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11/21/2015 CH 13 - Capital Budgeting Reda Alrashid Managerial Accounting 15e: Fall 2015 CH 13 - Capital Budgeting 1. instructions | help value: 1.87 points The management of Kunkel Company is considering the purchase of a $26,000 machine that would reduce operating costs by $6,500 per year. At the end of the machine's fiveyear useful life, it will have zero scrap value. The company's required rate of return is 16%. Click here to view Exhibit 13B1 and Exhibit 13B2, 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. Use the appropriate table to determine the discount factor(s).) Now 1 2 3 4 5 Purchase of machine Reduced operating costs Total cash flows $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0 0 0 0 0 0 $ 0 Discount factor (16%) Present value Net present value 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.) Total Cash Item Cash Flow Years Flows Annual cost savings $ Initial investment 0 $ Net cash flow 0 0 rev: 11_22_2014_QC_59826 Hints References eBook & Resources Hint #1 Check my work 2015 McGraw-Hill Education. All rights reserved. http://ezto.mheducation.com/hm.tpx 1/1 11/21/2015 CH 13 - Capital Budgeting Reda Alrashid Managerial Accounting 15e: Fall 2015 CH 13 - Capital Budgeting 2. instructions | help value: 1.87 points Wendell's Donut Shoppe is investigating the purchase of a new $52,100 donutmaking machine. The new machine would permit the company to reduce the amount of parttime help needed, at a cost savings of $6,100 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,800 dozen more donuts each year. The company realizes a contribution margin of $1.70 per dozen donuts sold. The new machine would have a sixyear useful life. Click here to view Exhibit 13B1 and Exhibit 13B2, to determine the appropriate discount factor(s) using tables. Required: 1. What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? Annual savings in parttime help Added contribution margin from expanded sales $ Annual cash inflows 0 2. Find the internal rate of return promised by the new machine to the nearest whole percent. Internal Rate of Return Choose Numerator: / Choose Denominator: = Factor / = Factor / Number of years Internal rate of return = % 3. In addition to the data given previously, assume that the machine will have a $10,000 salvage value at the end of six years. Under these conditions, compute the internal rate of return to the nearest whole percent. (Round discount factor(s) to 3 decimal places.) Internal rate of return % rev: 10_17_2014_QC_55964, 10_28_2014_QC_55964, 11_18_2014_QC_59195 Hints References http://ezto.mheducation.com/hm.tpx eBook & Resources 1/2 11/21/2015 Hints References CH 13 - Capital Budgeting eBook & Resources Hint #1 Check my work 2015 McGraw-Hill Education. All rights reserved. http://ezto.mheducation.com/hm.tpx 2/2 11/21/2015 CH 13 - Capital Budgeting Reda Alrashid Managerial Accounting 15e: Fall 2015 CH 13 - Capital Budgeting 3. instructions | help value: 1.87 points The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $74,000. The machine would replace an old piece of equipment that costs $19,000 per year to operate. The new machine would cost $9,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $31,000. The new machine would have a useful life of 10 years with no salvage value. Required: Compute the simple rate of return on the new automated bottling machine. Simple rate of return Choose Numerator: Simple Rate of Return = Simple rate of return / References = / Hints / Choose Denominator: = % eBook & Resources Hint #1 Check my work 2015 McGraw-Hill Education. All rights reserved. http://ezto.mheducation.com/hm.tpx 1/1 11/21/2015 CH 13 - Capital Budgeting Managerial Accounting 15e: Fall 2015 CH 13 - Capital Budgeting 4. Reda Alrashid instructions | help value: 1.87 points Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense frozen yogurt products under The Yogurt Place name. Mr. Swanson has assembled the following information relating to the franchise: a. A suitable location in a large shopping mall can be rented for $4,600 per month. b. Remodeling and necessary equipment would cost $384,000. The equipment would have a 10year life and an $38,400 salvage value. Straightline depreciation would be used, and the salvage value would be considered in computing depreciation. c. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $490,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $89,000 per year for salaries, $5,400 per year for insurance, and $46,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 13.5% of sales. Required: 1. Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet. PAUL SWANSON Contribution Format Income Statement Variable expenses: 0 0 Selling and administrative expenses: 0 0 2a. Compute the simple rate of return promised by the outlet. (Round percentage answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.) Simple rate of return % 2b. If Mr. Swanson requires a simple rate of return of at least 20%, should he acquire the franchise? Yes http://ezto.mheducation.com/hm.tpx 1/2 11/21/2015 CH 13 - Capital Budgeting No 3a. Compute the payback period on the outlet. (Round your answer to 1 decimal place.) Payback period years 3b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise? Yes No References eBook & Resources Worksheet Learning Objective: 1301 Determine the payback period for an investment. Difficulty: 1 Easy Learning Objective: 1306 Compute the simple rate of return for an investment. Check my work 2015 McGraw-Hill Education. All rights reserved. http://ezto.mheducation.com/hm.tpx 2/2 11/21/2015 CH 13 - Capital Budgeting Reda Alrashid Managerial Accounting 15e: Fall 2015 CH 13 - Capital Budgeting 5. instructions | help value: 1.87 points The Sweetwater Candy Company would like to buy a new machine that would automatically \"dip\" chocolates. The dipping operation is currently done largely by hand. The machine