Cash Payback Period, Net Present Value Method, and Analysis

Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows:

Each project requires an investment of $317,000. A rate of 12% has been selected for the net present value analysis.

Required:

1a. Compute the cash payback period for each project.

1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar.

A 5-year annuity of ten $4500 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 12% compounded monthly, what is the value of this annuity five years from now? What is the value three years from now? What is the current value of the annuity?

I have calculate the PVa at t=9 is 73073.68, but I don't know how to do the next steps...

Please explain as clearly as possible

Thanks!!

The comparative balance sheets for 2018 and 2017 and the statement of income for 2018 are given below for Dux Company. Additional information from Dux’s accounting records is provided also.

Additional information from the accounting records:

1. A building that originally cost $116,000, and which was three-fourths depreciated, was sold for $24,000.
2. The common stock of Byrd Corporation was purchased for $24,000 as a long-term investment.
3. Property was acquired by issuing a 10%, seven-year, $74,000 note payable to the seller.
4. New equipment was purchased for $34,000 cash.
5. On January 1, 2018, bonds were sold at their $44,000 face value.
6. On January 19, Dux issued a 4% stock dividend (1,000 shares). The market price of the $10 par value common stock was $13 per share at that time.
7. Cash dividends of $68,000 were paid to shareholders.
8. On November 54,000 shares of common stock were repurchased as treasury stock at a cost of $27,000.

Required:
Prepare the statement of cash flows for Dux Company using the indirect method. (Do not round intermediate calculations. Amounts to be deducted should be indicated with a minus sign. Enter your answers in thousands. (i.e., 10,000 should be entered as 10).))

Problem 4-2 Discontinued operations [LO4-4]

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2018 and 2017:

On October 15, 2018, Jackson entered into a tentative agreement to sell the assets of one of its divisions. The division qualifies as a component of an entity as defined by GAAP. The division was sold on December 31, 2018, for $5,090,000. Book value of the division’s assets was $4,460,000. The division’s contribution to Jackson’s operating income before-tax for each year was as follows:

Assume an income tax rate of 20%.

Required: (In each case, net any gain or loss on sale of division with annual income or loss from the division and show the tax effect on a separate line)
1. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.
2. Assume that by December 31, 2018, the division had not yet been sold but was considered held for sale. The fair value of the division’s assets on December 31 was $5,090,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.
3. Assume that by December 31, 2018, the division had not yet been sold but was considered held for sale. The fair value of the division’s assets on December 31 was $3,930,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.

Whispering Winds Manufacturing has an annual capacity of 80,400 units per year. Currently, the company is making and selling 78,100 units a year. The normal sales price is $106 per unit, variable costs are $70 per unit, and total fixed expenses are $2,000,000. An out-of-state distributor has offered to buy 5,600 units at $75 per unit. Whispering Winds's cost structure should not change as a result of this special order. By how much will Whispering Winds's income change if the company accepts this order?

Whispering Winds’ net income will(increase/decrease) by $ if it accepts the special order?

    1) A corporation has three investment centers with the following data:

Compute the ROI in two parts for each division.   Compute the residual income for each division.                                                                                                                         Assume each division is presented with an investment opportunity that yields a return on investment of 8%.                                                                                                                                                      

A) If performance is measured by ROI, which division(s) would probably accept the offer? Reject?                                                                                                                     B) If performance is measured by residual income, which division(s) would probably accept the offer? Reject?

2) A corporation has a segment, Division A that sells a part on the outside market for $120. Its costs, based on a unit capacity of 200,000 units, are $25 variable and $45 fixed. The company has a related segment, Division B that could use the part in its own assembly operations. Division B buys the part from another supplier for $112, and it will need 40,000 units.

Required: 1) Assume division A is selling 140,000 units to outside customers.

