Bed & Bath, a retailing company, has two departments-Hardware and Linens. The company's most recent monthly contribution format Income statement follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) Department Total Hardware Linens $ 4,150,000 $ 3,140,000 $ 1,010,000 1,302,000 891,000 411,000 2,848,000 2,249,800 599,000 2,270,000 1,488, 890 870,000 $ 578,000 $ 849,000 S (271,000) A study indicates that $378,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 18% decrease in the sales of the Hardware Department Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department? Financial (disadvantage Oxford Company has limited funds available for investment and mustration the funds among four competing projects. Selected information on the four projects follows: Rate Project A B Life of Net the Internal Investment Present Project Required Value (years) of Return $860,000 $481,252 8 24% 5675,000 $341,980 13 19% 5560,000 $172,682 8 $760,000 $165, 457 3 22% 183 cos The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth Required: 1. Compute the project profitability Index for each project 2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return Labeau Products, Ltd. of Perth, Australia, has $29,000 to invest The company is trying to decide between two alternative uses for the funds as follows: Investment required Annual cash inflows Single cash inflow at the end of 6 years Life of the project Invest in Invest in Project X Project Y $ 29,000 $ 29,000 $ 8,000 $ 60,000 6 years 6 year's The company's discount rate is 15% Click here to view Exhibit 138.1 and Exhibit 13B-2. to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net present value of Project X 2. Compute the net present value of Project Y 3. Which project would you recommend the company accept? Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $102,990, including freight and installation. Henrie's estimated the new machine would increase the company's cash Inflows, net of expenses, by $30,000 per year. The machine would have a five-year useful life and no salvage value, Click here to view Exhibit 138-1 and Exhibit 138-2. to determine the appropriate discount factor(s) using table. Required: 1. What is the machine's internal rate of return? (Round your final answer to the nearest whole percentage.) 2. Using a discount rate of 14%, what is the machine's net present value? Interpret your results 3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $27170 per year Under these conditions, what is the internal rate of return? (Round your final answer to the nearest whole percentage.) 1 2 3 Internal rate of return Net present value Internal rate of return 25 N
