Case 16-58 Student Name:
Class:
1. The net present value of the proposed investment: *
Calculation:
Time 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
New equipment *
Working capital * *
Disposition of equipment:
Old forklift trucks *
New conveyor belt system *
Operating revenue * * * * * * * *
Operating savings (A) * * * * * * * *
Tax effect (B) * * * * * * * * *
Total Cash Flow * * * * * * * * *
Discount Factor * * * * * * * * *
Present Value * * * * * * * * *
Net Present Value *
(A) Operating Savings
Operating Savings for Years 1, 2, 3, 4, 6, 7, 8:
Manufacturing cost reduction *
Maintenance cost reduction *
Increased operating costs *
Total *
Operating Savings for Year 5:
Manufacturing cost reduction *
Maintenance cost reduction *
Increased operating costs *
Equipment Repairs *
Total *
(B) Tax Effects
Tax effects – Time 0 – forklift disposal:
Book value *
Less: Salvage value *
Tax loss *
Tax rate *
Tax effect (cash inflow/(outflow)) *
Tax effects – Years 1 through 4:
Revenue *
Operating cost savings *
Loss of depreciation on forklifts *
Depreciation on new equipment *
Change in taxable income *
Tax rate *
Tax effect (cash inflow/(outflow)) *
Tax effects – Year 5:
Revenue *
Operating costs *
Loss of depreciation on forklifts *
Depreciation on new equipment *
Change in taxable income *
Tax rate *
Tax effect (cash inflow/(outflow)) *
Tax effects – Years 6 and 7:
Revenue *
Operating cost savings *
Depreciation on new equipment *
Change in taxable income *
Tax rate *
Tax effect (cash inflow/(outflow)) *
Tax effects – Year 8:
Revenue *
Operating cost savings *
Depreciation on new equipment *
Salvage value on new equipment *
Change in taxable income *
Tax rate *
Tax effect (cash inflow/(outflow)) *
Enter appropriate data in the yellow cells. An asterisk (*) to the right indicates an incorrect amount. Answers should be entered as whole numbers not formulas.
Instant Dinners, Inc.
Net-Present-Value Analysis
2. Referring to the specific ethical standards of competence, confidentiality, integrity, and credibility, Leland Forrest should evaluate Bill Rolland’s directives as follows:
3. Leland Forrest should take the following steps to resolve this situation:
Case 16-58 Student Name:
Class:
Enter appropriate data in the yellow cells. An asterisk (*) to the right indicates an incorrect amount. Answers should be entered as whole numbers not formulas.
1. The net present value of the proposed investment: (235,280)
Calculation:
Time 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
New equipment (4,500,000)$
Working capital (1,000,000) 1,000,000$
Disposition of equipment:
Old forklift trucks 100,000
(A) Operating Savings
Operating Savings for Years 1, 2, 3, 4, 6, 7, 8:
Manufacturing cost reduction 500,000$
Maintenance cost reduction 300,000
Operating Savings for Year 5:
Manufacturing cost reduction 500,000$
Maintenance cost reduction 300,000
Increased operating costs (200,000)
(B) Tax Effects
Tax effects – Time 0 – forklift disposal:
Book value 500,000$
Tax loss 400,000$
Tax effects – Years 1 through 4:
Revenue 700,000$
Operating cost savings 600,000
Loss of depreciation on forklifts 100,000
Change in taxable income 837,500$
Tax effects – Year 5:
Revenue 700,000$
Operating costs (200,000)
Loss of depreciation on forklifts 100,000
Change in taxable income 37,500$
Tax effects – Years 6 and 7:
Revenue 700,000$
Operating cost savings 600,000
Change in taxable income 737,500$
Tax effects – Year 8:
Revenue 700,000$
Operating cost savings 600,000
Depreciation on new equipment (562,500)
Change in taxable income 837,500$
Competence. Forrest has a responsibility to present complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.
Rolland does not wish the report to be complete or clear and has provided some information that is not reliable.
2. Referring to the specific ethical standards of competence, confidentiality, integrity, and credibility, Leland Forrest should evaluate Bill Rolland’s directives as follows:
Instant Dinners, Inc.
Net-Present-Value Analysis
New conveyor belt system 100,000
Operating revenue 700,000$ 700,000$ 700,000$ 700,000$ 700,000$ 700,000$ 700,000$ 700,000
Present Value -5240000 861,745$ 769,105$ 687,080$ 613,740$ 274,995$ 509,535$ 454,260$ 834,260$
Forrest should first investigate to see if Instant Dinners, Inc. (IDI) has an established policy for resolution of ethical conflicts and follow those procedures.
to influence an intended user’s understanding of the reports and recommendations presented, is being hampered. The board will not have the full scope of information
3. Leland Forrest should take the following steps to resolve this situation:
to clarify relevant concepts and obtain an understanding of possible courses of action. For example, he might want to talk to a close professional friend.
If Forrest cannot obtain a satisfactory resolution with Rolland, he should take the situation up to the next layer of management and inform Rolland that he is doing
until the issue is resolved.
person in IDI (e.g., the president or board of directors).
If this policy does not resolve the ethical conflict, the next step is for Forrest to discuss the situation with his supervisor, Rolland and see if he can obtain
problem and is seeking guidance.