Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 24
Exercise 24-22A (20 minutes)
Pool Spa
A
B
C
D
1
Initial investment
-160000
-105000
2
Annual cash flows,
end of period
3
4
5
6
7
8
Formula for IRR
Exercise 24-23 (15 minutes)
Year
Net
Cash Flows
Present Value
of 1 at 10%
Present Value of
Net Cash Flows
Initial
investment
$(90,000)
1.0000
$(90,000)
1
35,000
0.9091
31,819
2
35,000
0.8264
28,924
3
35,000
0.7513
26,296
4
35,000
0.6830
23,905
5
35,000
0.6209
21,732
PROBLEM SET A
Problem 24-1A (30 minutes)
Part 1
Annual amounts
Income
Cash Flow
Sales of new product ………………………………………..
$1,840,000
$1,840,000
Expenses
Part 2
Payback Period = = 2.84 years (rounded)
Part 3
Present Value of Net Cash Flows
Net Cash
Flows
Present
Value at 7%*
Present Value of
Net Cash Flows
Years 1-4 ……………………..
$168,900
3.3872
$572,098
Salvage value, year 4 ……
0.7629
Total …………………………….
$480,000
$168,900
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 24
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Problem 24-2A (30 minutes)
Part 1
Annual amounts
Income
Cash Flow
Sales of new product ………………………………………..
$350,000
$350,000
Expenses
Part 2
Part 3
Accounting rate of return = = 32%
*Average investment
Part 4
Net Cash
Flows
Present Value of
Annuity at 8%*
Present Value of
Net Cash Flows
Years 1-4 …………………..
$143,500
3.3121
$475,286
$56,000
$175,000*
1466
Problem 24-3A (45 minutes)
Part 1
Project Y
Annual amounts
Income
Cash Flow
Sales of new product ………………………………………..
$400,000
$400,000
Expenses
Project Z
Annual amounts
Income
Cash Flow
Sales of new product ………………………………………..
$500,000
$500,000
Expenses
Part 2
Project Y
Project Z
Initial investment ……………………….
$360,000
$360,000
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Problem 24-3A (continued)
Part 3
Project Y
Project Z
Annual income ……………………
$ 70,000
$130,000
Average investment* …………..
$180,000
$180,000
Accounting rate of return ……
38.9%
72.2%
*Average investment
Y
Z
Asset cost ………………
$360,000
$360,000
Total ………………………
$360,000
$360,000
Part 4
Project Y
Net Cash
Flows
Present Value of
Annuity at 8%*
Present Value of
Net Cash Flows
Years 1-4 ……………….
$160,000
3.3121
$529,936
Project Z
Net Cash
Flows
Present Value of
Annuity at 8%*
Present Value of
Net Cash Flows
Years 1-3 ……………….
$250,000
2.5771
$644,275
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Problem 24-4A (25 minutes)
Part 1
Project A
Net Cash
Flows
Present Value of
Annuity at 8%*
Present Value of
Net Cash Flows
Years 1-6 ……………….
$60,000
4.6229
$277,374
Project B
Net Cash
Flows
Present Value of
Annuity at 8%*
Present Value of
Net Cash Flows
Years 1-7 ……………….
$50,000
5.2064
$260,320
Initial investment ……
(250,000)
Net present value …..
$ 10,320
Project A
Net Cash
Flows
Present Value of
Annuity at 8%*
Present Value of
Net Cash Flows
Years 1-6 ……………….
$60,000
4.6229
$277,374
Part 2
Project A
Project B
Present value of net cash flows ……
$277,374
$260,320
Part 3
Project A. If the company bases investment decisions solely on a higher
profitability index, it will choose Project A.
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 24
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Problem 24-5A (25 minutes)
Part 1: Payback period
Year
Net Cash Flows
Cumulative Net Cash Flows
Initial investment. ……
$(250,000)
$(250,000)
3.8 years. Once $76,000 of net cash flow is received in Year 4, the
Part 2: Break-even time
Year
Net
Cash
Flows
Present
Value of
1 at 10%
Present Value
of Net Cash
Flows per Year
Cumulative
Present Value of
Net Cash Flows
Initial invest …
$(250,000)
1.0000
$(250,000)
$(250,000)
0.9091
0.8264
0.7513
0.6830
0.6209
Partial year = $43,749 / $77,613 = 0.6 (rounded)
Break-even time is 4.6 years.
Part 3: Net present value
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Problem 24-6A (25 minutes)
Part 1
Alternative 1: Keep old machine and overhaul it
Net
Cash
Flow
Present Value
Factors at
10%*
Present
Value of
Cash Flows
Years 1-5 ………………………………………..
$50,000
3.7908
$189,540
Salvage value (year 5) …………………….
15,000
0.6209
9,314
Total ………………………………………………
Initial investment (overhaul cost) ……….
Part 2
Alternative 2: Sell old machine and buy new machine
Net
Cash
Flow
Present Value
Factors at
10%*
Present
Value of
Cash Flows
Years 1-5 …………………………………………
$65,000
3.7908
$246,402
Salvage value—new machine (year 5) ….
20,000
0.6209
12,418
Salvage value—old machine (now) ………
29,000
29,000
Total ……………………………………………….
Initial investment (new machine cost) …..
Part 3
Keep old machine and overhaul it. Alternative 1 shows a positive NPV—see
part 1. The cost savings and additional net cash flows generated from buying
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 24
1471
PROBLEM SET B
Problem 24-1B (30 minutes)
Part 1
Annual amounts
Income
Cash Flow
Sales of new product ………………………………………..
$1,150,000
$1,150,000
Expenses
Part 2
Payback period = = 2.86 years (rounded)
Part 3
Present Value of Net Cash Flows
Net Cash
Flows
Present
Value at 7%*
Present Value of
Net Cash Flows
Years 1-4 ……………………..
$105,000
3.3872
$ 355,656
Salvage value, year 4 ……
0.7629
Total …………………………….
$300,000
$105,000
1472
Problem 24-2B (30 minutes)
Part 1
Cash
Annual amounts
Income
Flow
Sales of new product ………………………………………..
$250,000
$250,000
Expenses
$ 39,900
Part 2
Payback Period = = 2.40 years (rounded)
Part 3
Accounting rate of return = = 33.3% (rounded)
*Average investment
Part 4
Net Cash
Flows
Present Value of
Annuity at 8%*
Present Value of
Net Cash Flows
Years 1-4 ……………….
$99,900
3.3121
$330,879
$240,000
$ 99,900
$39,900
$120,000*
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Problem 24-3B (40 minutes)
Part 1
Project Y
Annual amounts
Income
Cash Flow
Sales of new product ………………………………………..
$320,000
$320,000
Expenses
Project Z
Annual amounts
Income
Cash Flow
Sales of new product ………………………………………..
$350,000
$350,000
Expenses
Part 2
Project Y
Project Z
Initial investment ……………………….
$240,000
$240,000
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Problem 24-3B (continued)
Part 3
Project Y
Project Z
Annual income ……………………
$ 64,000
$ 90,000
*Average investment
Y
Z
Asset cost ………………
$240,000
$240,000
Total ………………………
$240,000
$240,000
Part 4
Project Y
Net Cash
Flows
Present Value of
Annuity at 9%*
Present Value of
Net Cash Flows
Years 1-4 ……………….
$124,000
3.2397
$401,723
Project Z
Net Cash
Flows
Present Value of
Annuity at 9%*
Present Value of
Net Cash Flows
Years 1-3 ……………….
$160,000
2.5313
$405,008
Project Z. If the company bases investment decisions solely on net
present value, it will choose Project Z.