the company is considering costs $210,000. The manufacturer estimates that the machine would be usable for five years but would require the replacement of several key parts at the end of the third year. These parts would cost $10,200, including installation. After five years, the machine could be sold for $5,000. The company estimates that the cost to operate the machine will be $8,200 per year. The present method of dipping chocolates costs $42,000 per year. In addition to reducing costs, the new machine will increase production by 4,000 boxes of chocolates per year. The company realizes a contribution margin of $1.45 per box. A 10% rate of return is required on all investments. Click here to view Exhibit 13B1 and Exhibit 13B2, to determine the appropriate discount factor(s) using tables. Required: 1. What are the annual net cash inflows that will be provided by the new dipping machine? Reduction in annual operating costs: Operating costs, present hand method Operating costs, new machine Annual savings in operating costs 0 Increased annual contribution margin $ Total annual net cash inflows 0 2. Compute the new machine's net present value. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places and intermediate calculations to nearest dollar amount.) Now 1 2 3 4 5 Purchase of machine Annual net cash inflows Replacement parts Salvage value of machine Total cash flows $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0 0 0 0 0 0 Discount factor (10%) Present value Net present value $ 0 rev: 08_07_2014_QC_52185, 10_17_2014_QC_55956 References http://ezto.mheducation.com/hm.tpx eBook & Resources 1/2 11/21/2015 CH 13 - Capital Budgeting Expanded table Difficulty: 1 Easy Learning Objective: 1302 Evaluate the acceptability of an investment project using the net present value method. Check my work 2015 McGraw-Hill Education. All rights reserved. http://ezto.mheducation.com/hm.tpx 2/2 11/21/2015 CH 13 - Capital Budgeting Reda Alrashid Managerial Accounting 15e: Fall 2015 CH 13 - Capital Budgeting 6. instructions | help value: 1.87 points Julie has just retired. Her company's retirement program has two options as to how retirement benefits can be received. Under the first option, Julie would receive a lump sum of $132,000 immediately as her full retirement benefit. Under the second option, she would receive $15,000 each year for fifteen years plus a lumpsum payment of $51,000 at the end of the fifteenyear period. Click here to view Exhibit 13B1 and Exhibit 13B2, to determine the appropriate discount factor(s) using tables. Required: 1a. Calculate the present value for the following assuming that the money can be invested at 14%. (Round discount factor(s) to 3 decimal places.) Present Value of First Option Cash Flow Lumpsum payment Discount Factor = Present Value Present Value of Second Option Cash Flow Discount Factor = Annual annuity Lumpsum payment Present Value Total present value $ 0 1b. If you can invest money at a 14% return, which option would you prefer? First option Second option References Expanded table eBook & Resources Difficulty: 1 Easy Learning Objective: 1307 (Appendix 13A) Understand present value concepts and the use of present value tables. Check my work 2015 McGraw-Hill Education. All rights reserved. http://ezto.mheducation.com/hm.tpx 1/1 11/21/2015 CH 13 - Capital Budgeting Managerial Accounting 15e: Fall 2015 CH 13 - Capital Budgeting 7. Reda Alrashid instructions | help value: 1.87 points Gaston Company is considering a capital budgeting project that would require a $2,600,000 investment in equipment with a useful life of five years and no salvage value. The company's tax rate is 30% and its after tax cost of capital is 16%. It uses the straightline depreciation method for financial reporting and tax purposes. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed outofpocket costs Depreciation $3,400,000 1,780,000 1,620,000 $560,000 520,000 Total fixed expenses Net operating income 1,080,000 $ 540,000 Click here to view Exhibit 13B1 and Exhibit 13B2, to determine the appropriate discount factor(s) using tables. Required: Compute the project's net present value. (Round discount factor(s) to 3 decimal places.) Net present value Garrison 15e Recheck 20141229, 01_17_2015_QC_CS2705, 01_19_2015_QC_CS2705, 01_21_2015_QC_CS2705 Hints References eBook & Resources Hint #1 Check my work 2015 McGraw-Hill Education. All rights reserved. http://ezto.mheducation.com/hm.tpx 1/1 11/21/2015 CH 13 - Capital Budgeting Managerial Accounting 15e: Fall 2015 CH 13 - Capital Budgeting 8. Reda Alrashid instructions | help value: 1.91 points Lander Company has an opportunity to pursue a capital budgeting project with a fiveyear time horizon. After careful study, Lander estimated the following costs and revenues for the project: Cost of equipment needed Working capital needed Overhaul of the equipment in two years Annual revenues and costs: Sales revenues Variable expenses Fixed outofpocket operating costs $250,000 $ 60,000 $ 18,000 $350,000 $180,000 $ 80,000 The piece of equipment mentioned above has a useful life of five years and zero salvage value. Lander uses straightline depreciation for financial reporting and tax purposes. The company's tax rate is 30% and its aftertax cost of capital is 12%. When the project concludes in five years the working capital will be released for investment elsewhere within the company. Click here to view Exhibit 13B1 and Exhibit 13B2, to determine the appropriate discount factor(s) using tables. Required: Calculate the net present value of this investment opportunity. (Negative amounts should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.) Net present value References Worksheet eBook & Resources Difficulty: 1 Easy Learning Objective: 1308 (Appendix 13C) Include income taxes in a net present value analysis. Check my work 2015 McGraw-Hill Education. All rights reserved. http://ezto.mheducation.com/hm.tpx 1/1