Tell PROTECTED VIEW Be careful-files from the Internet can contain viruses. Unless you need to edit, it's safer to stay in NOTICE Most features are disabled because your Office product is inactive. To use for free, sign in and use ti F6 fx B $ per Unit 3.50 A D Solaris, Inc. manufactures lighting units for the home market. The company is currently looking to expand its product line but lacks the available capital to do so. Solaris' management believes that it can free up capital by outsourcing production of Part #77c (an internal power conditioner) overseas. This particular part is currently manufactured internally at the same facility as several of Solaris, Inc.'s other parts and the vast majority of fixed costs related to its production are, therefore, unavoidable. Information pertaining to the quantity of 77c's needed as well as the outsourcing, variable, and avoidable fixed costs of this part are as 2 follows: 3 Quantity of Part 77c Needed for Production 100,000 4 Unit Purchase Cost if Outsourced 6.00 5 Direct Materials 6 Direct Labor per Unit 2.75 7 Variable Overhead per Unit 2.25 8 Avoidable Fixed Manufactunng Costs 50,000 Prepare a differential analysis in order to find the costs savings that Solaris will experience if it outsources 9 production of these internal power conditioners. Manufacture Outsource Cost of Producing Part 77c's Difference 10 Internally Production 11 Variable Costs: 12 Direct Materials 13 Direct Labor Variable Manufacturing Overhead 15 Avoidable Fixed Costs 16 Purchase Cost of Outsourcing 17 Total Expected Cost of Part 770's Using the results of this differential analysis, determine the amount of capital that Solaris, Inc. will free up by 18 outsourcing production of part #77c-an internal power conditioner Amount of Free Capital Created by Outsourcing Production 20 14 19 21 22 22 115 fx 6 9 A B D E F Information about Potential Projects Solaris, Inc. has ten potential projects it can undertake using the capital which was freed up by outsourcing production of one of its parts. Information regarding the initial investment, residual value, 2 life, and future cash flows of each potential project are as follows: 3 Project A Project B Project C Project D Project Initial Investment $ 200,000 $ 270,000 $ 100,000 $ 100,000 $ 300,000 5 Residual Value 20,000 10,000 5,000 6 Life of Project (Years) 6 3 5 6 7 Cash Flows: 8 Year One 40,000 60,000 40,000 25,000 75,000 Year Two 40,000 60,000 40,000 25,000 75,000 10 Year Three 40,000 60,000 40,000 25,000 75,000 11 Year Four 40,000 60,000 25,000 75,000 Year Five 40,000 60,000 25,000 75,000 13 Year Six 40,000 60,000 75,000 14 Project F Project G Project H Project 1 Project ] Initial Investment $ 110,000 $ 250,000 $ 190,000 $ 300,000 $ 120,000 16 Residual Value 20,000 5,000 50,000 Life of Project (Years) 6 5 6 6 18 Cash Flows: 19 Year One 60,000 30,000 100,000 50,000 40,000 20 Year Two 30,000 30,000 60,000 100,000 40,000 21 Year Three 20,000 30,000 60,000 100,000 20,000 22 Year Four 20,000 60,000 40,000 25,000 20,000 23 Year Five 20,000 60,000 25,000 25,000 10,000 Year Six 80,000 50,000 10,000 Note: The receipt of cash from the residual value for all potential projects has already been included in its last year of cash flows. For example, Project A's year six cash flows of $40,000 already include the $20,000 25 residual value of the assets necessary for the project. 26 12 15 17 5 24 27 28 6 Part Two-Screen Potential Projects Using the Payback Method Fill out the following table to determine the payback period for all potential projects, Discard any potential projects that do not meet Solaris, Inc.'s maximum payback period. Maximum back Penod 4.50 Ye Progeeta Present Project Prat let Acumulated cambid 1 / Amma dermed 9 3 0 1 2 6 3 Toback 1 Proc Project multe Boo Year Hout 1 Acrowote med 2 9 3 0 lah 22 23 24 5 26 27 un es safer to stay in Protected Vier Most features are disabled because your Office product is inactive. To use for free, sign in and use the Web versio Jx H27 A B D E 1 F Part Three-Screen Potential Projects By Determining Their ARR Fill out the following tables in order to determine the accounting rate of return (ARR) of the remaining projects that you did not disqualify after screening using the payback method (leave the colums for these projects blank.) Disqualify any of the 2 remaining projects that do need meet Solaris, Inc.'s required accounting rate of return. 3 Required Accounting Rate of Return 13.00% 4 Step one: determine the average annual income for each potential project 5 Project A Project B 6 Sum of net cash intlows Project C Project D Project E 7 Less depreciation over operating life 8 Operating income during operating life 9 Divide by: operating life an years) 10 Average annual income 11 Project Project G Project 1 Project ! 12 Sum ol net cash inflows Project 13 Less: depreciation over operating life 14 Operating income during operating life 15 Divide by: operating life am years) 16 Average annual income 17 Step two: determine the average amount that will be invested in each potential project 18 Project A Project B Project Project D Project 1 19 Initial investment 20 Add: residual vale 21 Subtotal 22 Divide by: 2 23 Average amount invested Project 1 Project G Project H Project Project 25 Initial investment 26 Adds residual value 27 Subtotal 28 Divide by:2 29 Average amount invested 30 Step three: determine the accounting rate of return Assignment Info Out 24 31 Step three: determine the accounting rate of return Project A Project-B Project C Project D Project E 32 Average annual income 33 Divide by average amount invested 34 Accounting rate of retum 35 36 Average annual income 37 Divide by average amount invested 38 Accounting rate of retum 39 Project Project G Project H Project Project ] 0 91 42 13 D E F Now that Solaris, Inc. has screened out all potential projects that did not meet the company's requirements for payback or ARR, the company's accounting staff is ready to determine the most profitable project(s) to undertake with the newly available capital it created by outsourcing production of part #77c's. The company will discount all future cash flows at a rate of 10% annually. Fill out the chart below to determine the net present value (NPV) 2 of the remaining potential projects. 3 Discount Rate 10.00% 4 Project 5 Initial investment 6 Year one cash inflow 7 Year two cash inflow 8 Year three cash inflow 9 Year four cash inflow 10 Year five cash inflow 11 Year six cash inflow 12 13. Net Present Value In approximately one to two paragraphs describe which potential projects Solaris, Inc. should choose to 14 undertake with the capital it freed up from outsourcing production, 15 16 17