Calculate NPV: Evaluate the two options using NPV analysis and clearly identify which of the two alternatives results in a higher valuation for Rio Tinto. Include a brief commentary of your analysis.

Option 1: Building a “Crusher” and 13-kilometre Conveyor The construction and installation of a new “Crusher” and 13-kilometre conveyor will cost $24 million. In addition, an ANFO facility will also need to be constructed at a cost $8.2 million. This facility will need to be supplied with slurry pumps, mixed flotation systems and other equipment at a total cost of $7 million. Rio Tinto’s reserve fleet of autonomous Caterpillar Haulage trucks will meet the needs for this project, however until recently, the fleet has been earning a rental income of $1,030,000 per 2 year. The additional iron ore mined is expected to generate a revenue of $18 million per year, which is forecasted to increase by 2.5% per annum due to higher demand from China. As a result of the additional complexities involved with the construction and management of this project, 7 new engineers (yearly salary per engineer $145,000) will replace 11 existing engineers (yearly salary per engineer $105,000). The 1000 additional construction labour required for this project is expected to cost $6.2 million per annum for the duration of the project. For tax reasons you will expense the cost of the ANFO facility immediately. The cost for the construction of the new “Crusher”, 13-kilometre conveyor and associated slurry pumps, mixed floatation systems and other equipment will be depreciated over three years using the straight-line method. Due to the nature of the mining project, the crusher and associated systems and equipment will likely have a salvage value of $12 million at the end of three years. Finally, the required net working capital is $6.3 million which will be returned at the end of the project’s lifetime.

Option 2: Outsourcing the supply of ore Alternatively, to achieve the same iron ore mined from Option 1, Rio Tinto can contract BHP to supply the required iron ore. Based on the amount of iron ore required, BHP has quoted a total cost of $25 million. BHP has however offered this rate on the condition that Rio Tinto pays 24% of the total cost in advance in the beginning of the year (i.e. Y0), with the remaining paid in equal instalments thereafter. Rio Tinto will process the iron ore using existing facilities at an expected cost of $6.2 million per year. Interest expenses related to this project is expected to $3.8 million per year.

[For simplicity we will assume a project life time of 3 years – that is Year 0, Year 1, Year 2 and Year 3]

Interest on all debt securities is paid twice-yearly and the corporate tax-rate is 30 percent.

WACC = 4.25%

Allocating Payments and Receipts to Fixed Asset Accounts

The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale ceramic business. The receipts are identified by an asterisk.

Required:

1. Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts. Choose the correct account from the dropdown list for each letter and enter the appropriate amount. Enter receipts as negative amounts using the minus sign.

2. Determine the amount debited to Land, Land Improvements, and Building.

3. Since land used as a plant site does not lose its ability to provide services, it is not depreciated. Land improvements do lose their ability to provide services as time passes and are therefore depreciated .

4. What would be the effect on the current year’s income statement and balance sheet if the cost of filling and grading land of $20,600 [payment (i)] was incorrectly classified as Land Improvements rather than Land? Assume that Land Improvements are depreciated over a 20-year life using the double-declining-balance method.

Depreciation expense would be understated & Land improvements would be overstated.

Background information for all problems:

Chekley Manufacturing has two production departments (Machining and Assembly). They have two service departments that provide services to each other and to production (Plant Maintenance and IT) Chekley believes Plant Maintenance (PM) should be allocated based on square footage and IT should be allocated based on computer hours. Chekley allocates Plant Maintenance first when allocating using the step method. You have the following additional information:

