Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
1460
Problem 24-2B (Continued)
Part 4
PROJECT A
Present Value of Net Cash Flows
Present
Present
Value of
Value of
Net Cash
Flows
1 at 8%
Annuity
Net Cash
Flows
Years 1-4 ……………………………………………….
$99,900
3.3121
$330,879
Net present value …………………………………..
$ 90,879
PROJECT B
Present Value of Net Cash Flows
Present
Present
Value of
Value of
Net Cash
Flows
1 at 8%
Annuity
Net Cash
Flows
Years 1-3 ……………………………………………….
$105,900
2.5771
$272,915
Part 5
Recommendation to management is to pursue Project A. This is because
although both projects have a positive net present value, Project A has a
1461
Problem 24-3B (60 minutes)
Part 1
RESULTS USING STRAIGHT-LINE DEPRECIATION
(a)
Income
Before
Deprec.
(b)
Straight–
Line
Deprec.
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) – (d)
Year 1 ……………………….
$12,000
$3,000
$ 9,000
$3,600
$8,400
Year 2 ……………………….
Year 3 ……………………….
Year 4 ……………………….
Year 5 ……………………….
Year 6 ……………………….
Part 2
RESULTS USING MACRS DEPRECIATION
(a)
Income
Before
Deprec.
(b)
MACRS
Deprec.
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) – (d)
Year 1 ……………………….
$12,000
$6,000
$ 6,000
$2,400
$ 9,600
Year 2 ……………………….
11,040
Year 4 ……………………….
Year 5 ……………………….
Year 6 ……………………….
10,272
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
Problem 24-3B (Continued)
Part 3
NET PRESENT VALUE OF ASSET USING STRAIGHT-LINE DEPRECIATION
Present
Present
Net Cash
Value of
Value of Net
Flows
1 at 10%
Cash Flows
Year 1 …………………………………………………..
$ 8,400
0.9091
$ 7,636
Year 2 …………………………………………………..
9,600
0.8264
7,933
Year 3 …………………………………………………..
9,600
0.7513
7,212
Year 4 …………………………………………………..
9,600
0.6830
6,557
Year 5 …………………………………………………..
9,600
0.6209
5,961
Year 6 …………………………………………………..
0.5645
$55,200
$40,041
Part 4
NET PRESENT VALUE OF ASSET USING MACRS DEPRECIATION
Present
Present
Net Cash
Value of
Value of Net
Flows
1 at 10%
Cash Flows
Year 1 …………………………………………………..
$ 9,600
0.9091
$ 8,727
Year 2 …………………………………………………..
11,040
0.8264
9,123
Year 3 …………………………………………………..
9,504
0.7513
7,140
Year 4 …………………………………………………..
8,582
0.6830
5,862
Year 5 …………………………………………………..
8,582
0.6209
5,329
Year 6 …………………………………………………..
0.5645
$55,199
$40,635
Part 5
Analysis: The net present value using MACRS depreciation is greater than the
1463
Problem 24-4B (45 minutes)
Part 1
Alternative 1: Keep the old freezer and have it repaired
Item
Period
Cash Flow
Present
Value Factor
at 10%
Present
Value of
Cash Flows
Revenues …………………………..
1 – 8
$63,000
5.3349
$ 336,099
1 – 8
5.3349
Salvage value …………………….
0.4665
Total ………………………………….
Cost of repair ……………………..
Net present value ……………….
$ (5,921)
Part 2
Alternative 2: Sell the old freezer and buy a new one
Item
Period
Cash Flow
Present
Value Factor
at 10%
Present
Value of
Cash Flows
Revenues …………………………..
1 – 8
$68,000
5.3349
$ 362,773
Operating costs………………….
1 – 8
(30,000)
5.3349
(160,047)
0.4665
Cost of new freezer …………….
Net present value ……………….
$ 61,458
Part 3
Archer should sell the old freezer and buy a new one. The operating costs
of the old freezer are so much higher than that of the new freezer, even
1464
Problem 24-5B (40 minutes)
Part 1: Payback period
Period
Cash flow
Cumulative cash flow
0 …………………………………………………………………..
$(800,000)
$(800,000)
1 …………………………………………………………………..
2 …………………………………………………………………..
3 …………………………………………………………………..
4 …………………………………………………………………..
Part 2: Break-even time
Period
Cash Flow
Present Value
of 1 at 10%
Present Value
of Cash Flows
Cumulative
Present Value
of Cash Flows
0 ……………….
$(800,000)
1.0000
$(800,000)
$(800,000)
1 ……………….
0.9091
2 ……………….
0.8264
3 ……………….
0.7513
4 ……………….
0.6830
Part 3: Net present value
From the chart in part 2, we can see that the net present value of the
investment is $369,840.
Part 4
If the company requires a payback period of 2 years for any project, this
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
1465
Problem 24-6B (40 minutes)
Part 1: Payback period
Period
Cash flow
Cumulative cash flow
0 …………………………………………………………………..
