Problem 4-7 Calculating Sustainable Growth [LO3]

Problem 4-4 EFN [LO2]

Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $390,000 is estimated to result in $148,000 in annual pretax cost savings. The press falls in the 5-year MACRS class, and it will have a salvage value at the end of the project of $48,000. The press also requires an initial investment in spare parts inventory of $21,000, along with an additional $3,150 in inventory for each succeeding year of the project. The shop’s tax rate is 21 percent and its discount rate is 8 percent. (MACRS schedule) Calculate the NPV of this project.

MACRS schedule

Compare and Contrast the size of the net assets (same as book value or same as equity) of the two companies.

Background You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting firm with offices in Orange, Wagga Wagga, Tamworth, Port Macquarie and Albury in NSW, Toowoomba in Queensland and Ballarat in Victoria. Although a medium-sized firm by national standards, SBF includes Australia’s largest regionally-based auditing practice. Most of SBF’s audit clients are in the manufacturing and service industries. SBF recently acquired a major new audit client, Dudley Health Limited (DHL), which fully owns:
• St Neville's, a highly regarded private hospital located in Tamworth • Acuity Vision, a network of day surgery clinics across NSW and Queensland • Pellegrino Shores, a retirement village located in Port Macquarie

Its a chilly evening in early July 2019 and you are meeting with your audit senior, Jek Porkins, to discuss the findings of his preliminary work for the 30 June 2019 audit of DHL.
Fraud at Pellegrino Shores Last month a senior staff member at Pellegrino Shores was dismissed after it was discovered that she had worked in collusion with a number of residents to reduce their fees and receive secret payments from them in return. The senior staff member had access to the resident database. Whilst she was only supposed to update room location changes for residents, she was able to reduce the resident's period of stay and the value of other services provided. The fraud was detected by a fellow employee who overheard the senior staff member discussing the 'scam' with a resident.
St Neville's patient revenue system On Sunday 10 March 2019 St Neville's switched from its 'homegrown' patient revenue system to the DHL 'off the shelf' revenue system. The DHL internal audit unit was involved throughout the switchover. DHL was confident that its revenue system would perform all of the functions that the St Neville's patient system had performed. The 'homegrown' St Neville's revenue system consisted of:
1. Billing system: produces the invoice to charge the patient for services provided such as accommodation, medications, and medical services. This software includes a complex formula to calculate the patient bill after allowing for government subsidies, pensioner benefits and private medical insurance benefits. 2. Patient database: a master file containing personal patient details as well as the period of stay, services provided and client medical insurance details. 3. Rates database: a master file that shows all accommodation billing rates, rebate discounts, and government assistance benefits.
Jek Porkins spoke with a number of St Neville's administration staff about the impact of switching to the DHL patient revenue system:
• 'There was some sort of power surge last Friday and we had to re-enter every patient invoice that we processed in the last two weeks'. • 'Lately, we've had an unusually high number of complaints from recently discharged patients that the fee invoice we sent them does not line up with the agreed medical fund and pensioner subsidy rates. We found out that halfway through last month someone from the IT team made a software change to fix a bug in the billing calculation formula'. • 'There were some occasions where we invoiced people that were past patients. This seems to have happened when they shared the same surname as a current patient'. • 'We seem to have some patient fee invoices where for no reason we have billed patients at a lower room rate than we hold on the rates database'.
Acuity Vision sales team During the financial year, Acuity Vision released its own range of medical supplies which are sold via direct marketing by a sales team employed by Acuity. The sales team receive a fairly low base salary plus a bonus based on the dollar value of the sales they generate. Jek Porkins selected a sample of customer payments received by Acuity just after year end and traced them back to the general ledger and customer account balance.

DHL accounts payable Whilst on site at DHL's Head Office in early July, Jek Porkins undertook two accounts payable tests: Test Result Conclusion
1
15 suppliers were selected from the list of trade creditors at year-end. Balances were traced to supplier invoices and goods received notes to ensure goods were received prior to year-end. For two creditors out of 15 tested the balance was only marginally overstated.
Accepted as no material errors were located.
2
Selected 20 suppliers' invoices and checked that the pricing and discount terms have been reviewed and authorised by the purchase manager. Three out of the 20 invoices tested had not been authorised and incorrect discounts had been applied to them. A follow up of the three samples with deviations did not highlight a pattern or specific reason for the errors.
Accepted as the errors in discounts claimed were immaterial.
Pellegrino Shores payroll
In addition to full-time staff, Pellegrino Shores employs a significant number of casual nursing, cleaning and administrative staff. Overtime is often worked on weekends and night shifts due to a shortage of staff. Payment at overtime rates for standard weekend and night shifts has been a common occurrence.
Required
Write a memo to Jek Porkins, the audit senior on the DHL assignment, that advises him on: Question 1 (4%) The business risk impactandthe accounts (as well as related audit assertions) most likely affected by the fraud atPellegrino Shores.
Question 2 (6%)
Additional audit work to be undertaken in relation to the switchover of the new patient revenue system atSt Neville's. Specifically:
a. the associated audit risks b. two key questions to ask internal audit c. a justification for the audit strategy to be adopted for the audit of patient revenue at St Neville's

