Net Present Value Method—Annuity for a Service Company

Welcome Inn Hotels is considering the construction of a new hotel for $70 million. The expected life of the hotel is 10 years with no residual value. The hotel is expected to earn revenues of $19 million per year. Total expenses, including depreciation, are expected to be $14 million per year. Welcome Inn management has set a minimum acceptable rate of return of 10%. Assume straight-line depreciation.

a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars.
$ million

b. Calculate the net present value of the new hotel using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the minus sign to indicate a negative net present value.
Net present value of hotel project: $ million

c. Does your analysis support the purchase of the new hotel?
, because the net present value is  .

Calculate the salary budget for the fiscal year ending June 30, 20X8. Budgeted volume is planned to be 108,000 procedures. Each FTE can do 8,500 units a year. A pay raise will be given to all staff on May 1st of each year at a rate of 10 percent. The July 1, 20X7 rate of pay for new hires is set at $34.00/hour regardless of hire date. The following are the current staff with FTE values and hourly rates of pay as of October 1, 20X6:

Employee/FTE value/Pay rate

Anderson/0.5/ $34.50

Baker/1.0/$31.25

Carson/1.0/29.35

Davis/1.0/32.65

Evans/ 0.5/24.75

Flinton/0.5/36.20

Gates/1.0/31.00

Hayes/0.5/29.00

The following information may or may not be needed to solve this problem. In examining the payroll and personnel records of your department, you have determined that productive time is 85 percent of total paid time. New staff cannot be hired in less that half time FTE increments (e.g., if you calculate a need for 12.3 additional, new FTEs, 12.5 FTEs must be hired).

1/ Short Corporation acquired Hathaway, Inc., for $43,600,000. The fair value of all Hathaway's identifiable tangible and intangible assets was $38,000,000. Short will amortize any goodwill over the maximum number of years allowed. What is the annual amortization of goodwill for this acquisition?

Multiple Choice

• $1,400,000.

• $0.

• $2,800,000.

• $5,600,000.

2/ Nanki Corporation purchased equipment on January 1, 2016, for $657,000. In 2016 and 2017, Nanki depreciated the asset on a straight-line basis with an estimated useful life of eight years and a $13,000 residual value. In 2018, due to changes in technology, Nanki revised the useful life to a total of 4 years with no residual value. What depreciation would Nanki record for the year 2018 on this equipment? (Round your answer to the nearest dollar amount.)

Multiple Choice

• $107,333.

• $105,882.

• $248,000.

• None of these answer choices are correct.

3/ Cutter Enterprises purchased equipment for $78,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,900.

Using the double-declining balance method, the book value at December 31, 2019, would be:

Multiple Choice

• $29,280.

• $15,600.

• $28,080.

• $27,180.

21/ On March 31, 2018, M. Belotti purchased the right to remove gravel from an old rock quarry. The gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $174,300, with estimated salable rock of 21,000 tons. During 2018, Belotti loaded and sold 5,000 tons of rock and estimated that 16,000 tons remained at December 31, 2018. At January 1, 2019, Belotti estimated that 15,000 tons still remained. During 2019, Belotti loaded and sold 10,000 tons. Belotti uses the units-of-production method.

Belotti would record depletion in 2019 of: (Round cost per ton to two decimal places.)

Multiple Choice

• $88,500.

• $90,700.

• $101,620.

• $91,780.

Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions. The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the company as a whole produced a 15 percent return on its investment.

During the past week, management of the company’s Northeast Division was approached about the possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the Northeast Division and the competitor:

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an additional $125,000 of invested capital would be needed.

Required:

1. 1. Compute the current ROI of the Northeast Division and the division’s ROI if the competitor is acquired.

2. 2. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor?

3. 3-a. Compute the ROI of the competitor as it is now and after the intended upgrade.

4. 3-b. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be in favor of the acquisition of the competitor?

5. 4. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrading.

6. 5-a. Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division’s residual income if the competitor is acquired.

7. 5-b. If divisional management is being evaluated on the basis of residual income, will the Northeast Division likely pursue acquisition of the competitor?

