1

Appropriate Transfer Prices: Opportunity Costs Plains Peanut Butter Company recently acquired a peanut-processing company that has a normal annual capacity of 3,000,000 pounds and that sold 2,700,000 pounds last year at a price of $2.00 per pound. The purpose of the acquisition is to furnish peanuts for the peanut butter plant, which needs 700,000 pounds of peanuts per year. It has been purchasing peanuts from suppliers at the market price. Production costs per pound of the peanut-processing company are as follows:

Direct materials	$0.50
Direct labor	0.26
Variable overhead	0.11
Fixed overhead at normal capacity	0.21
Total	$1.08

Management is trying to decide what transfer price to use for sales from the newly acquired Peanut Division to the Peanut Butter Division. The manager of the Peanut Division argues that $2.00, the market price, is appropriate. The manager of the Peanut Butter Division argues that the cost price of $1.08 (or perhaps even less) should be used since fixed overhead costs should be recomputed. Any output of the Peanut Division up to 2,700,000 pounds that is not sold to the Peanut Butter Division could be sold to regular customers at $2.00 per pound.

(b) Compute the annual gross profit for the Peanut Division using a transfer price of $1.08.

$Answer

Question2

Payback Period, IRR, and Minimum Cash Flows The management of Mesquite Limited is currently evaluating the following investment proposal:

Initial investment	$250,000	--	--	--	--
Net operating
cash inflows	--	$100,000	$100,000	$100,000	$100,000

(c) Given the amount of the initial investment, determine the minimum annual net cash inflows required to obtain an internal rate of return of 8 percent. Round the answer to the nearest dollar. $Answer Question3

Time Value of Money: Basics Using Table 12A.1 and Table 12A.2 of this chapter, determine the answers to each of the following independent situations.(Round answers to the nearest whole number.) (a) The future value in three years of $2,000 deposited today in a savings account with interest compounded annually at 4 percent. $Answer

(b) The present value of $9,000 to be received in six years, discounted at 12 percent.

$Answer

(c) The present value of an annuity of $5,000 per year for seven years discounted at 18 percent.

$Answer

(d) An initial investment of $42,680 is to be returned in eight equal annual payments. Determine the amount of each payment if the interest rate is 10 percent.

$Answer

(e) A proposed investment will provide cash flows of $30,000, $9,000, and $6,000 at the end of Years 1, 2, and 3, respectively. Using a discount rate of 14 percent, determine the present value of these cash flows.

Year 1 $Answer

Year 2 $Answer

Year 3 $Answer

(f) Find the present value of an investment that will pay $9,000 at the end of Years 10, 11, and 12. Use a discount rate of 12 percent.

$Answer

Question5

Ranking Investment Proposals: Payback Period, Accounting Rate of Return,and Net Present Value Presented is information pertaining to the cash flows of three mutually exclusive investment proposals:

Initial investment	$69,000	$69,000	$69,000
Cash flow from operations
Year 1	60,000	34,500	69,000
Year 2	9,000	34,500
Year 3	33,500	33,500
Disinvestment	0	0	0
Life (years)	3 years	3 years	1 year

(a) Select thebestinvestment proposalusing the payback period, the accounting rate of return on initial investment, and the net present value criteria. Assume that the organization's cost of capital is 10 percent.

Round accounting rate of returnfour decimal places. Round net present value to the nearest whole number. Use negative signs with your answers when appropriate.

Payback period (years)	Answer	Answer	Answer	AnswerYXX,ZZY,ZX,Y
Accounting rate of return	Answer	Answer	Answer	AnswerZX,ZY,ZXYX,Y
Net present value	Answer	Answer	Answer	AnswerY,ZX,YYX,ZZX