Total manufacturing costs

COSTS Plant maintenance $500,000

Information systems $450,000

Machining $2,000,000

Assembly $3,150,000 $6,100,000

Square Feet Computer hours

Plant maintenance 4,000.00 8,000.00

Information systems 2,000.00 4,000.00

Machining 12,000.00 24,000.00

Assembly 6,000.00 8,000.00

24,000.00 44,000.00

Problem A

1. Under the direct method, what percentage of PM should be allocated to Machining? 2. Under the direct method, what percentage of PM should be allocated to Assembly? 3. Under the direct method, how much of the total allocable cost attributable to PM should be allocated to Machining? 4. Under the direct method, how much of the total allocable cost attributable to PM should be allocated to Assembly? 5. Under the direct method, what percentage of IT should be allocated to Machining? 6. Under the direct method, what percentage of IT should be allocated to Assembly? 7. Under the direct method, how much of the total allocable cost attributable to IT should be allocated to Machining? 8. Under the direct method, how much of the total allocable cost attributable to IT should be allocated to Assembly? Problem B 1. Under the step method, what percentage of PM should be allocated to IT? 2. Under the step method, what percentage of PM should be allocated to Machining? 3. Under the step method, what percentage of PM should be allocated to Assembly? 4. Under the step method, how much of the total allocable cost attributable to PM should be allocated to IT? 5. Under the step method, how much of the total allocable cost attributable to PM should be allocated to Machining? 6. Under the step method, how much of the total allocable cost attributable to PM should be allocated to Assembly? 7. Under the step method, what percentage of IT should be allocated to PM? 8. Under the step method, what percentage of IT should be allocated to Machining? 9. Under the step method, what percentage of IT should be allocated to Assembly? 10. Under the step method, how much of the total allocable cost attributable to IT should be allocated to PM? 11. Under the step method, how much of the total allocable cost attributable to IT should be allocated to Machining? 12. Under the step method, how much of the total MOH cost attributable to IT should be allocated to Assembly?

Problem C

1. Using the reciprocal method, what is the formula for determining the total PM costs that should be allocated? PM = 500,000 + .2IT PM = 500,000 + .2(450,000) PM = 450,000 + .1IT PM = 500,000 + .1(450,000) 2. Using the reciprocal method, what is the formula for determining the total IT costs that should be allocated? IT =500,000 + .1PM IT = 450,000 + .1PM IT = 450,000 + .2(500,000) IT = 500,000 + .1(450,000) 3. Using the reciprocal method, how much in total will be allocated from PM to the other departments? 4. Using the reciprocal method, how much in total will be allocated from IT to the other departments?

In 2021, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2023. Information related to the contract is as follows:

Assume that Westgate Construction’s contract with Santa Clara County does not qualify for revenue recognition over time.

Required:
1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years.
2-a. In the journal below, complete the necessary journal entries for the year 2021 (credit "Various accounts" for construction costs incurred).
2-b. In the journal below, complete the necessary journal entries for the year 2022 (credit "Various accounts" for construction costs incurred).
2-c. In the journal below, complete the necessary journal entries for the year 2023 (credit "Various accounts" for construction costs incurred).

1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years. (Leave no cells blank - be certain to enter "0" wherever required. Loss amounts should be indicated with a minus sign.)

Exercise 10-5 Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment. Abstract company’s fee for title search $1,186 Architect’s fees 7,228 Cash paid for land and dilapidated building thereon 198,360 Removal of old building $45,600    Less: Salvage 12,540 33,060 Interest on short-term loans during construction 16,872 Excavation before construction for basement 43,320 Machinery purchased (subject to 2% cash discount, which was not taken). Company uses net method to record discount. 125,400 Freight on machinery purchased 3,055 Storage charges on machinery, necessitated by noncompletion of    building when machinery was delivered 4,970 New building constructed (building construction took 6 months from    date of purchase of land and old building) 1,105,800 Assessment by city for drainage project 3,648 Hauling charges for delivery of machinery from storage to new building 1,414 Installation of machinery 4,560 Trees, shrubs, and other landscaping after completion of building    (permanent in nature) 12,312 Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of implementation. (Please leave spaces blank if there is no answer. Do not enter zeros in those spaces.)

Glitz hotel is going to make a $2,000,000 investment by completing renovating a floor of the hotel. The floorplan will be entirely redone, and they can have a mix of three types of rooms: Luxury Suites, Large rooms, or Regular rooms. Due the size of the floor, they can build a maximum of 20 luxury suites or a maximum of 40 large rooms or a maximum of 60 regular rooms or a mix of all three.

