University Car Wash built a deluxe car wash across the street from campus. The new machines cost $261,000 including installation. The company estimates that the equipment will have a residual value of $27,000. University Car Wash also estimates it will use the machine for six years or about 12,000 total hours. Actual use per year was as follows:

Your buddy in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $50. However, once built, the machine will last for 20 years and will require no maintenance. The machine takes one year to build and it will cost $1,000 to build. Your buddy wants to know if he should invest the money to construct it. If the interest rate is 3% per year, what should your buddy do?

1. To make the decision you need to calculate the net present value (NPV) of the machine.

The NPV of the machine is $????. (round to the nearest dollar, if negativ use -)

2. You convince your friend to improve the machine so that the amount of produced money will increase every year by 2% over the 20 years.

The NPV of the new machine is $????. (round to the nearest dollar, if negativ use -)

3. What is the IRR of the machine in b.?

The IRR of the machine is ????%. (round to two decimals)

University Car Wash built a deluxe car wash across the street from campus. The new machines cost $264,000 including installation. The company estimates that the equipment will have a residual value of $25,500. University Car Wash also estimates it will use the machine for six years or about 12,500 total hours. Actual use per year was as follows: Year Hours Used 1 2,900 2 1,300 3 1,400 4 2,600 5 2,400 6 1,900

1. Prepare a depreciation schedule for six years using the straight-line method. (Do not round your intermediate calculations.) 2 Prepare a depreciation schedule for six years using the double-declining-balance method. (Do not round your intermediate calculations.) 3. Prepare a depreciation schedule for six years using the activity-based method. (Round your "Depreciation Rate" to 2 decimal places and use this amount in all subsequent calculations.)

University Car Wash built a deluxe car wash across the street from campus. The new machines cost $258,000 including installation. The company estimates that the equipment will have a residual value of $28,500. University Car Wash also estimates it will use the machine for six years or about 12,500 total hours. Actual use per year was as follows:

1. Prepare a depreciation schedule for six years using the straight-line method. (Do not round your intermediate calculations.)

2. Prepare a depreciation schedule for six years using the double-declining-balance method. (Do not round your intermediate calculations.)
3. Prepare a depreciation schedule for six years using the activity-based method. (Round your "Depreciation Rate" to 2 decimal places and use this amount in all subsequent calculations.)

University Car Wash built a deluxe car wash across the street from campus. The new machines cost $234,000 including installation. The company estimates that the equipment will have a residual value of $27,000. University Car Wash also estimates it will use the machine for six years or about 12,000 total hours. Actual use per year was as follows:

1. Prepare a depreciation schedule for six years using the straight-line method. (Do not round your intermediate calculations.)

2. Prepare a depreciation schedule for six years using the double-declining-balance method. (Do not round your intermediate calculations.)

3. Prepare a depreciation schedule for six years using the activity-based method. (Round your "Depreciation Rate" to 2 decimal places and use this amount in all subsequent calculations.)

Overview

How we account for and present debt and equity investments on the financial statements is an important part of U.S. GAAP as we move towards an asset/liability approach as to how certain transactions are recorded. The application of the principles of fair value accounting in regards to these assets can be extremely important in how investors determine a company's financial position. It is an area that has had some interesting ramifications in the financial world.

Instructions

Buckingham Company holds a large portfolio of debt securities as investments. The total fair value of the portfolio is greater than its total original cost, even though some of the individual debt securities have decreased in value. Julia, the CFO, and Sam, the Controller, are near year-end in the process of classifying, for the first time, this investment portfolio in accordance with U.S. GAAP. Julia wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year, and wants to classify those that have decreased in value as held-to-maturity. Sam, on the other hand, disagrees. He wants to classify the securities that have decreased in value as trading securities and those that have increased in value as held-to-maturity. He contends that the company is having a good earnings year and the recognizing the losses will help to smooth the income this year, and thus the company will have built-in gains for future periods when the company may not be as profitable.

Answer the following questions:

1- Will classifying the portfolio as each proposes actually have the effect on earnings that each says it will? Why or why not?

2- Is there anything unethical in what each of them proposes? Who are the stakeholders affected by their proposals? Be sure to include a solid analysis of current U.S. GAAP standards that the company should be following for debt investments, including properly cited references.

