Cash Payback Period, Net Present Value Method, and Analysis

Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows:

Year Plant Expansion Retail Store Expansion

1 $175,000 $147,000

2 144,000 172,000

3 124,000 118,000

4 112,000 83,000

5 35,000 70,000

Total $590,000 $590,000

Each project requires an investment of $319,000. A rate of 10% has been selected for the net present value analysis.

Present Value of $1 at Compound Interest

Year 6% 10% 12% 15% 20%

1 0.943 0.909 0.893 0.870 0.833

2 0.890 0.826 0.797 0.756 0.694

3 0.840 0.751 0.712 0.658 0.579

4 0.792 0.683 0.636 0.572 0.482

5 0.747 0.621 0.567 0.497 0.402

6 0.705 0.564 0.507 0.432 0.335

7 0.665 0.513 0.452 0.376 0.279

8 0.627 0.467 0.404 0.327 0.233

9 0.592 0.424 0.361 0.284 0.194

10 0.558 0.386 0.322 0.247 0.162

Required:

1a. Compute the cash payback period for each project.

Cash Payback Period

Plant Expansion

Retail Store Expansion

1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar.

Plant Expansion Retail Store Expansion

Present value of net cash flow total $ $

Less amount to be invested $ $

Net present value $ $

2. Because of the timing of the receipt of the net cash flows, the

offers a higher

.

Profit Center Responsibility Reporting for a Service Company

Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31:

RevenuesN Region $1,027,300 RevenuesS Region 1,221,700 RevenuesW Region 2,187,200 Operating ExpensesN Region 651,000 Operating ExpensesS Region 727,100 Operating ExpensesW Region 1,322,700 Corporate ExpensesDispatching 549,000 Corporate ExpensesEquipment Management 212,000 Corporate ExpensesTreasurers 156,200 General Corporate Officers Salaries 345,000

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurers Department. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the railroad cars inventories. It makes sure the right freight cars are at the right place at the right time. The Treasurers Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

North South West Number of scheduled trains 4,600 5,500 8,200 Number of railroad cars in inventory 1,000 1,600 1,400

Required:

1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

Thomas Railroad Company Divisional Income Statements For the Quarter Ended December 31 North South West Revenues $ $ $ Operating expenses Income from operations before service department charges $ $ $ Service department charges: Dispatching $ $ $ Equipment Management Total service department charges $ $ $ Income from operations $ $ $

2. What is the profit margin of each division? Round to one decimal place.

Region Profit Margin North Region % South Region % West Region %

Identify the most successful region according to the profit margin.

3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions? a.The method used to evaluate the performance of the divisions should be reevaluated. b.A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets). c.A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets). d.None of these choices would be included. e.All of these choices (a, b & c) would be included.

5.

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