Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
Exercise 24-17A (20 minutes)
Project A Project B
A
B
C
D
1
Initial investment
-160000
-105000
2
Annual cash flows,
end of period
3
1
40000
32000
4
2
56000
50000
5
3
80295
66000
6
4
90400
72000
7
5
65000
24000
8
Formula for IRR
Exercise 24-18 (15 minutes)
Recovery time computation
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
1446
PROBLEM SET A
Problem 24-1A (50 minutes)
Part 1
Part 2
Net
Net Cash
Income
Flow
$1,840,000
$1,840,000
(480,000)
(480,000)
(115,000)
Part 3
Payback Period = = 2.84 years
$480,000
$168,900
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Problem 24-1A (Continued)
Part 4
* Average investment
Asset cost ……………………………………………………………………….
$480,000
Average (Sum /2) ……………………………………………………….
$250,000
Part 5
Present Value of Net Cash Flows
Present
Present
Net Cash
Value of
Value of Net
Flows
1 at 7%
Cash Flows
Year 1 ………………………………………………….
$168,900
0.9346
$ 157,854
Year 2 ………………………………………………….
168,900
0.8734
147,517
Year 3 ………………………………………………….
168,900
0.8163
137,873
Year 4* …………………………………………………
0.7629
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
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Problem 24-2A (55 minutes)
Part 1
PROJECT Y
Net income ………………………………………………………………………………
$ 56,000
$143,500
PROJECT Z
Net income ………………………………………………………………………………
$ 36,400
$153,067
Part 2
PROJECT Y
Payback Period = = 2.44 years
PROJECT Z
$350,000
$153,067
$350,000
$143,500
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Problem 24–2A (Continued)
Part 3
PROJECT Y
Accounting rate of return = = 32%
PROJECT Z
$56,000
$175,000*
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
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Problem 24–2A (Continued)
Part 4
PROJECT Y
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 ………………………………………………
$143,500
3.3121
$475,286
PROJECT Z
Present Value of Net Cash Flows
Present
Present
Value of
Value of
Net Cash
Flows
1 at 8%
Annuity
Net Cash
Flows
Net present value ………………………………….
$ 44,469
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Problem 24-3A (60 minutes)
Part 1
RESULTS USING STRAIGHT-LINE DEPRECIATION
(a)
Income
Before
Deprec.
(b)
Straight–
Line
Deprec.
(c)
Taxable
Income
(a) – (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) – (d)
Year 1 ……………………….
$66,000
$ 9,000
$57,000
$22,800
$43,200
Year 3 ……………………….
Year 5 ……………………….
Year 6 ……………………….
Part 2
RESULTS USING MACRS DEPRECIATION
(a)
Income
Before
Deprec.
(b)
MACRS
Deprec.
(c)
Taxable
Income
(a) – (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) – (d)
Year 1 ……………………….
$66,000
$18,000
$48,000
$19,200
$46,800
Year 3 ……………………….
Year 4 ……………………….
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Problem 24–3A (Continued)
Part 3
NET PRESENT VALUE OF ASSET USING STRAIGHT-LINE DEPRECIATION
Present
Present
Value of
Net Cash
Flows
Value of
1 at 10%
Net Cash
Flows
Year 1 ………………………………………………….
$ 43,200
0.9091
$ 39,273
Year 2 ………………………………………………….
46,800
0.8264
Year 3 ………………………………………………….
46,800
0.7513
Year 4 ………………………………………………….
46,800
0.6830
Year 5 ………………………………………………….
46,800
0.6209
Year 6 ………………………………………………….
0.5645
Totals ………………………………………………….
$273,600
Net present value …………………………………
$108,518
Part 4
NET PRESENT VALUE OF ASSET USING MACRS DEPRECIATION
Present
Present
Value of
Net Cash
Flows
Value of
1 at 10%
Net Cash
Flows
Year 1 ………………………………………………….
$ 46,800
0.9091
$ 42,546
Year 2 ………………………………………………….
51,120
0.8264
42,246
Year 3 ………………………………………………….
46,512
0.7513
34,944
Year 4 ………………………………………………….
43,747
0.6830
29,879
Year 5 ………………………………………………….
