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Principles of Accounting, Volume 2: Managerial Accounting

Problem Set B

Principles of Accounting, Volume 2: Managerial AccountingProblem Set B
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PB 1.

LO 11.2A bookstore is planning to purchase an automated inventory/remote marketing system, which includes an upgrade to a more sophisticated cash register system. The package has an initial investment cost of $360,000. It is expected to generate $144,000 of annual cash flows, reduce costs and provide incremental cash revenues of $326,000, and incur incremental cash expenses of $200,000 annually.

What is the payback period and accounting rate of return (ARR)?

PB 2.

LO 11.2Markoff Products is considering two competing projects, but only one will be selected. Project A requires an initial investment of $42,000 and is expected to generate future cash flows of $6,000 for each of the next 50 years. Project B requires an initial investment of $210,000 and will generate $30,000 for each of the next 10 years. If Markoff requires a payback of 8 years or less, which project should it select based on payback periods?

PB 3.

LO 11.3Use the tables in Appendix B to answer the following questions.

  1. If you would like to accumulate $4,200 over the next 6 years when the interest rate is 8%, how much do you need to deposit in the account?
  2. If you place $8,700 in a savings account, how much will you have at the end of 12 years with an interest rate of 8%?
  3. You invest $2,000 per year, at the end of the year, for 20 years at 10% interest. How much will you have at the end of 20 years?
  4. You win the lottery and can either receive $500,000 as a lump sum or $60,000 per year for 20 years. Assuming you can earn 3% interest, which do you recommend and why?
PB 4.

LO 11.3Chang Consulting, Inc., has a $15,000 overdue debt with Supplier No. 1. The company is low on cash, with only $4,000 in the checking account and does not want to borrow any more cash. Supplier No. 1 agrees to settle the account in one of two ways:

Option 1: Pay $4,000 now and $18,750 when some large projects are finished, two years from today.

Option 2: Pay $25,000 three years from today, when even larger projects are finished.

Assuming that the only factor in the decision is the cost of money (8%), which option should Clary choose?

PB 5.

LO 11.4Mason, Inc., is considering the purchase of a patent that has a cost of $85,000 and an estimated revenue producing life of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows:

Year 1, 2, 3, and 4 respectively: Net Income: $6,900, 9,600, 3,000, 6,300. Operating cash flows: 19,500, 18,700, 20,250, 15,9000
  1. What is the NPV of the investment?
  2. What happens if the required rate of return increases?
PB 6.

LO 11.4There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment or $28,000 and is expected to generate the following cash flows:

First Year, Second Year, Third Year, Total (respectively): Alpha Project: 22,000, 23,500, 5,000, 50,500. Beta Project: 12,700, 22,000, 15,800, 50,500.

If the discount rate is 5% compute the NPV of each project and make a recommendation of the project to be chosen.

PB 7.

LO 11.4Use the information from the previous exercise to calculate the Internal Rate of Return on both projects and make a recommendation regarding which one to accept.

PB 8.

LO 11.4D&M Pizza has a delivery car that is uses for pizza deliveries. The transmission needs to be replaced, and there are several other repairs that need to be done. The car is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. D&M’s has put together the following budgetary items:

Present Car: Transmission replacement and other work needed $6,500, annual Cash Operating Cost $8,500, Fair Market Value Now $6,000, FMV in five more years $100. New Car: Purchase cost new $30,000, Annual Cash Operating Cost 7,500, FMV in five more years $6,000.

If D&M replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they purchase a new vehicle, they will sell the existing one and use the new vehicle for 5 years and then trade it in for another new pizza delivery vehicle. If they trade for the new delivery vehicle, their operating expenses will decrease because the new vehicle is more gas efficient. This project is analyzed using a discount rate of 15%. What should D&M do?

PB 9.

LO 11.4Joliet Company is considering two alternative investments. The company requires an 18% return from its investments.

Project X, Project Y, Respectively: Initial Investment $108,000, 98,000. Net cash flows anticipated in year: 1, 36,000, 25,000; 2, 39,000, 45,000; 3, 32,000, 42,000; 4, 34,000, 28,000; 5, 25,000, 17,000.

Compute the IRR for both Projects and recommend one of them. For further instructions on internal rate of return in Excel, see Appendix C.

PB 10.

LO 11.5Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%.

Compute the net present value of this investment to determine whether Bouvier should invest in the grill.

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