Elegant Decor Company’s management is trying to decide whether to eliminate Department 200, which has produced losses or low profits for several years. The company’s 2017 departmental income statements shows the following. ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Dept. 200 Combined Sales $ 444,000 $ 283,000 $ 727,000 Cost of goods sold 262,000 209,000 471,000 Gross profit 182,000 74,000 256,000 Operating expenses Direct expenses Advertising 15,500 12,000 27,500 Store supplies used 5,000 4,400 9,400 Depreciation—Store equipment 4,400 3,200 7,600 Total direct expenses 24,900 19,600 44,500 Allocated expenses Sales salaries 78,000 46,800 124,800 Rent expense 9,500 4,730 14,230 Bad debts expense 9,500 7,200 16,700 Office salary 21,840 14,560 36,400 Insurance expense 1,900 1,100 3,000 Miscellaneous office expenses 2,400 1,700 4,100 Total allocated expenses 123,140 76,090 199,230 Total expenses 148,040 95,690 243,730 Net income (loss) $ 33,960 $ (21,690 ) $ 12,270 In analyzing whether to eliminate Department 200, management considers the following: The company has one office worker who earns $700 per week, or $36,400 per year, and four sales clerks who each earn $600 per week, or $31,200 per year for each salesclerk. The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is charged to Department 200. The salary of the fourth clerk, who works half-time in both departments, is divided evenly between the two departments. Eliminating Department 200 would avoid the sales salaries and the office salary currently allocated to it. However, management prefers another plan. Two salesclerks have indicated that they will be quitting soon. Management believes that their work can be done by the other two clerks if the one office worker works in sales half-time. Eliminating Department 200 will allow this shift of duties. If this change is implemented, half the office worker’s salary would be reported as sales salaries and half would be reported as office salary. The store building is rented under a long-term lease that cannot be changed. Therefore, Department 100 will use the space and equipment currently used by Department 200. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 75% of the insurance expense allocated to it to cover its merchandise inventory; and 23% of the miscellaneous office expenses presently allocated to it. Required: 1. Complete the following report showing total expenses, expenses that would be eliminated by closing Department 200 and the expenses that would continue. The statement should reflect the reassignment of the office worker to one-half time as salesclerk. 2. Prepare a forecasted annual income statement for the company reflecting the elimination of Department 200 assuming that it will not affect Department 100’s sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk. 3. Reconcile the company’s combined net income with the forecasted net income assuming that Department 200 is eliminated (list both items and amounts). (Amounts to be deducted should be indicated by a minus sign.)

Samtech Manufacturing purchased land and building for $3 million. In addition to the purchase price, Samtech made the following expenditures in connection with the purchase of the land and building:

An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3 and $2 million, respectively. Shortly after acquisition, Samtech spent $89,000 to construct a parking lot and $47,000 for landscaping.

Required:
1. Determine the initial valuation of each asset Samtech acquired in these transactions.
2. Determine the initial valuation of each asset, assuming that immediately after acquisition, Samtech demolished the building. Demolition costs were $320,000 and the salvaged materials were sold for $9,500. In addition, Samtech spent $86,000 clearing and grading the land in preparation for the construction of a new building.

• Required 1

Determine the initial valuation of each asset Samtech acquired in these transactions. (Enter your answers in whole dollars.)

• Required 2

• Determine the initial valuation of each asset, assuming that immediately after acquisition, Samtech demolished the building. Demolition costs were $320,000 and the salvaged materials were sold for $9,500. In addition, Samtech spent $86,000 clearing and grading the land in preparation for the construction of a new building. (Enter your answers in whole dollars.)

  	Assets Initial Valuation Land Building Land improvements

A company constructs a building for its own use. Construction began on January 1 and ended on December 30. The expenditures for construction were as follows: January 1, $580,000; March 31, $680,000; June 30, $480,000; October 30, $840,000. To help finance construction, the company arranged a 7% construction loan on January 1 for $860,000. The company’s other borrowings, outstanding for the whole year, consisted of a $4 million loan and a $6 million note with interest rates of 8% and 6%, respectively.

Assuming the company uses the specific interest method, calculate the amount of interest capitalized for the year. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places (i.e. 0.1234 should be entered as 12.34%).)

Determine the total cash inflows, the total cash outflows, and the expected change in cash for each month from January to July, 2019. Show your work in excel using excel functions. Based the findings, explain in your own words whether the company should borrow/invest and how much and in which months.

The management estimates total sales for the period January, 2019 through June 2019 based on actual sales from the immediate past six months. The following assumptions are made:

The Sales were $125,000 in July 2018 and then the sales grew by 8% each month for the first three months (i.e., August to October 2018) and by 6% for the next two months (i.e., November and December 2018). The sales are expected to grow by 3% each month thereafter.

35% of the Sales are collected in the same month. 33% of the sales are collected in the following month. 31% in collected after and the remainder are not collected.

