ACCT221 AssessmentFall 2017

LO Functional Knowledge

Brummel Limited bronzes accounting textbooks for students who want to cherish those fond memories of studying accounting. At the present time, Brummels operation is all done manually. Kane Manufacturing wants Brummel to automate its operation with one of Kanes bronzing machines. Selected information relating to the two proposals is as follows:

	Proposal X	Proposal Y
Equipment cost	$220,000	$410,000
Sales	$280,000	$380,000
Variable cash operating costs	132,000	182,000
Depreciation expense	37,000	79,000
Fixed cash operating costs	73,000	60,000

Brummel suspects that bronzed accounting textbooks will only be popular for the next five years due to the burgeoning market for textbook apps. The companys required rate of return is 14%.

Required:

Build an worksheet to compute the following:

1table calculating cash flows for each year for Proposal X and Proposal Y

2Calculate the following for each investment:

Payback period

Simple rate of return

Net present value

Internal rate of return

3using the table you created in questions 1 and 2, determine the impact on payback, simple rate of return, net present value, and internal rate of return for each of the following independent scenarios (assume all other information remains the same as in the original problem):

The cost of Proposal Y has increased to $500,000

Proposal X requires additional cash operating costs of $10,000 each year

The NPV and IRR of Proposal X and Proposal Y assuming the required rate of return is 21%

Use this table to submit your answers:

	Payback	Simple Rate of Return	NPV	IRR
Cost of Proposal Y increased to $500,000
Proposal X requires additional cash operating costs of $10,000 each year
The NPV and IRR of Proposal X and Proposal Y assuming the required rate of return is 21%

Discuss all your work. What recommendations would you make based on your findings? Justify your response.

Compare and contrast the payback and accounting rate of return methods to NPV and IRR methods for capital budgeting analysis.

What would be the impact on the NPV and IRR if there is a salvage value?

How do the concepts of time value of money impact your discipline? Give an example to support your narrative.