Luxury suites will rent for $400 per night.

Lrrge rooms will rent for $200 per night.

Regular rooms will rent for $135 per night.

The cost to maintain each room, excluding depreciation, is $30/night ($25 in variable maintenance and $5 in fixed booking costs).

The food and beverage manager noted that since the suites are often used for conventions as private hospitality suites, they purchase an average of $200 per night in room service. Large rooms purchase an average of $40 and Regular $10 per night for room service. Room service generates a 70% gross profit. The cleaning manager noted that the suites generally require an extra $10/night in cleaning costs due to these conventions.

Estimated maximum demand per night is as follows:

Suites:10 rooms

Large: 25 rooms

Regular: no maximum demand

How many of each room should they build as part of the renovation?

Posa Hotels, Inc., has a sixth night free policy. Every sixth night a guest stays at the hotel is free. Because not all guests stay enough nights to earn a free stay, on average the number of free nights redeemed is 70% of the maximum possible number of free nights available one obtains by dividing the total number of paid nights the hotel has had by 5. Rooms at Posa Hotels cost $300 per night. In 2019, Posa had a total of 100,000 paid room-nights and collected a total of $30 million from customers. Also in 2019, customers redeemed a total of 10,000 free room-nights. Some of the room-nights awarded were based on customers paid nights from previous years and some were based on paid nights from the current year. Required: Prepare journal entries to record revenue for 2019 for Posa. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) 1)Prepare the entry to record the revenue recognized for the nights paid by customers. 2)Prepare the entry to record the revenue recognized for the free nights redeemed by customers.

Marilyn Helm Retailers is attempting to decide on a location for a new retail outlet. At the​ moment, the firm has three​ alternatives: stay where it is but enlarge the​ facility; locate along the main street in nearby Newbury​; or locate in a new shopping mall in Hyde Park.

The company has selected the four factors listed in the following table as the basis for evaluation and has assigned weights as​ shown:

​a) Based on the given​ information, the best location for Marilyn Helm Retailers is to open the new retail outlet in _____, with a total weighted score of_____​(Enter your response rounded to two decimal​ places.)

​b) A new subway station is scheduled to open across the street from the present location in about a​ month, so its third factor score should be raised to 75. Then, the best location for Marilyn Helm Retailers is to open the new retail outlet in ______, with a total weighted score of ____.(Enter your response rounded to two decimal​places.)

