A company is considering an investment proposal to install new milling controls. The project will cost Kes50,000. The facility has a life expectancy of five years and no salvage value. The company’s tax rate is 40%. The estimated cash flows from the proposed investment proposal are as follows:

Year CF
1 10,000
2 11,000
3 14,000
4 15,000
5 25,000

Compute:
a. Accounting Rate of Return and advise management if the required rate of return is 6 %

b. Traditional Payback period and advise management on the feasibility of the project

c. Discounted payback period at 6% discounting factor

d. Net present value at 6% discounting factor and advise management on the project’s feasibility

e. Net present value at 15% discounting factor and advise management on the project’s feasibility

f. Internal rate of return and explain its significance to the firm

g. Profitability Index at 10% discounting factor

For the retail investor who would like to participate in a stock market, does it matter whether they choose to hold a ETF or an index fund? Which key variable drives the decision between either instrument

Bill ClintonBill Clinton

reportedly was paid an advance of

$ 10.0$10.0

million to write his book

My LifeMy Life.

Suppose the book took three years to write. In the time he spent​ writing, Clinton could have been paid to make speeches. Given his​ popularity, assume that he could earn

$ 8.1$8.1

million a year​ (paid at the end of the​ year) speaking instead of writing. Assume his cost of capital is

10.2 %10.2%

per year.                                       

a. What is the NPV of agreeing to write the book​ (ignoring any royalty​ payments)?

b. Assume​ that, once the book is​ finished, it is expected to generate royalties of

$ 4.9$4.9

million in the first year​ (paid at the end of the​ year) and these royalties are expected to decrease at a rate of

30 %30%

per year in perpetuity. What is the NPV of the book with the royalty​ payments?

Pisa​ Pizza, a seller of frozen​ pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be

$ 15$15

million per year. While many of these sales will be to new​ customers, Pisa Pizza estimates that

45 %45%

will come from customers who switch to the​ new, healthier pizza instead of buying the original version.  

a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new​ pizza?

b. Suppose that

58 %58%

of the customers who will switch from Pisa​ Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this​ case?

Beryl's Iced Tea currently rents a bottling machine for

$ 53 comma 000$53,000

per​ year, including all maintenance expenses. It is considering purchasing a machine​ instead, and is comparing two​ options:

a. Purchase the machine it is currently renting for

$ 150 comma 000$150,000.

This machine will require

$ 24 comma 000$24,000

per year in ongoing maintenance expenses.

b. Purchase a​ new, more advanced machine for

$ 265 comma 000$265,000.

This machine will require

$ 15 comma 000$15,000

per year in ongoing maintenance expenses and will lower bottling costs by

$ 13 comma 000$13,000

per year.​ Also,

$ 36 comma 000$36,000

will be spent upfront training the new operators of the machine.

Suppose the appropriate discount rate is

7 %7%

per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each​ year, as is the rental of the machine. Assume also that the machines will be depreciated via the​ straight-line method over seven years and that they have a​ ten-year life with a negligible salvage value. The corporate tax rate is

20 %20%.

Should​ Beryl's Iced Tea continue to​ rent, purchase its current​ machine, or purchase the advanced​ machine? To make this​ decision, calculate the NPV of the FCF associated with each alternative.

Note​:

the NPV will be​ negative, and represents the PV of the costs of the machine in each case.

OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost

$ 496$496

​million, but would operate for

2020

years. OpenSeas expects annual cash flows from operating the ship to be

$ 68.6$68.6

million​ (at the end of each​ year) and its cost of capital is 11.7 %11.7%

a. Prepare an NPV profile of the purchase using discount rates of

2.0 %2.0%​,

11.5 %11.5%

and

17.0 %17.0%.

b. Identify the IRR ​(to the nearest​ 1%) on a graph.

c. Is the purchase attractive based on these​ estimates?

d. How far off could​ OpenSeas? cost of capital be​ (to the nearest​ 1%) before your purchase decision would​ change?

Note​:

Subtract the discount rate from the actual IRR. Use Excel to compute the actual IRR.

There are those who suggest that any standard setting body is redundant because accounting standards are unnecessary. Other people feel that such standards should be produces, but by the government, so that they are a legal requirement.

Required:

Discuss the statement that accounting standards are unnecessary for the purpose of regulating financial statements.

Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,800.

A) 14%  
B) 12%
C) 8%
D) 25%

As the director of Big Sky Corp, you are evaluating two mutually exclusive projects with the following net cash flow:

Year     Cash Flow X ($)            Cash Flow Y ($)

0          -100,000                       -100,000

1          60,000                          20,000

2          30,000                          20,000

3          30,000                          40,000

4          10,000                          60,000

5          10,000                          20,000

What is the discount payback for project Y if the interest rate is 10% per year?

4.26 years

3.86 years

4.16 years

2.36 years

What is the NPV for project Y if the discount rate is 10% per year?

$21,588.77

$21,624.87

$18,162.57

$21,323.67

What is the IRR for Project Y?

15.150%

It has no IRR

14.150%

16.150%

What is the crossover rate for the two projects?

13.81%

15.81%

12.81%

14.81%

The intercept on the x-axis for project Y is…?

16.15%

14.15%

15.15%

It does not intercept X-axis

PLEASE show your work!

A director of a public listed company has expressed concerns about the accounting treatment of some of the company's items of property, plant and equipment which have increased in value. His concern is that the statement of financial position does not show the true value of assets which have increased in value and that this 'undervaluation' is compounded by having to charge depreciation on these assets, which also reduces reported profit. He argues that this does not make economic sense.

Required:

Respond to director's concerns by summarizing the principal requirements of IAS 16 Property, Plant and Equipment in relation the revaluation of property, plant and equipment, including subsequent treatment.

                  Using the 13% cost of capital, what is the project’s NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the project’s optimal (economic) life?

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,456.00 to install, $5,136.00 to operate per year for 7 years at which time it will be sold for $6,888.00. The second, RayCool 8, costs $41,798.00 to install, $2,013.00 to operate per year for 5 years at which time it will be sold for $8,968.00. The firm’s cost of capital is 6.80%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes .

You are valuing Soda City Inc. It has $104 million of debt, $89 million of cash, and 154 million shares outstanding. You estimate its cost of capital is 12.6%. You forecast that it will generate revenues of $703 million and $797 million over the next two years. Projected operating profit margin is 21%, tax rate is 29%, reinvestment rate is 23%, and terminal exit value multiple at the end of year 2 is 15. What is your estimate of its share price? Round to one decimal place. ​[Hint: Compute projected FCFF for years 1 and 2 based on info provided, compute terminal value using the exit multiple method, discount it all to find EV, walk the bridge to Equity, divide by number of shares outstanding.]

(L.O. 2 and 3) On January 1, 2017 Bengston Company amended its pension plan to provide greater benefits to its employees. The amendment to the plan resulted in prior service costs with a present value of $90,000. Also, the following facts relate to the pension plan for 2017

Projected benefit obligation, 12/31/16 $175,000

Plan assets, 12/31/16 171,000
Prior service cost, 1/1/17 90,000
Annual service cost, 2017 18,000

Settlement rate, 2017 12%

Actual return on plan assets 18,500
Employer’s contribution, 2017 42,000
Benefits paid to retirees, 2017 12,000
Balance in pension asset/liability, 12/31/16 4,000
Amortization of prior service cost using the years­of­service method 23,800

Instructions:

a. Based upon the information presented above prepare a pension worksheet for Bengston Company for 2017.

b.Record the journal entry to formally recognize the pension expense for 2017.

c.Prepare the reconciliation schedule for December 31, 2017.