The Purchases are 60% of each month’s sales and paid in the same month.

Wages and Salaries are $25,000 each month and paid in the same month.

Other administrative expenses are $15,000 and paid in the same month.

Depreciation expense is $5,000 each month.

An electrical device worth $150,000 will be purchased on credit in April 2019. $75,000 will be paid immediately and the balance will be paid in May, 2019.

The company had previously taken a loan of $125,000. The annual interest rate is 5%. The interest is paid twice a year in June and December each year. Assume that no principal repayments are made in this period, only interest payments are made.

The company pays rent of $2,500 quarterly (in March, June, September, and December each year).

Project 2: Review of Merchandising Cycle

[The following information applies to the questions displayed below.]

• WWC decides to use the aging method to estimate uncollectible accounts. WWC determines 8% of the ending balance is the appropriate end of February estimate of uncollectible accounts.

Note: Enter debits before credits.

problem 2.3

the following account balances are available for The Clothing Outlet, Inc., a discount retailer, as of and for the year ended December 31, 20X9, except for the retained earnings balance which is stated below as of January 1, 20X9:Label each of the accounts listed above as an asset (A), liability (L), permanent equity account (PE), or temporary equity account (TE).

Cash .................................................................. $11,600,000

Accounts receivable ...................................................$9,000,000

Marketable securities    ................................................ $4,000,000

Prepaid insurance ....................................................$400,000

Inventory    ............................................................... $8,000,000

Equipment ............................................................... $7,000,000

Accumulated depreciation: equipment ........................... $22,000,000

Buildings ............................................................ $22,000,000

Accumulated depreciation: buildings .............................. $5,000,000

Land    ..................................................................... $6,000,000

Investments (long-term) ............................................. $4,000,000

Accounts payable ...................................................... $9,000,000

Salaries payable......................................................... $1,000,000

Dividends payable ...................................................... $500,000

Interest payable.........................................................$800,000

$Notes payable (long-term) ....................................... $11,000,000

Bonds payable (long term) .......................................$ 14,000,000

Common stock    ......................................................$18,000,000

Retained Earnings (as of Jan. 1, 20X9) ........................ $7,400,000

Dividends declared    ...................................................$500,000

Sales .................................................................. $80,000,000

Cost of goods sold ...................................................    $48,000,000

Interest revenue    ...................................................... $200,000

Interest expense    ......................................................$1,700,000

Income tax expense ................................................... $1,900,000

Selling expenses:

Sales salaries and commissions ................................. $6,900,000

Insurance expense ................................................$2,100,000

Advertising expense    .............................................$300,000,00

Utilities expense ................................................... $3,000,000

Depreciation expense: equipment .............................. $300,000

Delivery expense ...................................................$500,000

General and administrative expenses:

Executive and administrative salaries    ........................ $5,800,000

Utilities expense ................................................... $3,100,000

Rental expense...................................................... $600,000

Depreciation expense: buildings..............................$500,000

Shaftel Ready Mix is a processor and supplier of concrete, aggregate, and rock products. The company operates in the intermountain western United States. Currently, Shaftel has 14 cement-processing plants and a labor force of more than 375 employees. With the exception of cement powder, all materials (e.g., aggregates and sand) are produced internally by the company. The demand for concrete and aggregates has been growing steadily nationally. In the West, the growth rate has been above the national average. Because of this growth, Shaftel has more than tripled its gross revenues over the past 10 years.

Of the intermountain states, Arizona has been experiencing the most growth. Processing plants have been added over the past several years, and the company is considering the addition of yet another plant to be located in Scottsdale. A major advantage of another plant in Arizona is the ability to operate year round, a feature not found in states such as Utah and Wyoming.

In setting up the new plant, land would have to be purchased and a small building constructed. Equipment and furniture would not need to be purchased. These items would be transferred from a plant that opened in Wyoming during the oil boom period and closed a few years after the end of that boom. However, the equipment needs some repair and modifications before it can be used. The equipment has a book value of $200,000, and the furniture has a book value of $30,000. Neither has any outside market value. Other costs, such as the installation of a silo, well, electrical hookups, and so on, will be incurred. No salvage value is expected. The summary of the initial investment costs by category is as follows:

After reviewing these data, Karl Flemming, vice president of operations, argued against the proposed plant. Karl was concerned because the plant would earn significantly less than the normal 8.3% return on sales. All other plants in the company were earning between 7.5 and 8.5% on sales. Karl also noted that it would take more than 5 years to recover the total initial outlay of$582,000. In the past, the company had always insisted that payback be no more than 4 years. The company's cost of capital is 10%. Assume that there are no income taxes.

