Tough Steel, Inc. is a processor of carbon, aluminum, and stainless steel products. The firm is considering replacing an old stainless steel tube-making machine for a more cost-effective machine that can meet the firm’s quality standards. The old machine was acquired 2 years ago at an installed cost of $500,000. It has been depreciated under the MACRS’s 5-year recovery period, and has a remaining economic life of 5 years. It can be sold today for $350,000 before taxes, but if the firm decides to keep it, it can be sold for $100,000 before taxes at the end of year 5. The first option is Machine A, which can be purchased for $600,000, but will require $30,000 in installation costs. This machine would be depreciated under the MACRS’s 3-year recovery period. At the end of its economic life, the machine will have a salvage value of $350,000 before taxes. This machine would require an investment in net working capital of $100,000. The second option is Machine B, which can be purchased for $550,000, but requires $20,000 in installation costs. This machine would be depreciated under the MACRS’s 5-year recovery period. At the end of its economic life, the machine would have a salvage value of $330,000 before taxes. This machine requires no investment in net working capital. The firm has estimated the following EBIT for all three machines: The firm’s WACC is 14% and its tax rate is 40%. Determine which machine is more profitable for the company based on the payback period, discounted payback period, net present value, profitability index, internal rate of return, and modified internal rate of return. EBIT: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Old Machine $90,000 $90,000 $120,000 $150,000 $150,000 Machine A $90,000 $10,000 $150,000 $230,000 $270,000 Machine B $120,000 $20,000 $120,000 $200,000 $200,000

Bottom line refers to which line on the income statement?

• A. Operating income

• B. Retained earnings

• C. Net income, net profit, or net earnings

• D. Net worth

1. Piper Wells is single and received the items and amounts of income shown below during 2015, as shown below. Determine the marginal tax rate applicable to each item. Note that if the item is not taxable, the marginal rate is 0.

Salary $30,000

Dividends 800

Gift from mother 500

Child support from ex-husband 3,600

Interest on savings account 250

Rental property 900

Loan from bank 2,000

Interest on state government bonds 300

a.discuss the criteria for recognizing deferred tax assets and deferred tax liabilities under the provisions of fasb asc 740

b. compare and contrast the asset-liability method and the deferred method

Reflect on the past two week’s lecture, material from readings and discussions. In at least 150 words, describe the main points or ideas you learned and how your interactions with classmates and/or your instructor built upon your learning. Describe which main point you found most important and how you believe it can be related to your life/career. for accounting principles II

WCP.7  

WCP.7  

Phil Clark Jr., president of Waterways, was very pleased with how adopting a CVP approach to reporting operating income was helping management to make good business decisions with respect to planning, production, and sales for the coming year. He has a feeling that knowing how fixed and variable costs behave might also help them to find savings in the production department. Further, he is concerned that Waterways' production facility is working near full capacity right now, and he does not know if the company could generate enough new business to make adding another shift viable.

Phil decides to sit down with his brother Ben, vice-president of operations, and Ryan Smith, the plant manager, to see if they could “do more with less,” as he put it. Jordan Leigh, CFO, had recently presented them with a number of situations that required decisions that would impact operations in the plant. Phil thought that together the four of them could find some efficient solutions.

Part 1  

Waterways packages some of its products into sets for do-it-yourself (DIY) installations. The smaller set that sells for $159 has variable costs of $79, while the larger set sells for $249 with variable costs of $159. Fixed costs are assigned at a rate of $6 per machine hour.

It takes 32 minutes of machining time to produce and package the smaller set. The larger set is more complicated and requires 60 minutes of production time. The machines operate for two shifts of eight hours each day for 20 days per month. Maintenance and set-ups are handled outside of these times.

Analysis of the current market trends reveals that monthly demand for the smaller set would not exceed 500 units, while Waterways could sell as many of the larger ones as it can produce.

Instructions

Given the information above, determine the best use of these machines.

Part 2  

As we learned in Chapter 6, Waterways markets a simple water controller and timer that it mass-produces. During 2020, the company sold 350,000 units at an average selling price of $8.00 per unit. The variable expenses were $1,575,000, and the fixed expenses were $800,000.

