managerial accounting

Example Old New $390,000 Purchase Price Book value Current disposal value Salvage value Useful Life Depreciation Working capital $ 40,000 $ 6,500 S 0 5 years $ 8,000 $ 6,000 % 0 5 years $ 78,000 $15,000 Income tax rate -40% Required Rate of Return = 8% Before-tax operational cash savings: $120,000 in year 1 through 4 $105,000 in year 5 1. Initial Cash Flows Price of new machine $390,000 After-tax Cash Flow from Current Disposal of Old Machine $6,500 + (S40,000 - $6,500) x 40% - $19.900 Initial Working Capital Investment $15,000 - $6,000 $9,000 Total initial cash flows: $390,000 - $19,900 + $9,000 - $379,100 2. Recurring Cash Flows from Operation After-tax cash inflows from operations or from savings in operating costs $120,000 x (1 -0.4) for years 1 through 4 x 3.312 - $238,464 $105,000 x (1 -0.4) for year 5 x 0.681 - $42,903 Tax savings from annual depreciation (578,000 - $8,000) x 40% for years through 5 x 3.993 = $111.804 Total cash flows from operation $238,464 + $42.903 + $111.804 - $393,171 3. Terminal Cash Flows After-tax cash inflow from salvage value of new asset Disposal value of new machine - $0 Deducting Tax paying on gain - 50 Adding Tax saving on loss - $0 After-tax cash inflow from recovery of working capital ($15,000 - $6,000) x 0.681 - $6,129 4. Net Present Value $393,171 + $6,129 - $379,100 - $20,200 5. Payback Period Initial investment: $379,100 1"year: $120,000 x (1 -0.4)+($78,000 - $8,000) x 40% - 72,000 + 28,000 - $100,000 20 year: $100,000+ $100,000 = $200,000 30 year: $100,000+ $100,000+ $100,000 = $300,000 4 year: $100,000 - $100,000+ $100,000+ $100,000 = $400,000 Therefore, 3.5 years Problem 1(40 points) SSU Inc. has one particular product that has an annual demand of 720 units per year. Total manufacturing costs per unit are $160. Direct material ordering costs for the product are $25 per order. Currently, the carrying costs per unit are 25% of total manufacturing costs. Required: a. Use the economic-order-quantity (EOQ) model to determine the optimal order size. (20 points) b. What is the total relevant cost (RTC) when the company orders the same amount as EOQ? (20 points) *EOQ = 720P *RTC = D/Q x P+Q/2 x C