Required:

1. Prepare a variable-costing income statement for the proposed plant. Compute the ratio of net income to sales.
2. (A) Compute the payback period for the proposed plant.  (B) Suppose you were told that the equipment being transferred from Wyoming could be sold for its book value; what is the payback period?
3. Compute the NPV for the proposed plant.
4. (A)Compute the cubic yards of cement that must be sold for the new plant to break even. Using this break-even volume, compute the NPV.  (B)How can a plant that is breaking even be generating a sufficient NPV?

Please answer number  differently from the answer key

The following transactions occurred during March 2018 for the Wainwright Corporation. The company owns and operates a wholesale warehouse.

1. Issued 50,000 shares of capital stock in exchange for $500,000 in cash.

2.Purchased equipment at a cost of $80,000. $30,000 cash was paid and a note payable was signed for the balance owed.

3.Purchased inventory on account at a cost of $130,000. The company uses the perpetual inventory system.

4.Credit sales for the month totaled $140,000. The cost of the goods sold was $90,000.

5.Paid $7,000 in rent on the warehouse building for the month of March.

6.Paid $8,000 to an insurance company for fire and liability insurance for a one-year period beginning April 1, 2018.

7.Paid $90,000 on account for the merchandise purchased in 3.

8.Collected $75,000 from customers on account.

9.Recorded depreciation expense of $3,000 for the month on the equipment.

Required: Prepare a statement of cash flows, using the direct method to present cash flows from operating activities. Assume the cash balance at the beginning of the month was $60,000.

On May 1, 2018, Hecala Mining entered into an agreement with the state of New Mexico to obtain the rights to operate a mineral mine in New Mexico for $9.9 million. Additional costs and purchases included the following (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $12,000. The structures will be torn down.

Geologists estimate that 790,000 tons of ore can be extracted from the mine. After the ore is removed the land will revert back to the state of New Mexico.

The contract with the state requires Hecala to restore the land to its original condition after mining operations are completed in approximately four years. Management has provided the following possible outflows for the restoration costs:

Hecala’s credit-adjusted risk-free interest rate is 7%. During 2018, Hecala extracted 119,000 tons of ore from the mine. The company’s fiscal year ends on December 31.

Required:

1. Determine the amount at which Hecala will record the mine.(Round your final answer to nearest whole dollar.)

2. Calculate the depletion of the mine and the depreciation of the mining facilities and equipment for 2018, assuming that Hecala uses the units-of-production method for both depreciation and depletion. (Do not round your intermediate calculations. Round "Depreciation" and "Depletion" rates to 4 decimal places. Round your final answers to the nearest whole dollar.)

3. How much accretion expense will the company record in its income statement for the 2018 fiscal year? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

4. Are depletion of the mine and depreciation of the mining facilities and equipment reported as separate expenses in the income statement?

5. During 2019, Hecala changed its estimate of the total amount of ore originally in the mine from 790,000 to 990,000 tons. Calculate the depletion of the mine and depreciation of the mining facilities and equipment for 2019 assuming Hecala extracted 149,000 tons of ore in 2019.(Do not round your intermediate calculations. Round "Depreciation" and "Depletion" rates to 4 decimal places. Round your final answers to the nearest whole dollar.)

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $724,000 cash. Greenburg’s accounting records showed net assets on that date of $560,000, although equipment with a 10-year life was undervalued on the records by $87,500. Any recognized goodwill is considered to have an indefinite life.

Greenburg reports net income in 2016 of $108,500 and $121,000 in 2017. The subsidiary declared dividends of $20,000 in each of these two years.

Account balances for the year ending December 31, 2018, follow. Credit balances are indicated by parentheses.

1. Determine parent's investment income for 2018 under partial equity method and equity method.

2. What would be Foxx’s balance for retained earnings as of January 1, 2018, if each of the following methods had been in use?

• 	d. Investment Income e. Retained Earnings Initial value method $1,236,000 Partial equity method Equity method

Trump, Clinton, and Mueller are forming a partnership.                                                                              

Trump and Clinton are each contributing $100,000 while Mueller is contributing $70,000 and his expertise.                                                                                      

They will be equal partners and each will show the same beginning capital account.             

REQUIRED: A) MAKE THE JOURNAL ENTRY USING THE BONUS METHOD                                                               

                      B) MAKE THE JOURNAL ENTRY USING THE GOODWILL METHOD