3- Assume that Julia and Sam end up properly classifying the entire portfolio into proper categories, but then each makes a different proposal just before year end: Julia wants to sell those securities with gains and Sam wants to sell only those with losses to accomplish their individual desired effects on net income. Is this unethical? Why or why not?

4- Is the financial community in the U.S. in agreement with the current U.S. GAAP standards as to how to present investments at fair value (often called mark-to-market accounting)? What impact did these standards have in the 2008 financial crisis? Research this on the internet and summarize what you find, being sure to include properly cited references.

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 20 properties with an average of 150 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 75 percent, based on a 365-day year. The average room rate was $220 for a night. The basic unit of operation is the “night,” which is one room occupied for one night.

The operating income for year 1 is as follows:

In year 1, the average fixed labor cost was $407,000 per property. The remaining labor cost was variable with respect to the number of nights. Food and beverage cost and miscellaneous cost are all variable with respect to the number of nights. Utilities and depreciation are fixed for each property. The remaining costs (management, marketing, and other costs) are fixed for the firm.

At the beginning of year 2, HomeSuites will open four new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 75 percent. Management has made the following additional assumptions for year 2:

The average room rate will increase by 8 percent.

Food and beverage revenues per night are expected to decline by 15 percent with no change in the cost.

The labor cost (both the fixed per property and variable portion) is not expected to change.

The miscellaneous cost for the room is expected to increase by 20 percent, with no change in the miscellaneous revenues per room.

Utilities and depreciation costs (per property) are forecast to remain unchanged.

Management costs will increase by 6 percent, and marketing costs will increase by 8 percent.

Other costs are not expected to change.

Required:

Prepare a budgeted income statement for year 2. (Round your per unit average cost calculations to 2 decimal places.)

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 22 properties with an average of 150 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 80 percent, based on a 365-day year. The average room rate was $215 for a night. The basic unit of operation is the “night,” which is one room occupied for one night.

The operating income for year 1 is as follows:

In year 1, the average fixed labor cost was $418,000 per property. The remaining labor cost was variable with respect to the number of nights. Food and beverage cost and miscellaneous cost are all variable with respect to the number of nights. Utilities and depreciation are fixed for each property. The remaining costs (management, marketing, and other costs) are fixed for the firm.

At the beginning of year 2, HomeSuites will open two new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 80 percent. Management has made the following additional assumptions for year 2:

The average room rate will increase by 5 percent.

Food and beverage revenues per night are expected to decline by 20 percent with no change in the cost.

The labor cost (both the fixed per property and variable portion) is not expected to change.

The miscellaneous cost for the room is expected to increase by 25 percent, with no change in the miscellaneous revenues per room.

Utilities and depreciation costs (per property) are forecast to remain unchanged.

Management costs will increase by 8 percent, and marketing costs will increase by 10 percent.

Other costs are not expected to change.

Required:

Prepare a budgeted income statement for year 2. (Round your per unit average cost calculations to 2 decimal places.)

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 12 properties with an average of 200 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 75 percent, based on a 365-day year. The average room rate was $218 for a night. The basic unit of operation is the “night,” which is one room occupied for one night.

The operating income for year 1 is as follows.

In year 1, the average fixed labor cost was $419,000 per property. The remaining labor cost was variable with respect to the number of nights. Food and beverage cost and miscellaneous cost are all variable with respect to the number of nights. Utilities and depreciation are fixed for each property. The remaining costs (management, marketing, and other costs) are fixed for the firm.

At the beginning of year 2, HomeSuites will open three new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 75 percent. Management has made the following additional assumptions for year 2.

• The average room rate will increase by 8 percent.
• Food and beverage revenues per night are expected to decline by 15 percent with no change in the cost.
• The labor cost (both the fixed per property and variable portion) is not expected to change.
• The miscellaneous cost for the room is expected to increase by 20 percent, with no change in the miscellaneous revenues per room.
• Utilities and depreciation costs (per property) are forecast to remain unchanged.
• Management costs will increase by 6 percent, and marketing costs will increase by 8 percent.
• Other costs are not expected to change.

Required:

Prepare a budgeted income statement for year 2. (Round your per unit average cost calculations to 2 decimal places.)