1. From the standpoint of Division A, what is the lowest acceptable transfer price for units sold to Division B?
2. From the standpoint of Division B, what is the highest acceptable transfer price for units purchased from Division A.
3. If left to bargain freely, would you expect the division managers to voluntarily agree on a transfer of units from Division A to Division B? Give reasons.
4. From the standpoint of the entire company, should the transfer take place? Give reasons.

2) Now assume Division A is selling all its capacity to outside customers. Answer a through d under this new condition.

“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Products Division. “But I want to see the numbers before I make any move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.”

Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company’s Office Products Division for this year are given below:

The company had an overall return on investment (ROI) of 16.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,501,500. The cost and revenue characteristics of the new product line per year would be:

Required:

1. Compute the Office Products Division’s ROI for this year.

2. Compute the Office Products Division’s ROI for the new product line by itself.

3. Compute the Office Products Division’s ROI for next year assuming that it performs the same as this year and adds the new product line.

4. If you were in Dell Havasi’s position, would you accept or reject the new product line?

5. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?

6. Suppose that the company’s minimum required rate of return on operating assets is 13% and that performance is evaluated using residual income.

a. Compute the Office Products Division’s residual income for this year.

b. Compute the Office Products Division’s residual income for the new product line by itself.

c. Compute the Office Products Division’s residual income for next year assuming that it performs the same as this year and adds the new product line.

d. Using the residual income approach, if you were in Dell Havasi’s position, would you accept or reject the new product line?

Bridger Company currently has the capacity to manufacture 250,000 widgets a year. The widgets normally sell for $8.00 each.

Bridger Company has the following costs related to manufacturing and selling 200,000 widgets:

Assume Minot Inc. asks Bridger to complete a manufacture a special order of 10,000 widgets. Minot is willing to pay $5.50 per widget (and the sales commission will apply on this special order).

By how much will Bridger's income change if they accept the special order?

Mr. Bailey has approached you regarding an opportunity he has to become a homeowner.  Mr. Bailey has asked you to perform a financial analysis to determine if this would be a wise move to purchase the new condominium, or if he should continue to rent.  You will create an Excel spreadsheet and a written Word document to explain the results for Mr. Bailey.  

Currently he rents a downtown condominium for $2500 per month. A neighboring unit has recently gone onto the market for $500,000. Mr. Bailey feels that this would make a great investment for him and it would make sense to stop renting and purchase this unit. Mr. Bailey can put down 20% on the new unit. He will assume a 30-year mortgage for the condominium with a 6% APR. Mr. Bailey plans to remain in the condominium for 5 years and then sell and move to suburban Berkshire Farms.

Financial Details
If Mr. Bailey purchases the condo, he will have additional monthly fees of:

$1000 HOA fee (maintenance, pool, health club)
$300 property taxes
$100 repairs

You have reviewed real estate trends and have determined that over 5 years the condo will appreciate approximately 3% per year. When he sells the condo, you estimate that he will pay 5% in commission and an additional $2,000 in closing costs.

Excel Spreadsheet:

1. Mortgage payment with costs to Buy versus Rent (Sheet 1)
2. Amortization Schedule for the mortgage (Sheet 2)
3. Present value of the proceeds if he were to sell the property in 5 years (Sheet 3)

Word Document:

In a professional 3- 5 page written analysis explain the results of your findings for Mr. Bailey. Provide a detailed written explanation of your calculations for the present value of the proceeds if he were to sell the property in 5 years. In addition, provide an explanation of the importance of the time value of money and the key decisions to be made in this buy versus rent decision. You should also include qualitative decisions to consider in this scenario for Mr. Bailey (e.g. what are some factors which influence this buy versus rent decision which should be considered).