Waterways has determined the full cost to manufacture its timers is $6.79 per unit. Recently it was discovered that a competitor was selling this unit for $6.58 per unit. Ryan immediately suggested that Waterways buy the timer from the other supplier, but Jordan was not convinced. He cautioned Ryan that $77,120 worth of fixed costs would not be eliminated by buying the unit. However, he also knew that, if Waterways bought the unit from the competitor, it would free up 120 machine hours that could be used to produce the large DIY installation kits described in (Part 1).

Instructions

a.  

Assuming Waterways requires 350,000 timers, evaluate whether it should continue to make the timer or if it should purchase it from the outside supplier.

b.  

What is the maximum price per unit Waterways should be willing to pay to purchase the timer from an outside supplier?

c.  

What non-financial factors might be considered in making this decision?

Part 1

The vice-president of sales and marketing, Madison Tremblay, is trying to plan for the coming year in terms of production needs to meet the forecasted sales. The board of directors is very supportive of any initiatives that will lead to increased profits for the company in the upcoming year.

Instructions

a.  Waterways markets a simple water controller and timer that it mass-produces. During 2020, the company sold 350,000 units at an average selling price of $8 per unit. The variable expenses were $1,575,000, and the fixed expenses were $800,000.

• 1.What is the product's contribution margin ratio?
• 2.What is the company's break-even point in units and in dollars for this product?
• 3.What is the margin of safety, both in dollars and as a ratio?
• 4.If management wanted to increase income from this product by 10%, how many additional units would the company have to sell to reach this income level?
• 5.If sales increase by 71,000 units and the cost behaviours do not change, how much will income increase on this product?

b.  Waterways is considering mass-producing one of its special-order screens. This would increase variable costs for all screens by an average of $0.71 per unit. The company also estimates that this change could increase the overall number of screens sold by 10%, and the average sales price would increase by $0.25 per unit. Waterways currently sells 491,740 screen units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable and $2,050,140 fixed. Selling and administrative costs are $2,661,352 variable and $794,950 fixed.

• 1.If Waterways begins mass-producing its special-order screens, how would this affect the company?
• 2.If the average sales price per screen did not increase when the company began mass-producing the screen, what would be the effect on the company?

SOLVE ALL PARTS WITH EXPLANATION

Revenues generated by a new fad product are forecast as follows:

Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $42,000 in plant and equipment.

a. What is the initial investment in the product? Remember working capital.

b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.)

c. If the opportunity cost of capital is 10%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Afghan Saffron Exporters Vs Iranian Saffron Market:
Economists use ‘Game Theory’ as a tool to analyze economic competition, economic phenomena such as bargaining, mechanism design, auctions, voting theory; experimental economics, political economy, behavioral economics etc. Refer to below short case study and respond to listed questions using the core concept of Game theory to determine and analyses the expected outcome. “A company, say Afghan Saffron, is considering entering the Iranian’s market which is dominated by its principal rival, say Iranian Saffron. Clearly, Afghan Exporters decision to enter or not will be judged on the potential profitability of such a move. This, in turn, depends upon the way Iranian will react to such a business move by Afghan Exporters. If Iranian reacts aggressively by launching a big commercial campaign, then an entry by Afghan n Saffron Exporters will result to a loss of $2.8 million for Afghan Saffron Exporters and a loss of $2.2 million for Iranian Manufacturers. If, on the other hand, Iranian accommodates Afghan Saffron exporter’s entry, then both Afghan and Iranian will be making profits of $1 million and $1 million, respectively. Finally, if Afghan Exporter does not enter the market at all, then Iranians will be making monopoly profits of $3.5 million”.

Required:
a) What would you do if you were the CEO of Afghan Saffron Exporter and Why, Explain briefly-use any practical approach or model discussed in the class to justify your response?
b) If you were an Iranian Saffron Producer, Would you play aggressively or would you accommodate Afghan Exporters entry?
c) What about if you were Iranian Saffron Exporters CEO?