On September 28, 1994, Disney officials announced the end of the Disney’s America project in Prince William County, Virginia. Two representatives from Disney’s America flew to Richmond to brief Virginia’s Governor George Allen on the decision. The same day, Prince William County officials were notified as well. Peter S. Rummell, president of Disney Design and Development Company, issued a public statement, saying in part: We remain convinced that a park that celebrates America and an exploration of our heritage is a great idea, and we will continue to work to make it a reality. However, we recognize that there are those who have been concerned about the possible impact of our park on historic sites in this unique area, and we have always tried to be sensitive to the issue. While we do not agree with all their concerns, we are seeking a new location so that we can move the process forward. . . . Despite our confidence that we would eventually win the necessary approvals, it has become clear that we could not say when the park would be able to open—or even when we could break ground. The controversy over building in Prince William County has diverted attention and resources from the creative development of the park. Implicit in our vision for the park is the hope that it will be a source of pride and unity for all Americans. We certainly cannot let a particular site undermine that goal by becoming a source of divisiveness.1 Rummell stated that Disney would try to build an American history theme park elsewhere in Virginia, but that a site had not yet been selected. Many Virginia politicians were disappointed, but some tried to remain optimistic. Governor George Allen’s office issued a statement: “I’m committed to a Disney theme park in Virginia and the jobs that will be created thereby. I’m pleased that the Walt Disney Company shares that commitment.”2 Robert S. Skunda, Allen’s Secretary of Commerce and Trade, commented to reporters, “I think they see the likelihood of long-term damage to their image. No company likes to be publicly bashed when they feel as though they are doing something that is worthwhile. . . . The thing that a company values most is its reputation. It has to. Without a reputation a company cannot continue to exist. I think those things drove Disney away from the Haymarket site.”3 Prince William County executive James Mullen said the county would be forced to go through a time of self-examination following Disney’s exit. He stated, “Mainly I’m disappointed for the people in the community who supported the project and for our staff, who put so much time in on this. Disney certainly hasn’t helped our marketing effort. They’ve made it very difficult for us to overcome the perception that this is a place (where) you can’t do a big project without a hassle.”4 Other local politicians were not as generous in their remarks about Disney. State Senator Joseph Benedetti of Richmond stated, “Promises were made that they’d stay, come hell or high water. Whatever they do is going to have to be written in blood next time.”5 State Senator Charles Colgan of Prince William County stated, “I think they broke faith with us.”6 James McPherson, the Princeton history professor and one of Disney’s most vocal opponents, stated, “I’m very happy. It’s good news.”7 McPherson said that he would be happy to help Disney find another location in Virginia that would be less significant historically. He stated, “Some of us would be quite happy to advise them. This has never been an attempt to bash Disney.”8 Over the next few weeks, scores of municipalities wrote newspaper articles and petitioned Disney directly, stating that they would welcome a Disney park in their areas. Since the decision to halt plans for Disney’s America in Virginia, observers have tried to make sense in retrospect of the park’s failure. In 1998, Eisner issued a memoir, Work in Progress. In a chapter devoted to the Disney’s America project,9 Eisner freely and openly admits that Disney made many missteps, while still arguing for the vision he had for the theme park. Among the missteps Eisner identified were • Naming the project “Disney’s America,” which implied the company’s ownership of U.S. history. He said, “That was unfortunate because we were never interested in a park that merely reflected a Disneyesque view of American history.” • Failing to “recognized how deeply people often feel about maintaining their communities just as they are. . . . There may have been no collection of people [the Piedmont Environmental Council] in America better equipped to lobby a cause, whether with Congress or government agencies or through the media.” • Being “blindsided” by the issue of proximity to the Manassas Battlefield Park. Jody Powell’s advice had been that the distance of three miles would be great enough to avoid controversy. • Believing Disney “could announce the project on [its] own timetable. Our focus on secrecy in land acquisition had prevented us from even briefing, much less lobbying, the leading politicians in the state about our plans as they evolved. The consequence was that we lost the opportunity to develop crucial allies and nurture goodwill.” • Revealing to the public “a plan that looked relatively complete [which] opened ourselves up to every critic with different ideas about what a park based on American history should and should not include.” • Making emotional statements that critics latched on to, including being shocked about not being taken around on people’s shoulders and complaining that history in school was boring. Eisner reflects: “My comments made me sound not just smug and arrogant but like something of a Philistine. . . . Looking back, I realize how much my brief moment of intemperance undermined our cause.” To balance his story, Eisner also recollects his well-meaning