Question 3 (6%)
Additional information required in relation toAcuity Vison'ssale of medical supplies. Specifically:
a. the key account balance(s) and associated assertions at risk due to Acuity Vision's arrangements for paying its sales team b. the implications for the control environment within DHL, including specific issues management would need to consider c. the effectiveness of his customer payments testing
Question 4 (5%)
Both accounts payable tests he has undertaken. Specifically:
a. whether each is a test of control or substantive test b. the key assertion addressed by each test c. the reasonableness of the conclusion reached for each test d. additional audit procedures, if any, that need to be performed.
Answer this question using the following table: Test type of test keyassertion reasonableness of conclusion additional audit procedures 1 2
Question 5 (4%)
The key assertion at risk in relation to the payment of overtime atPellegrino Shores, a preventative internal controlanda detective internal control that would directly address the risk.

Problem 3-11 Balance Sheet Analysis Complete the balance sheet and sales information in the table that follows for J. White Industries using the following financial data: Total assets turnover: 1.8 Gross profit margin on sales: (Sales - Cost of goods sold)/Sales = 25% Total liabilities-to-assets ratio: 55% Quick ratio: 1.00 Days sales outstanding (based on 365-day year): 32 days Inventory turnover ratio: 4.0 Do not round intermediate calculations. Round your answers to the nearest whole dollar. Partial Income Statement Information Sales $ Cost of goods sold $ Balance Sheet Cash $ Accounts payable $ Accounts receivable Long-term debt 50,000 Inventories Common stock Fixed assets Retained earnings 100,000 Total assets $ 400,000 Total liabilities and equity $

​Beryl's Iced Tea currently rents a bottling machine for $54,000 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 $150,000. This machine will require $22,000 per year in ongoing maintenance expenses.

B. Purchase a​ new, more advanced machine for $265,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year.​ Also,$39,000 will be spent upfront on training the new operators of the machine.

Suppose the appropriate discount rate is 8% 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 negligible salvage value. The marginal corporate tax rate is 35%.

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.)

The NPV of renting the machine is $______?

The NPV of Option A is $_______?

The NPV of Option B is $________?

Which of the following is the best choice?

A.Purchase the Advanced Machine

B.Rent the current Machine

C.Purchase the Current Machine

D.Rent the Advanced Machine

4) Interest (Show all of your work!) Find the interest rate required for an investment of $10,000 to grow to $15,000 in 5 years if the interest is compounded as follows:

a) Annually

b) Quarterly

5) Inflation (Show all of your work!) Assuming annual compounding, find the time it would take for the general level of prices, in the economy, to double at the following annual inflation rates:

a) 3%

b) 8%

6) Time to Double (Show all of your work!) With an interest rate of 6% and monthly compounding, how long will it take for an investment to double in value?

You are interested in arranging financing to purchase a new car from Bloomington Cars, Inc. The car that you want has a sticker price of $42,000, an instant rebate of $3,500, a fair market value of $39,000, and a great sound system. The salesperson, while smoothing over his comb-over, taps his pinky ring on the hood of the car and tells you, “You picked the best car we have. I can also kick in a free Bloomington Cars coffee mug.” Since you love the car, you hop up and down and say, “Sold! I’ll take it.” You sign a loan contract for 60 monthly payments based on a rate of 7.3% per year and drive home with your new car and coffee mug, listening to that great sound system. (Your market rate of return for the risks you pose for a car loan is 5.5%.)

What is your monthly payment (rounded to two places)?

Group of answer choices

$802.25

$777.78

$767.81

$707.98

None of the above

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Question 21 pts

How much value did you destroy in pursuit of that great sound system and your free coffee mug (rounded to two places)?

Group of answer choices

$499.86

$1,197.03

$3,000.06

$2,324.09

None of the above

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Question 31 pts

What would have been a “fair” monthly payment (rounded to two places)?

Group of answer choices

$744.95

$837.61

$735.39

$767.43

None of the above

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Question 41 pts

Based on Questions #1 and #3, how much are you overpaying each month (rounded to two places)?

Group of answer choices

$26.82

$17.46

$8.24

$32.87

None of the above

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Question 51 pts

If you come to your senses in 12 months and realize what a bad deal you negotiated and would like to pay off this bad loan, how much do you owe (rounded to two places)?

Group of answer choices

$36,854.88

$33,014.89

$8,859.51

$31,878.28

None of the above

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Question 61 pts

How much interest will you pay in the first year of the loan (rounded to two places)?

Group of answer choices

$9,213.72

$2,592.00

$6,621.72

$3,452.28

None of the above

Southern airline inc.announced that its net income in the first quarter jumped percent to $100 million as number of passenger climbed. The airline also booked of $40 million from the sales of 2 aircraft. According to the survey of 6 analysts average estimate of the first quarter net income for the airline was $200 miliion. After earning announcement what would be the possible movement of the company's stock. Please explain with any financial concepts and theories?

Write in your own words Define the payback, net present value, internal rate of return, and profitability index methods.

Need 300 words discussion

Don't rewrite already existing chegg answer

• Yes

• No

At a required return of 24 percent, should the firm accept this project?  

• Yes

• No