Question

BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below.

		Machine A		Machine B
Original cost		$74,100		$183,000
Estimated life		8 years		8 years
Salvage value		0		0
Estimated annual cash inflows		$20,500		$39,500
Estimated annual cash outflows		$4,850		$10,020

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Calculate the net present value and profitability index of each machine. Assume a 9% discount rate.

2. Turney Company produces and sells automobile batteries, the heavy-duty HD-240. The 2020 sales forecast is as follows.

Quarter		HD-240
1		5,300
2		7,490
3		8,470
4		10,290

3. The January 1, 2020, inventory of HD-240 is 2,120 units. Management desires an ending inventory each quarter equal to 40% of the next quarter’s sales. Sales in the first quarter of 2021 are expected to be 25% higher than sales in the same quarter in 2020.

Prepare quarterly production budgets for each quarter and in total for 2020.

Rodriguez, Inc., is preparing its direct labor budget for 2020 from the following production budget based on a calendar year.

Quarter		Units		Quarter		Units
1		20,200		3		35,240
2		25,280		4		30,120

Each unit requires 1.80 hours of direct labor.

Prepare a direct labor budget for 2020. Wage rates are expected to be $18 for the first 2 quarters and $20 for quarters 3 and 4. (Round Direct labor time per unit answers to 2 decimal places, e.g. 52.50.)

Fultz Company has accumulated the following budget data for the year 2020. 1. Sales: 31,310 units, unit selling price $85. 2. Cost of one unit of finished goods: direct materials 1 pound at $5 per pound, direct labor 3 hours at $12 per hour, and manufacturing overhead $7 per direct labor hour. 3. Inventories (raw materials only): beginning, 10,100 pounds; ending, 15,400 pounds. 4. Selling and administrative expenses: $170,000; interest expense: $30,000. 5. Income taxes: 30% of income before income taxes.

Prepare a schedule showing the computation of cost of goods sold for 2020.

Answer 1

Answer to Question 1:

Machine A:

Original Cost = $74,100
Estimated Life = 8 years

Annual Net Cash Flows = Annual Cash Inflows - Annual Cash Outflows
Annual Net Cash Flows = $20,500 - $4,850
Annual Net Cash Flows = $15,650

Present Value of Cash Flows = $15,650 * PVA of $1 (9%, 8)
Present Value of Cash Flows = $15,650 * 5.53482
Present Value of Cash Flows = $86,620

Net Present Value = Present Value of Cash Flows - Initial Investment
Net Present Value = $86,620 - $74,100
Net Present Value = $12,520

Profitability Index = Present Value of Cash Flows / Initial Investment
Profitability Index = $86,620 / $74,100
Profitability Index = 1.17

Machine B:

Original Cost = $183,000
Estimated Life = 8 years

Annual Net Cash Flows = Annual Cash Inflows - Annual Cash Outflows
Annual Net Cash Flows = $39,500 - $10,020
Annual Net Cash Flows = $29,480

Present Value of Cash Flows = $29,480 * PVA of $1 (9%, 8)
Present Value of Cash Flows = $29,480 * 5.53482
Present Value of Cash Flows = $163,166

Net Present Value = Present Value of Cash Flows - Initial Investment
Net Present Value = $163,166 - $183,000
Net Present Value = -$19,834

Profitability Index = Present Value of Cash Flows / Initial Investment
Profitability Index = $163,166 / $183,000
Profitability Index = 0.89