intentions for the theme park, describing his motives as the patriotic and socially responsible vision of a son of immigrants. He wanted visiting Disney’s America to be as multimedia intensive and deeply moving an experience as the U.S. Holocaust Museum. In retrospect, Eisner explained “We saw ourselves as storytellers first and foremost,” who needed advice from historical experts to portray American history “knowledgeably and responsibly.” Working with the advisory group of “openminded” historians who critiqued comparable exhibits in Orlando was particularly eye-opening: “In our original plan, for example, we’d envisioned recreating a classic twentieth-century steel. mill and then putting a roller-coaster through it. To do that, we began to understand, could trivialize and even demean the attempt to portray the steel mill realistically.” Of his critics, Eisner complains, “By any reasonable measure, this attack on Disney’s America was dramatically overstated. . . . Much like negative advertising in a political campaign, [their] incendiary claims were effective in influencing public opinion and putting us further on the defensive. I was suddenly the captain of Exxon’s Valdez. . . . By the summer of 1994, opposing Disney’s America had become a fashionable cause célèbre in the media centers of New York City and Washington, D.C. . . . Fairness seemed to have given way to polemics.” In the end, Eisner explains that financial projections made in late August 1994 “showed that rather than the profit we’d previously projected for Disney’s America, we were now facing the prospect of substantial losses.” On the cost side, Eisner attributed the losses to the current and future expense of dealing with opponents’ legal challenges, to the carrying costs caused by a projected two-year delay before breaking ground, and to the modifications to the original plans that increased costs by almost 40 percent. On the revenue side, the Disney’s America team now projected a lower price point for tickets and a shorter season at eight months down from nine. According to Eisner, “Now that a dozen members of our team had spent a year living in the towns adjacent to our site, they had a different view. An eight-month season for the park seemed more realistic.” The revised figures, coupled with the psychic impact of Wells’ death, Eisner’s by-pass surgery, and Katzenburg’s departure led to the decision to abandon plans for Disney’s America. As Eisner concludes, I still believed that it was possible to get Disney’s America built, but the question now was at what cost. . . . [A]fter two weeks of soul-searching, we finally agreed that it wasn’t fair to subject the company to more trauma. The issue was no longer who was right or wrong. We had lost the perception game. Largely through our own missteps, the Walt Disney Company had been effectively portrayed as an enemy of American history and a plunderer of sacred ground. The revised economic projections took the last bit of wind out of our sails. The cost of moving forward on Disney’s America, we reluctantly concluded, finally outweighed the potential gain. Others interpreted the situation as one in which Eisner himself needed better handling. In The Keys to the Kingdom, former Washington Post reporter Kim Masters says Eisner’s dealings with the media had suffered since late 1992 when he lost his chief of corporate communications, Erwin Okun, to cancer. “Okun had a shrewd yet avuncular style that worked well with the press,” wrote Masters. Journalist Peter Boyer said of Okun “‘He somehow pushed that button in all of us that said Disney is an honest, good company that meant well. . . . He packaged [Eisner] well without seeming to do so.’” “Eisner said he relied on Okun ‘to counsel, review, berate, encourage, and protect me,’” Masters writes. Okun’s successor, John Dreyer, however, “came from the theme parks. He lacked Okun’s cordiality and treated the press with suspicion bordering on hostility. At the Washington Post, he quickly alienated the very reporters whose coverage of Disney’s America would prove most influential.”10 Pat Scanlon, formerly an Imagineer, speculated that Wells might have salvaged the Disney’s America project. “There wasn’t anybody at a high enough level to keep Michael in his box, [Scanlon] says. “Michael was making public remarks that weren’t helpful. Michael sounded a bit like an abrasive Hollywood producer coming to town. Frank would have shaped public relations because he would have made Michael more aware. Frank was the consummate diplomat.”11 Whatever the cause, Nick Kotz, a member of the Piedmont Environmental Council and author of the editorial in the Los Angeles Times, observed this about the effects of the Disney’s America theme park controversy: “Undoubtedly Disney had internal reasons for the decision to strike its tent on the Piedmont battlefield. But it had also faced the danger of a Pyrrhic victory. In all probability, it could have prevailed and built its theme park, but it would have suffered serious and perhaps permanent value to its reputation.”12 Despite claims by Eisner and Disney officials to the contrary, as of the writing of this case, no further plans have been announced for a Disney’s America theme park.

Discuss and Anlysis the Case Study.

A contractor must choose between buying or renting a crane for the duration of a 5 year construction project. The contractor uses an MARR of 8%. At the end of the project, the crane can be sold for 26% of its initial cost. The cost to operate and maintain the crane is $210,000 per year. Renting the crane costs $330,000 per year including all operating and maintenance costs. Determine the maximum amount the contractor should pay to purchase the crane (i.e. the breakeven initial cost of the crane). Express your answer in $ to the nearest $1,000