Exercise 8-1 Net Present Value Method [LO8-1]

The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $30,000 machine that would reduce operating costs in its warehouse by $5,000 per year. At the end of the machines 8-year useful life, it will have no scrap value. The companys required rate of return is 12%. (Ignore income taxes.)

Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using table.

Required:
1.	Determine the net present value of the investment in the machine. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate to the nearest dollar amount.)

Item Years Cash Flow 12% Factor PV Cash Flows

Annual Cost savings 1-8

Initial Investment NOW

Net PV

2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Any cash outflows should be indicated by a minus sign.)

Item Years Toal Cash Flow

Annual Cost savings

Initial Investment

Net cash flow

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2.

Exercise 7-2 Dropping or Retaining a Segment [LO7-2]

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniorshome nursing, Meals On Wheels, and housekeeping. In the home nursing program, nurses visit seniors on a regular basis to check on their general health and to perform tests ordered by their physicians. The Meals On Wheels program delivers a hot meal once a day to each senior enrolled in the program. The housekeeping service provides weekly housecleaning and maintenance services. Data on revenue and expenses for the past year follow:

		Total		Home Nursing		Meals On Wheels		House keeping
Revenues	$	917,000	$	261,000	$	404,000	$	252,000
Variable expenses		479,000		118,000		209,000		152,000
Contribution margin		438,000		143,000		195,000		100,000
Fixed expenses:
Depreciation		69,800		8,300		41,000		20,500
Liability insurance		44,100		20,500		7,900		15,700
Program administrators salaries		115,000		40,800		38,600		35,600
General administrative overhead*		183,400		52,200		80,800		50,400
Total fixed expenses		412,300		121,800		168,300		122,200
Net operating income (loss)	$	25,700	$	21,200	$	26,700	$	(22,200)

*Allocated on the basis of program revenues.

Required:

1a.

What is the impact on net operating income by discontinuing housekeeping program?

		Total	Home Nursing	Meals on Wheels	House-keeping
	Revenues.........................	$	$	$
	Variable expenses..............
	Contribution margin...........
	Traceable fixed expenses:
	Depreciation...................
	Liability insurance...........
	Program administrators salaries........................
	Total traceable fixed expenses.......................
	Program segment margins.
	General administrative overhead.......................
	Net operating income (loss)

Comment

1b.

Should the housekeeping program be discontinued?

	Yes
	No

2a.	Prepare a segmented income statement.

2b.

Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services.

	Yes
	No

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The management of Weimar, Inc., a civil engineering design company, is considering an investment in a high-quality blueprint printer with the following cash flows:

Year	Investment	Cash Inflow
1	$75,000	$6,000
2	$7,000	$12,000
3		$18,000
4		$17,000
5		$20,000
6		$18,000
7		$16,000
8		$14,000
9		$10,000
10		$13,000

Required:
1.	Determine the payback period of the investment. (Round your answer to 1 decimal place.)

2.

Would the payback period be affected if the cash inflow in the last year were several times larger?

	Yes
	No