The Grilton Tire Company manufactures racing tires for bicycles. Grilton sells tires for $50 each. Grilton is planning for next year by developing a master budget by quarters. Grifton’s balance sheet for December 31, 2016 follows:

GRILTON TIRE COMPANY

Balance Sheet

December 31, 2016

Assets

Current Assets:

  Cash                                                                                           $  39,000

  Accounts Receivable                                                                   40,000

  Raw Materials Inventory                                                              2,400

  Finished Goods Inventory                                                            8,700

  Total Current Assets                                                                                               $  90,100

Property, Plant and Equipment:

  Equipment                                                                                 177,000

  Less: Accumulated Depreciation                                            (42,000)                135,000

Total Assets                                                                                                               $225,100

Liabilities

Current Liabilities:

  Accounts Payable                                                                                                  $  8,000

Stockholder’s Equity

Common Stock, no par                                                           $ 130,000

Retained Earnings                                                                         87,100

  Total Stockholder’s Equity                                                                                  217,100

Total Liabilities and Stockholder’s Equity                                                          $225,100

Other data for Grilton Tire Company:

1. Budgeted Sales are 1,500 for the first quarter and expected to increase by 200 tires per quarter. Cash Sales are expected to be 30% of total sales, with the remaining 70% of sales on account.
2. Finished Goods Inventory on December 31, 2016 consists of 300 tires at $29 each.
3. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2018 are expected to be 2,300 tires and second quarter sales for 2018 are expected to be 2,500.  FIFO inventory costing method is used.
4. Direct Materials cost is $8 per tire.
5. Desired ending Finished Goods Inventory is 30% of the next quarter’s direct materials needed for production.
6. Each tire requires 0.40 hours of direct labor; direct labor costs average $16 per hour.
7. Variable manufacturing overhead is $2 per tire produced.
8. Fixed manufacturing overhead includes $4,500 per quarter in depreciation and $26,780 per quarter for other costs, such as utilities, insurance, and property taxes.
1. Fixed selling and administrative expenses include $8,000 per quarter for salaries; $1,800 per quarter for rent; $1,200 per quarter for insurance; and $500 per quarter for depreciation.
10. Variable selling and administrative expenses include supplies at 2% of sales.
11. Capital expenditures include $45,000 for new manufacturing equipment, to be purchased and paid in the first quarter.
50. Cash receipts for sales on account are 60% in the quarter of sale and 40% in the quarter following the sale; December 31, 2016, Accounts Receivable is received in the first quarter of 2017.
1000. Direct materials purchases are paid 70% in the quarter purchased and 30% in the following quarter; December 31, 2016, Accounts Payable is paid in the first quarter of 2017.
14. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
15. Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.
16. Grilton desires to maintain a minimum cash balance of $35,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

REQUIREMENTS:

1. Prepare a schedule of expected cash disbursements for purchases of  materials for each quarter and in total of the year 2017. (5 pts.)
2. Prepare a budgeted Schedule of Cost of Goods Manufactured for the year of 2017. (10 pts.)
3. Prepare a budgeted Income Statement for the year of 2017    (10 pts.)
4. Prepare a cash budget for the year of 2017.   (15 pts.
5. Essay:  What types of information do your budgets yield? Is cash flow adequate?  Do sales need to be increased, costs reduced? Etc….. ( 5 pts.)

10.Neatness and completeness (5 pts)

Please do number 1,2,3,4,5

TEL Company provided the following account balances on December 31, 2019:

Accounts receivable
400,000.00

Advances to officers-not-currently collectible
100,000.00

Sinking fund
400,000.00

Building
5,000,000.00

Long-term refundable deposit
50,000.00

Cash and cash equivalents
500,000.00

Cash surrender value
60,000.00

Equipment
1,000,000.00

Lease rights
100,000.00

Accrued interest on notes receivable
10,000.00

Inventories
1,300,000.00

Land
1,500,000.00

Land held for speculation
500,000.00

Notes receivable
250,000.00

Computer software
3,250,000.00

Prepaid expenses
70,000.00

Trading securities
280,000.00

Unearned rent income
40,000.00

Retained earnings (deficit)
(1,800,000.00)

Share premium – preference
500,000.00

Premium on bonds payable
1,000,000.00

Preference share capital
2,000,000.00

Share premium – ordinary
200,000.00

Notes payable
300,000.00

SSS payable
10,000.00

Accounts payable
400,000.00

Accrued salaries
100,000.00

Accumulated depreciation – building
2,000,000.00

Accumulated depreciation – equipment
200,000.00

Allowance for doubtful accounts
20,000.00

Bonds payable
5,000,000.00

Dividends payable
120,000.00

Ordinary share capital
5,000,000.00

Withholding tax payable
30,000.00

Preference share redemption fund
350,000.00

Required: A detail "NOTES" and financial position on December 31, 2019.