You can answer any of above 3 a, b or c follow your role

Rey Custom Electronics (RCE) sells and installs complete security, computer, audio, and video systems for homes. On newly constructed homes it provides bids using time-and-material pricing. The following budgeted cost data are available. Time Charges Material Loading Charges Technicians' wages and benefits $150,000 - Parts manager's salary and benefits - $34,000 Office employee's salary and benefits 30,000 15,000 Other overhead 15,000 42,000 Total budgeted costs $195,000 $91,000 The company has budgeted for 6,250 hours of technician time during the coming year. It desires a $38 profit margin per hour of labor and an 80% profit on parts. It estimates the total invoice cost of parts and materials in 2020 will be $700,000. Compute the rate charged per hour of labor. (Round answer to 2 decimal places, e.g. 10.50.) Labor rate $ per hour Compute the material loading percentage. Material loading percentage % RCE has just received a request for a bid from Buil Builders on a $1,200,000 new home. The company estimates that it would require 80 hours of labor and $40,000 of parts. Compute the total estimated bill. Total estimated bill $

Give an example of indirect labor and where are they located

On January 1, 2016, Learned, Inc., issued $70 million face amount of 20-year, 14% stated rate bonds when market interest rates were 16%. The bonds pay semiannual interest each June 30 and December 31 and mature on December 31, 2035. Assuming Learned, Inc. uses the effective (compound) interest method, what would be the total interest expense for 2016? Hint: you will need to calculate interest expense as of June 30, 2016 and then December 31, 2016 to determine the total interest expense for the year. Be sure to round your answer to the nearest dollar.

Part Three

Present Value Index

When funds for capital investments are limited, projects can be ranked using a present value index. A project with a negative net present value will have a present value index below 1.0. Also, it is important to note that a project with the largest net present value may, in fact, return a lower present value per dollar invested.

Let's look at an example of how to determine the present value index.

The company has a project with a 5-year life, an initial investment of $195,000, and is expected to yield annual cash flows of $57,500. Whathat is the present value index of the project if the required rate of return is set at 10%?

Calculation Steps

Note: Round total present value of net cash flows and initial investment to nearest dollar. Round present value index to two decimal places.

Feedback

Part Four

Internal Rate of Return Method

The internal rate of return (IRR) method uses present value concepts to compute the rate of return from a capital investment proposal based on its expected net cash flows. This method, sometimes called the time-adjusted rate of return method, starts with the proposal's net cash flows and works backward to estimate the proposal's expected rate of return.

Let's look at an example of internal rate of return calculation with even cash flows.

A company has a project with a 5-year life, requiring an initial investment of $231,600, and is expected to yield annual cash flows of $58,000. What is the internal rate of return?

Calculation Steps

Present Value of an Annuity of $1 at Compound Interest.

The calculated factor corresponds to which percentage in the present value of ordinary annuity table?

%

Feedback

Part Five

APPLY THE CONCEPTS: Net present value and Present value index

Calculate the net present value and the present value index for each project using the present value tables provided below.

Present Value of $1 (a single sum) at Compound Interest.

Present Value of an Annuity of $1 at Compound Interest.

Based upon net present value, which project has the more favorable profit prospects?   Project A

Based upon the present value index, which project is ranked higher?   Project A

Feedback

Part Six

APPLY THE CONCEPTS: Internal rate of return

Compute the internal rate of return factor for Project A and Project B and then identify each project's corresponding percentage from the PV ordinary annuity table.

Note: Enter the IRR factor, to 5 decimal places.

Project A: The calculated IRR factor is  and this value corresponds to which percentage in the present value of ordinary annuity table? %

Project B: The calculated IRR factor is  and this value corresponds to which percentage in the present value of ordinary annuity table? %

Ford Allen, CEO of the Amstelveen Corporation, has some major decisions to make. Seven division managers are clamoring for investment in projects totaling €34,000,000. Allen is working to fund them all, but currently only has €8,000,000 available for Amstelveen to invest.

Amstelveen’s cost of capital is 7%, it uses a payback period cut-off of 2 years, and it calculates depreciation on a straight-line basis with the assumption of a zero salvage value. Allen has tasked you, an employee in the corporate controller’s office, with several tasks.

First, if there are no capital constraints, identify each project as advisable or inadvisable to pursue. Calculate this using the four methods of calculating capital budgeting that we covered in class. If there are any contradictory recommendations (i.e., recommended under payback but not recommended under IRR), explain how this is possible and what you would recommend as the dominant criteria.

Second, give the recommended total that you suggest Amstelveen raise, in addition to the €8,000,000 it already has, in order to invest in your recommended projects.

Third, Allen wants a recommendation on which project(s) the company should pursue if it remains limited to €8,000,000. Make sure to clearly explain the basis for your recommendation.

Note: you cannot recommend abandoning Project D when it becomes negative in Year 4.