Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 25
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Chapter 25
Capital Budgeting and Managerial
Decisions
QUESTIONS
1. Capital budgeting decisions require careful analysis because they are generally
3. Capital budgeting decisions are risky because: (1) the outcomes are uncertain, (2)
4. The payback period ignores both the present value of cash flows and all cash
5. A shorter payback period is desirable because management prefers to reduce the
risk that the investment might not be profitable over the long run. As a result of
6. If net income is earned evenly throughout each year and straight-line depreciation
($200,000 + $20,000)/ 2.
7. When the present value of expected net cash flows, discounted at 10%, exceeds
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8. Receiving $100 one year from today is worth less than $100 today because a
return can be earned on a $100 investment during the year. If $100 to be received
9. The internal rate of return is the rate that produces a net present value of zero. If
10. Accelerated depreciation produces larger tax deductions and lower tax payments
in the early years of an asset’s life compared with straight-line depreciation. This
11. An out-of-pocket cost requires a current outlay of cash. An opportunity cost is the
13. There are virtually no incremental costs associated with shipping the additional
14. Management could use one of the following common methods to evaluate the
15. The company might be willing to sell the units internationally if (a) the company
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 25
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QUICK STUDIES
Quick Study 25-1 (5 minutes)
Quick Study 25-2 (5 minutes)
Net present value of investment
Quick Study 25-3 (5 minutes)
Present value factor = Amount invested = $27,000 = 3.00
Quick Study 25-4 (10 minutes)
2. However, if the investments are different, then there are at least four
reasons why Investment B might be preferred over Investment A:
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Quick Study 25-7 (5 minutes)
Quick Study 25-8 (15 minutes)
Net present value of investment*
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Quick Study 25-9 (15 minutes)
Net present value of investment*
Quick Study 25-10 (10 minutes)
Quick Study 25-11 (15 minutes)
Net Cash
Flows
Present
Value of
1 at 12%
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Quick Study 25-12 (15 minutes)
Net Cash
Present
Value of
Quick Study 25-13 (10 minutes)
Present value factor = Amount invested = $47,947 = 2.2832 (rounded)
Quick Study 25-14 (10 minutes)
Net present value of investment
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Quick Study 25-15 (10 minutes)
Net present value of investment*
Since the NPV is positive the project should be accepted.
Quick Study 25-16 (10 minutes)
Present value factor = Amount invested = $125,374.60 = 9.6442
Quick Study 25-17 (5 minutes)
Quick Study 25-18 (15 minutes)
INCREMENTAL INCOME FROM NEW BUSINESS
Sales (750 units x $250) ……………………………………………………………………
$ 187,500
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Quick Study 25-19 (15 minutes)
Incremental cost analysis
Costs of purchasing
Cost to purchase………………………………………………………………………………
Revenue loss from reduced price ($13.50 – $12.00) …………………………..
Total cost …………………………………………………………………………………………
Savings of purchasing
Costs eliminated if purchased ($5 of $9) ……………………………………………
Quick Study 25-20 (10 minutes)
(Per unit)
Make
Buy
Quick Study 25-21 (15 minutes)
Scrap
Rework
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Quick Study 25-22 (15 minutes)
Sell as is
Process
further
Quick Study 25-23 (5 minutes)
(Per unit)
Sell as is
Process
further
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Quick Study 25-24 (15 minutes)
X
Y
Quick Study 25-25 (15 minutes)
Avoidable
Unavoidable
Expenses
Expenses
Cost of goods sold ……………………………………….
$56,000
—-
Direct expenses ……………………………………………
Quick Study 25-26 (5 minutes)
Avoidable
Expenses
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Quick Study 25-27 (10 minutes)
INCREMENTAL INCOME FROM REPLACING MACHINE
Quick Study 25-28 (15 minutes)
Year
Cash flows
Present value
of 1 at 10%
Present value of
cash flows
Cumulative
present value of
cash flows
Quick Study 25-29 (15 minutes)
Quick Study 25-30 (10 minutes)
Total
Costs
Direct materials ($100 x 10,000) …………………….
$1,000,000
Total cost ($2,500,000/10,000) ……………………….
Quick Study 25-31 (10 minutes)
Selling price = Total cost + markup
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Quick Study 25-32 (10 minutes)
Variable
Costs
Direct materials ($110 x 10,000) …………………….
$1,100,000
Per Unit
Variable cost ($1,900,000/10,000) …………………..
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 25
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EXERCISES
Exercise 25-1 (20 minutes)
Annual Net
Cumulative
Cash Flows
Cash Flows
Year 0 …………………………………………………………..
$(180,000)
$(180,000)
Cost of investment …………………………………………………………………..
$180,000
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Exercise 25-2 (20 minutes)
Net Cash
Flows
Present
Value of
1 at 10%
Exercise 25-3 (15 minutes)
ANNUAL CASH FLOWS
Net
Income
Depreciation*
Net Cash
Flow
Cumulative
Cash Flow
130,000
Year 0
$(150,000)
$(150,000)
Cost of machine ……………………………………………………………………
$150,000
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Exercise 25-4 (30 minutes)
COMPUTATION OF ANNUAL DEPRECIATION EXPENSE
Annual Depr.
Beginning
(40% of
Accum. Depr.
Ending
Year
Book Value
Book Value)
at Year-End
Book Value
1
$150,000
$60,000
$ 60,000
$90,000
2
90,000
54,000
3
54,000
32,400
5
19,440
ANNUAL CASH FLOWS
Net
Income
Depreciation
Net Cash
Flow
Cumulative
Cash Flow
(19,000)
119,440
Year 0
$(150,000)
$(150,000)
Cost of machine ……………………………………………………………………
$150,000
Paid back in years 1 and 2 ……………………………………………………..
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Exercise 25-5 (20 minutes)
a.
b.
Payback period = = = 3.62 years
Exercise 25-6 (20 minutes)
a.
Net present value of investment*
Present value of six $235,000** cash inflows ($235,000 x 4.3553) ……….
$1,023,496
Exercise 25-6 (continued)
Cost of investment
$520,000
Cost of investment
Annual net cash flow
$380,000
$105,000
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 25
1500
b.
Net present value of investment*
Present value of eight $105,000** cash inflows ($105,000 x 5.3349) ……..
$560,165
Exercise 25-7 (15 minutes)
$700,000 + $100,000
Present value of cash inflows ……………………………………………………….
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Exercise 25-8 (20 minutes)
COMPUTING NET CASH FLOWS FROM NET INCOME
Net income
Cash flows
Sales …………………………..…………………………………………
$225,000
$225,000
$ 36,750
Exercise 25-9 (15 minutes)
Annual
Net Cash
Flows
Present
Value of
Annuity
at 8%
Present
Value of
Net Cash
Flows
$36,750
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Exercise 25-10 (20 minutes)
PROJECT A
Net Cash
Flows
Present
Value of
1 at 10%
Year 1 ……………………………………………………….
0.9091
Year 2 ……………………………………………………….
0.8264
Year 3 ……………………………………………………….
0.7513
Year 4 ……………………………………………………….
0.6830
Year 5 ……………………………………………………….
0.6209
PROJECT B
Net Cash
Flows
Present
Value of
1 at 10%
Year 1 ……………………………………………………….
$ 32,000
0.9091
Year 2 ……………………………………………………….
0.8264
Year 3 ……………………………………………………….
0.7513
Year 4 ……………………………………………………….
0.6830
Year 5 ……………………………………………………….
0.6209