$(800,000)
$(800,000)
1 …………………………………………………………………..
2 …………………………………………………………………..
3 …………………………………………………………………..
4 …………………………………………………………………..
Part 2: Break-even time
Period
Cash Flow
Present Value
of 1 at 10%
Present Value
of Cash Flows
Cumulative
Present Value
of Cash Flows
0 ……………….
$(800,000)
1.0000
$(800,000)
$(800,000)
1 ……………….
0.9091
2 ……………….
0.8264
3 ……………….
0.7513
4 ……………….
0.6830
Part 3: Net present value
From the chart in part 2, we can see that the net present value of the
investment is $407,510.
Part 4
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
1466
SERIAL PROBLEM — SP 24
Serial Problem, Business Solutions (50 minutes)
COMPUTING NET CASH FLOWS FROM NET INCOME
Net income
Cash flows
Sales ……………………………………………………………………..
$375,000
$375,000
Materials, labor & overhead ……………………………………
(200,000)
(200,000)
Net income ……………………………………………………….
1. Payback period = = 2.7 years
2. Accounting rate of return = = 40.8%
$300,000
$111,250
$61,250
$150,000*
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
Company Analysis — AA 24-1
1. The internal rate of return (given here as 10%) is the rate which yields a
$2.12 billion = Annual cash flows x 6.1446
Annual cash flows = $2.12 billion / 6.1446
2. From its statement of cash flows (investing section), Apple invested
$12,451 (millions) in capital assets in 2017.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
Comparative Analysis — AA 24-2
1. We know that the present value equals the annual cash flows times the
present value of an annuity factor for 7 periods, 15%. This means:
$2.42 billion = Annual cash flows x 4.1604
Therefore,
2. From its statement of cash flows (investing section), Google invested
$13,184 (millions) in capital assets in 2017.
Global Analysis — AA 24-3
1. From its statement of cash flows for the year ended December 31, 2017,
2. The present value of a 10-year annuity of 7,000,000 (millions of Korean
won) at 9% is 44,923,900 (computed as 7,000,000 x 6.4177). The net
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
Ethics Challenge — BTN 24-1
2. We need to be concerned about any project with expected long-term
cash inflows. This is especially the case if the larger cash inflows are
expected later rather than sooner in the asset’s life. This concern is tied
to the riskiness of long-term predictions and the likely biases of
individuals proposing the project.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
1470
Communicating in Practice — BTN 24-2
Instructor note: Answers will vary, but responses should address the questions
asked and include some discussion of the following points for each method.
Payback Period
Accounting Rate
of Return
Net Present
Value
Internal Rate
of Return
Measurement
basis
• Cash flows
• Accrual income
• Cash flows
• Profitability
• Cash flows
• Profitability
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
1471
Taking It to the Net — BTN 24-3
Period
Cash flow
Cumulative cash flow
0 …………………………………………………………………..
$(15,000)
$(15,000)
1 …………………………………………………………………..
1,000
(14,000)
2 …………………………………………………………………..
2,000
(12,000)
3 …………………………………………………………………..
3,000
4 …………………………………………………………………..
6,000
5 …………………………………………………………………..
7,000
Present
Present
Value of
Net Cash
Flows
Value of
1 at 10%
Net Cash
Flows
Year 1 ……………………………………………………..
$ 1,000
0.9091
$ 909
Year 2 ……………………………………………………..
2,000
0.8264
1,653
Year 3 ……………………………………………………..
3,000
0.7513
2,254
Year 4 ……………………………………………………..
6,000
0.6830
4,098
Year 5 ……………………………………………………..
0.6209
The investment with the revised cash flows now has a negative net present
value of $(1,740), as opposed to the positive net present value of $563
using the original cash flows provided on the website.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
1472
Teamwork in Action — BTN 24-4
Instructor note: Answers will vary across students. Yet the examples, while
different, should capture similar qualitative factors.
SAMPLE SOLUTION
Project: Investment in an improved baggage handling system.
Qualitative Factors
• Competition has a new, more efficient and effective system.
• Need to replace old system.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
1473
Entrepreneurial Decision — BTN 24-5
1. Marco could use payback period, accounting rate of return, net present
2. For these tools, Marco needs estimates of how much the manufacturing
facility and warehouse will cost, both upfront and for recurring (e.g.
3.
Payback Period
Accounting Rate
of Return
Net Present
Value
Internal Rate
of Return
Advantages
• Easy to
understand
• Allows
• Easy to
understand
• Allows
• Reflects
time value
of money
• Reflects
• Reflects
time value
of money
• Allows
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
Hitting the Road — BTN 24-6
1. Answers will vary among students.
Sample Example
For illustrative purposes, one sample solution would appear as follows:
Lease terms—$400 per month for 35 months; plus $10,000 final
payment at the end of 35 months; 12% annual interest rate.
To compute the present value of the lease payments
2. In most cases the students will find it more costly to lease an
automobile than to purchase it outright. Also, getting the salesperson