43,747
0.6209
27,163
Year 6 ………………………………………………….
0.5645
Totals ………………………………………………….
$273,600
Part 5
Analysis: The net present value using MACRS depreciation is greater than the
net present value using straight-line depreciation because the cash flows are
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
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Problem 24-4A (45 minutes)
Part 1
Alternative 1: Keep the old machine and have it overhauled
Item
Period
Cash
Flow
Present
Value Factor
at 10%
Present
Value of
Cash Flows
Revenues …………………………..
1 – 5
$95,000
3.7908
$360,126
Operating costs ………………….
1 – 5
(42,000)
3.7908
(159,214)
Total …………………………………..
(150,000)
Net present value ……………….
$ 60,226
Part 2
Alternative 2: Sell the old machine and buy a new one
Item
Period
Cash
Flow
Present
Value Factor
at 10%
Present
Value of
Cash Flows
Revenues …………………………..
1 – 5
$100,000
3.7908
$379,080
Operating costs ………………….
1 – 5
(32,000)
3.7908
(121,306)
Total …………………………………..
Net present value ……………….
Part 3
Interstate should keep the old machine and overhaul it. The cost savings
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Problem 24-5A (35 minutes)
Part 1: Payback period
Period
Cash flow
Cumulative cash flow
0 …………………………………………………………………..
$(250,000)
$(250,000)
1 …………………………………………………………………..
47,000
(203,000)
2 …………………………………………………………………..
52,000
(151,000)
3 …………………………………………………………………..
75,000
4 …………………………………………………………………..
94,000
5 …………………………………………………………………..
$76,000 / $94,000 = 0.8 (rounded)
The payback period is about 3.8 years.
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 ……………….
$(250,000)
1.0000
$(250,000)
$(250,000)
1 ……………….
0.9091
42,728
2 ……………….
0.8264
42,973
3 ……………….
0.7513
56,348
5 ……………….
125,000
0.6209
77,613
Part 3: Net present value
From the chart in part 2, we can see that the net present value of the
investment is $33,864.
Part 4
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Problem 24-6A (30 minutes)
Part 1: Payback period
Period
Cash flow
Cumulative cash flow
0 …………………………………………………………………..
$(250,000)
$(250,000)
1 …………………………………………………………………..
125,000
(125,000)
2 …………………………………………………………………..
3 …………………………………………………………………..
4 …………………………………………………………………..
5 …………………………………………………………………..
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 ……………….
$(250,000)
1.0000
$(250,000)
$(250,000)
1 ……………….
125,000
0.9091
2 ……………….
0.8264
3 ……………….
0.7513
5 ……………….
0.6209
Part 3: Net present value
From the chart in part 2, we can see that the net present value of the
investment is $62,366.
Part 4
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 24
1456
PROBLEM SET B
Problem 24-1B (50 minutes)
Part 2
Net
Net Cash
Income
Flow
Expected annual sales of new product …………………..
$1,150,000
$1,150,000
Expected annual costs of new product
Direct materials …………………………………………………..
300,000
300,000
Overhead excluding depr. on new asset ………………
210,000
210,000
Selling and administrative expenses ……………………
100,000
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Problem 24-1B (Continued)
Part 3
Part 4
Accounting rate of return = = 21.88%
Part 5
Present Value of Net Cash Flows
Present
Present
Value of
Net Cash
Flows
Value of
1 at 7%
Net Cash
Flows
Year 1 ……………………………………………………..
$105,000
0.9346
$ 98,133
Year 2 ……………………………………………………..
105,000
0.8734
91,707
Year 3 ……………………………………………………..
105,000
0.8163
85,712
Year 4* ……………………………………………………
0.7629
$35,000
$160,000*
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Problem 24-2B (55 minutes)
Part 1
PROJECT A
Net income …………………………………………………………………………………..
$39,900
$99,900
PROJECT B
Net income …………………………………………………………………………………..
$ 25,900
$105,900
Part 2
PROJECT A
Payback Period = = 2.40 years
PROJECT B
$240,000
$ 99,900
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Problem 24–2B (Continued)
Part 3
PROJECT A
Accounting rate of return = = 33.3%
PROJECT B
$39,900
$120,000*