,000) (175,000) (175,000)
Out-of-pocket costs …. (100,000) (100,000) (100,000) (100,000) (100,000)
Net present value
:
Purchase equipment … $(420,000)
Working capital ………. (65,000)
Sale of old equipment . $80,000
Release working capital 65,000
Income tax expense … ________ (15,300) (15,300) (9,300) (9,300) (15,300)
Total cash flows (a) …. $(405,000) $119,700 $119,700 $105,700 $105,700 $184,700
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Solutions Manual, Appendix 13C 71
Problem 13C-5 (45 minutes)
1. and 2. The annual income tax expense and net present value of Product A are computed as follows:
Now 1 2 3 4 5
Annual tax expense
:
Sales ……………………. $370,000 $370,000 $370,000 $370,000 $370,000
Operating expenses …. (200,000) (200,000) (200,000) (200,000) (200,000)
Repairs …………………. (45,000)
Sales ……………………. $370,000 $370,000 $370,000 $370,000 $370,000
Operating expenses …. (200,000) (200,000) (200,000) (200,000) (200,000)
Repairs …………………. (45,000)
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72 Managerial Accounting, 16th Edition
Problem 13C-5 (continued)
3. and 4. The annual income tax expense and net present value of Product B are computed as follows:
Now 1 2 3 4 5
Annual tax expense
:
Sales ……………………. $390,000 $390,000 $390,000 $390,000 $390,000
Operating expenses …. (170,000) (170,000) (170,000) (170,000) (170,000)
Repairs …………………. (70,000)
Net present value
:
Purchase equipment … $(550,000)
Working capital ………. (60,000)
Sales ……………………. $390,000 $390,000 $390,000 $390,000 $390,000
Operating expenses …. (170,000) (170,000) (170,000) (170,000) (170,000)
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
Solutions Manual, Appendix 13C 73
Problem 13C-5 (continued)
5. Students should use the project profitability index to answer this
question as follows:
Product
A
Product B
Net present value (a) ………………………….. $28,629 $29,849