Question

QUESTION 11

1. The management of Consumers Mfg. would like to purchase a specialized production machine for $95,000. The machine is expected to last three years, with a salvage value of $5,000. Annual maintenance costs will total $12,000, and annual labor and material savings are predicted to be $55,000. The company's required rate of return in 15%. Find the NPV of this investment.

   		$5,623
   		$2,811
   		$6,466
   		$1,406

QUESTION 12

1. The Montana Consulting is evaluating the profitability of their two clients, X and Y. Total fixed costs are allocated evenly between customer X and Y, and will remain the same whether they add or drop clients. Should The Montana Consulting drop client Y? The profit/loss for each customer is shown below. Should client Y be dropped?

   	X	Y
   Revenue	$410,000	$230,000
   Variable costs	$184,500	$163,500
   Contribution margin	$225,500	$66,500
   Allocated fixed costs	$80,000	$80,000
   Customer profit (loss)	$145,500	($13,500)

   
   

   		Yes, because any customer showing a loss should be dropped.
   		Yes, profit will increase if Client Y is dropped.
   		Yes, because their revenues are much lower than Client  X .
   		No, profit will decrease if Client Y is dropped.

QUESTION 13

1. Hawk, Inc. has a 15% required rate of return. Three divisions of Hawk have proposed three projects to increase income over the next 12 years. Three divisions report different measures as follows: Project A was reported to have an NPV of $530. Project B was reported with an internal rate of return of 12%. Project C was reported to have a payback period of 15 years. With which of these projects should Hawk move forward?

   		Project B
   		Project C
   		All three sound great!
   		Project A

QUESTION 22

1. Jane's Juices, which makes smoothies on university campuses across Michigan, is making an annual budget for this coming financial year. Last year, 26,000 units were sold, and sales are expected to increase 20% next year, and the sales price is expected to remain at $8 each. Finished goods inventory at the end of the year was 1125 units, and management likes to have enough inventory at the end of the year for 2% of next year's sales. What is the sales budget (in dollars) for next year?

   		$208,000
   		$249,600
   		$260,400
   		$238,800

Answer 1

Question 11

NPV= Present value of cash inflow- cash outflow

Cash Outflow= $95000

Calculation of cash inflow

Particulars	Amount
Annual labor and material savings	$55000
Less- Maintenance Cost	($12000)
Net savings	$43000
Year	3
Required rate of return	15%
P.V factor @15% for 3 years	2.283225
Present value of net savings ($43000*2.283225)	$98178.68
Salvage Value in 3rd Year	$5000
P.V factor @15% for 3rd year only	0.65751
Present value of salvage value ($5000*0.65751)	$3287.58
Present value of total cash inflow ($98178.68+$3287.58)	$101466.26

NPV= $101466.26-$95000= $6466.26

Hence the answer would be $6466.

P.V. factor table @15%

	Year 1	Year 2	Year 3	Total
P.V. factor	1/1.15	1/(1.15)2	(1/1.15)3
	0.86956	0.76514	0.65751	2.283225

Question 12

If Monatana consulting drops the customer y still the total fixed cost will incur.

Total fixed cost= $160000 ($80000+$80000)

Now calculation of profit and loss for the company if customer y is no more-

Customer x

Revenue	$410000
Variable Cost	$184500
Contribution margin	$225500
Allocated fixed cost	$160000
Profit	$65500

The profit of the company will be $45500 after dropping the customer y.

If both x and y are the customers of the company, then profit of the company is

Profit/ (loss)
Customer X	$145500
Customer Y	($13500)
Total profit	$132000

Hence the answer would be that the profit will decrease if Client y is dropped.

Decrease in profit=$132000-$65500=$66500

Question 13

NPV method, pay back method and internal rate of return method are the methods of capital budgeting. Different methods are adopted by different companies or different projects but the NPV (Net present value) method will be the most favorable method of capital budgeting NPV method is followed in project A hence Hawk, should move forward with project A.

Hence the answer would be project A.

Question 14

Sales Budget (in dollars)

Units sold in the last year= 26000

Sales are expected to increase 20% next year

The sales would be in the next year= 26000+ 20%=31200 Units

Sale price per unit= $8

Sales budget (in dollars)= 31200*$8=$249600

The answer would be $249600