A cost estimator for a construction company has collected the data found in the source file Estimation.xlsx describing the total cost (Y) of 97 difference projects and the following 3 independent variables thought to exert relevant influence on the total cost: total units of work required (X1), contracted units of work per day (X2), and city/location of work (X3). The cost estimator would like to develop a regression model to predict the total cost of a project as a function of these 3 independent variables.

b. Suppose the estimator wants to use the total units of work required (X1), contracted units of work per day (X2), and city/location of work (X3) as the independent variables to predict total cost. What should be the regression function between Y and X1, X2, and X3? What is the adjusted R-squared value of this model? What conclusions can you make? (Note that X3 is a dummy variable. You should process it into different categories as I showed you in the class lecture. You should expand X3 into Location1, Location 2, …. Location 5 to differentiate the six locations.)

Exercise 11-12

In 1990, Pina Company completed the construction of a building at a cost of $2,120,000 and first occupied it in January 1991. It was estimated that the building will have a useful life of 40 years and a salvage value of $63,600 at the end of that time.

Early in 2001, an addition to the building was constructed at a cost of $530,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years, and that the addition would have a life of 30 years and a salvage value of $21,200.

In 2019, it is determined that the probable life of the building and addition will extend to the end of 2050, or 20 years beyond the original estimate.

Compute the annual depreciation to be charged, beginning with 2019. (Round answer to 0 decimal places, e.g. 45,892.)

Irwin, Inc., constructed a machine at a total cost of $41 million. Construction was completed at the end of 2012 and the machine was placed in service at the beginning of 2013. The machine was being depreciated over a 10-year life using the straight-line method. The residual value is expected to be $3 million. At the beginning of 2016, Irwin decided to change to the sum-of-the-years’-digits method. Ignoring income taxes, prepare the journal entry relating to the machine for 2016.

Option 1: Building a new refinery

The construction and installation of a new refinery will cost $22 million. In addition, a processing plant will also need to be constructed at a cost $6 million. This plant will need to be supplied with grinding machines, DMS flotation machines and other equipment at a total cost of $16 million. Kidman Resources’ current fleet of Haul trucks, water carts and dump trucks will meet the needs for this project, however until recently, the fleet has been earning a rental income of $120,000 per year.

Under the agreement with Tesla inc., the lithium mined is expected to generate a revenue of $15 million per year, which will increase by 2.8% per annum adjusted for rising costs. Due to the additional complexities involved with the construction and management of this new refinery, 5 new engineers (yearly salary per engineer $160,000) will replace 5 existing engineers (yearly salary per engineer $120,000). All other remaining labour force required is expected to cost $3 million per annum for the duration of the project.

For tax reasons you will expense the cost of the processing plant immediately. The cost for the construction and installation of the new refinery and associated machines and equipment will be depreciated over three years using the straight-line method. Due to the nature of the mining project, the machines and equipment will likely have a salvage value of $10 million at the end of three years. Finally, the required net working capital is $2 million.

Option 2: Outsourcing the supply of ore

Alternatively, Kidman Resources can contract BHP to supply the required ore to process into lithium hydroxide. Based on the required amount of lithium hydroxide, management has quoted a total cost of $28 million. BHP has however offered this rate on the condition that Kidman Resources pays 20% of the total cost in advance in the beginning of the year, with the remaining paid in equal instalments thereafter. Kidman Resources will process the ore into lithium hydroxide using existing facilities at an expected cost of $4.4 million per year.

Calculate NPV for option 1 and 2. Tax rate= 28%, discount rate= 10%

Question:

Building a new refinery

The construction and installation of a new refinery will cost $22 million. In addition, a processing plant will also need to be constructed at a cost $6 million. This plant will need to be supplied with grinding machines, DMS flotation machines and other equipment at a total cost of $16 million. Kidman Resources' current fleet of Haul trucks, water carts and dump trucks will meet the needs for this project, however until recently, the fleet has been earning a rental income of $120,000 per year.

Under the agreement with Tesla inc., the lithium mined is expected to generate a revenue of $15 million per year, which will increase by 2.8% per annum adjusted for rising costs. Due to the additional complexities involved with the construction and management of this new refinery, 5 new engineers (yearly salary per engineer $160,000) will replace 5 existing engineers (yearly salary per engineer $120,000). All other remaining labour force required is expected to cost $3 million per annum for the duration of the project.

For tax reasons you will expense the cost of the processing plant immediately. The cost for the construction and installation of the new refinery and associated machines and equipment will be depreciated over three years using the straight-line method. Due to the nature of the mining project, the machines and equipment will likely have a salvage value of $10 million at the end of three years. Finally, the required net working capital is $2 million.

Calculate Net Present Value given rate of return = 10% and tax rate= 30%

Irwin, Inc., constructed a machine at a total cost of $23 million. Construction was completed at the end of 2012 and the machine was placed in service at the beginning of 2013. The machine was being depreciated over a 10-year life using the straight-line method. The residual value is expected to be $3 million. At the beginning of 2016, Irwin decided to change to the sum-of-the-years’-digits method. Ignoring income taxes, prepare the journal entry relating to the machine for 2016.

Irwin, Inc., constructed a machine at a total cost of $45 million. Construction was completed at the end of 2014 and the machine was placed in service at the beginning of 2015. The machine was being depreciated over a 10-year life using the sum-of-the-years’-digits method. The residual value is expected to be $1 million. At the beginning of 2018, Irwin decided to change to the straight-line method.

Ignoring income taxes, prepare the journal entry relating to the machine for 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)
  

Answer:

Edwards Construction currently has debt outstanding with a market value of $430,000 and a cost of 6 percent. The company has an EBIT of $25,800 that is expected to continue in perpetuity. Assume there are no taxes.

a. What is the value of the company’s equity and the debt-to-value ratio? (Do not round intermediate calculations. Leave no cells blank - be certain to enter "0" wherever required. Round your debt-to-value answer to 3 decimal places, e.g., 32.161.)

b. What is the equity value and the debt-to-value ratio if the company's growth rate is 4 percent? (Do not round intermediate calculations. Round your equity value to 2 decimal places, e.g., 32.16, and round your debt-to-value answer to 3 decimal places, e.g., 32.161.)

c. What is the equity value and the debt-to-value ratio if the company's growth rate is 5 percent? (Do not round intermediate calculations. Round your equity value to 2 decimal places, e.g., 32.16, and round your debt-to-value answer to 3 decimal places, e.g., 32.161.)

The Starr Theater, owned by Meg Vargo, will begin operations in March. The Starr will be unique in that it will show only triple features of sequential theme movies. As of March 1, the ledger of Starr showed: Cash $2,950, Land $22,000, Buildings (concession stand, projection room, ticket booth, and screen) $10,000, Equipment $10,000, Accounts Payable $6,000, and Owner’s Capital $38,950. During the month of March, the following events and transactions occurred.

1.) Enter the beginning balances in the ledger.

2.) Journalize the March transactions. Starr records admission revenue as service revenue, rental of the concession stand as rent revenue, and film rental expense as rent expense.(Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

3.) Post the March journal entries to the ledger. (Post entries in the order of journal entries presented in the previous question.)