Managerial Accounting focuses heavily on finding solutions to numerical problems.With that in mind, most units will include a number of problems. For each problem, you will need to provide more than a simple numerical response. Your solutions should thoroughly address the issue and present the findings in a meaningful format similar to those developed within the chapters and as part of the review exercises solutions. Part value may be assigned for incorrect responses.

Instructions

At the end of each chapter is a series of Unit Exercises.Students are to complete the exercises in Word (or some other compatible word processor) and submit.

Notes

When solving NPV questions, you may use excel, a calculator, the equation method or the attached PVIF andPVIFA tables. All methods are acceptable for solving these types of problems.

Question 1

Bradley Company's required rate of return is 14%. The company has an opportunity to be the exclusive distributor of a very popular consumer item. No new equipment would be needed, but the company would have to use one-fourth of the space in a warehouse it owns. The warehouse cost $200,000 new. The warehouse is currently half-empty, and there are no other plans to use the empty space. In addition, the company would have to invest $100,000 in working capital to carry inventories and accounts receivable for the new product line. The company would have the distributorship for only five years. The distributorship would generate a $17,000 net annual cash inflow. (Ignore income taxes in this problem.)

What is the net present value of the project at a discount rate of 14%? Should the project be accepted?

Question 2

King Company's required rate of return is 10%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently. (Ignore income taxes in this problem.)

Machine A will cost $25,000 and will have a useful life of 15 years. Its salvage value will be $1,000 and cost savings are projected at $3,500 per year. Calculate the machine's net present value.

How much should King Company be willing to pay for Machine B if the machine promises annual cash inflows of $5,000 per year for eight years?

Machine C has a projected life of ten years. What is the machine's internal rate of return if it costs $31,296 and will save $6,000 annually in cash operating costs? Would you recommend to King Company to purchase Machine C? Explain.

Question 3

Big Cat Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows:

Purchase cost: $180,000

Annual cost savings that will be provided by the equipment: $37,500

Life of the equipment: 12 years

(Ignore income taxes.)

Compute the payback period for the equipment. If the company rejects all proposals with a payback period of more than four years, would the equipment be purchased?

Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment's useful life, assuming $0 salvage value. Would the equipment be purchased if the company's required rate of return is 14%?

Question 4

Consider each of the following situations independently.

Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment. Compute the present value of the cash inflows for each investment using a 20% discount rate.

Year

Investment X Investment Y

1 $1,000 $4,000

2 2,000 3,000

3 3,000 2,000

4 4,000 1,000

Total $10,000 $10,000

At the end of three years, when you graduate from college, your father has promised to give you a used car that will cost $12,000. What lump sum must he invest now to have the $12,000 at the end of three years if he can invest money at:

6%?

10%?

Mark has just won the grand prize on the Hoot 'n' Holler quiz show. He has a choice between (a) receiving $500,000 immediately and (b) receiving $60,000 per year for eight years plus a lump sum of $200,000 at the end of the eight-year period. If Mark can get a return of 10% on his investments, which option would you recommend that he accept? (Use present value analysis and show all computations.)

You have just learned that you are a beneficiary in the will of your late Aunt Susan. The executrix of her estate has given you three options as to how you may receive your inheritance:

You may receive $50,000 immediately.

You may receive $75,000 at the end of six years.

You may receive $12,000 at the end of each year for six years (a total of $72,000).

If you can invest money at a 12% return, which option would you prefer?