Exercise 14-29 Reporting bonds at fair value [LO14-6]

Federal Semiconductors issued 12% bonds, dated January 1, with a face amount of $840 million on January 1, 2018. The bonds sold for $780,588,787 and mature on December 31, 2037 (20 years). For bonds of similar risk and maturity the market yield was 13%. Interest is paid semiannually on June 30 and December 31. Federal determines interest at the effective rate. Federal elected the option to report these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $760 million as determined by their market value in the over-the-counter market. Assume the fair value of the bonds on December 31, 2019 had risen to $766 million.

Required:

Complete the below table to record the following journal entries.
1. & 2. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet, and adjust the bonds to their fair value for presentation in the December 31, 2019, balance sheet. Federal determined that one-half of the increase in fair value was due to a decline in general interest rates.

• Calculation
• General Journal

Complete the below table to record the following journal entries. (Negative amount should be indicated by a minus sign. Round final answers to the nearest whole dollars.)

• Calculation

• Journal entry worksheet

• Record the interest expense.

• Note: Enter debits before credits.

  	Date General Journal Debit Credit June 30, 2018

• Record the interest expense.

• Note: Enter debits before credits.

  	Date General Journal Debit Credit December 31, 2018

• Record the fair value adjustment.

Note: Enter debits before credits.

• Record the interest expense.

Note: Enter debits before credits.

• Record the interest expense.

Note: Enter debits before credits.

• Federal determined that one-half of the increase in fair value was due to a decline in general interest rates.

Note: Enter debits before credits.

1.Boris Corporation issued 25,000 shares of $10 par value common stock at $30 per share. As a result of this transaction, Boris Corporation’s: A. Paid in Capital in Excess of Par Value increased by $250,000 B. Paid in Capital in Excess of Par Value increased by $750,000 C. Common Stock increased by $250,000 D. Common Stock increased by $750,000

2.Karin, Inc. has 5,000 shares of 6%, $200 par value, cumulative preferred stock and 100,000 shares of $2 par value common stock outstanding. There were no dividends declared in 2015. The board of directors declared and paid dividends of $100,000 each in 2016 and 2017.

What is the amount of dividends received by the common stockholders in 2017?

3.

The stockholders equity section of Prancer Company showed the following:

Prancer declared a 10% stock dividend on a day when the market value of the stock was $60 per share. The stock dividend will:

4.

Stockholders' equity represents the current market value of a company.

True

False

5.

The cumulative feature on preferred stock means that regular dividends to preferred stockholders omitted in past years must be paid in addition to the current year's dividend before any dividend distribution may be made to common stockholders.

True

False

6.

A statement of retained earnings will disclose the amount of net income (or loss) for the accounting period.

True

False

The following situations should be considered independently. (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.) 1. John Jamison wants to accumulate $63,968 for a down payment on a small business. He will invest $32,000 today in a bank account paying 8% interest compounded annually. Approximately how long will it take John to reach his goal? 2. The Jasmine Tea Company purchased merchandise from a supplier for $32,802. Payment was a noninterest-bearing note requiring Jasmine to make five annual payments of $8,000 beginning one year from the date of purchase. What is the interest rate implicit in this agreement? 3. Sam Robinson borrowed $14,000 from a friend and promised to pay the loan in 12 equal annual installments beginning one year from the date of the loan. Sam’s friend would like to be reimbursed for the time value of money at a 9% annual rate. What is the annual payment Sam must make to pay back his friend?