McCormick & Company is considering a project that requires an initial investment of $24 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $4.3 million. The company will produce bulk units at a cost of $130 each and will sell them for $420 each. There are annual fixed costs of $500 thousand. Unit sales are expected to be $150,000 each year for the next six years, at which time the project will be abandoned. At that time, the plant and equipment is expected to be worth $8 million (before tax) and the land is expected to be worth $5.4 million (after tax). To supplement the production process, the company will need to purchase $1 million worth of inventory. That inventory will be depleted during the final year of the project. The company has $100 million of debt outstanding with a yield to maturity of 8 percent, and has $150 million of equity outstanding with a beta of 0.9. The expected market return is 13 percent, and the risk-free rate is 5 percent. The company's marginal tax rate is 40 percent.

6. Create an after-tax cash flow timeline.

7. What are the total expected cash flows at the end of year six? The $4.3 million is an opportunity cost and must be included at date 0 as a cash outflow. If the project is accepted, however, the land can be sold in six years for $5.4 million.

8. Find the NPV using the after-tax WACC as the discount rate.

9. Find the IRR.

10. Should the project be accepted? Discuss whether NPV or IRR creates the best decision rule.

2.Gary inherited a Maine summer cabin on 10 acres from his grandmother. His grandparents originally purchased the property for $500 in 1950 and built the cabin at a cost of $10,000 in 1965. His grandfather died in 1980 and when his grandmother recently passed away, the property was appraised at $500,000 for the land and $650,000 for the cabin. Since Gary doesn’t currently live in New England, he decided that it would be best to put the property to use as a rental. What is Gary’s combined basis in both the land and cabin?

3. At the beginning of the year, Poplock began a calendar-year dog boarding business called Griff’s Palace. Poplock bought and placed in service the following assets during the year:

Asset                                 Date Acquired   Cost Basis

Computer equipment      3/23                       $5,000

Dog grooming furniture  5/12                          $7,000

Pickup truck                      9/17                     $10,000

Commercial building       10/11                    $280,000

Land (one acre)                10/11                    $80,000

Assuming Poplock does not elect §179 expensing or bonus depreciation, what is Poplock’s year 1 depreciation expense for each asset?

4. At the beginning of the year, Poplock began a calendar-year dog boarding business called Griff’s Palace. Poplock bought and placed in service the following assets during the year:

Asset                                 Date Acquired   Cost Basis

Computer equipment      3/23                          $5,000

Dog grooming furniture  5/12                       $7,000

Pickup truck                      9/17                      $10,000

Commercial building       10/11                    $280,000

Land (one acre)                10/11                    $80,000

Assuming Poplock does not elect §179 expensing or bonus depreciation, what is Poplock’s year 2 depreciation expense for each asset?

Gen-X Industries is developing the incremental cash flows associated with the proposed replacement of an existing machine tool with a​ new, technologically advanced one. Given the following costs related to the proposed​ project, explain whether each would be treated as a sunk cost or an opportunity cost in developing the relevant cash flows associated with the proposed replacement decision.

a. ​Gen-X would be able to use the same​ tooling, which had a book value of $ 37,000​ on the new machine tool as it had used on the old one.

b.​ Gen-X would be able to use its existing computer system to develop programs for operating the new machine tool. The old machine tool did not require these programs. Although the​ firm's computer has excess capacity​ available, the capacity could be leased to another firm for an annual fee of $19,000.

c. ​Gen-X would have to obtain additional floor space to accommodate the larger new machine tool. The space that would be used is currently being leased to another company for $11,000 per year.

d.​ Gen-X would use a small storage facility to store the increased output of the new machine tool. The storage facility was built by​ Gen-X 3 years earlier at a cost of $123,000.

Because of its unique configuration and​ location, it is currently of no use to either​ Gen-X or any other firm.  

e.​ Gen-X would retain an existing overhead​ crane, which it had planned to sell for its $178,000 market value. Although the crane was not needed with the old machine​tool, it would be used to position raw materials on the new machine tool.

Aliya works for an irrigation district that is considering two options for building new infrastructure to expand irrigation. The infrastructure won’t be built for 3 years (so, capital costs will be incurred in 2023). Option A is estimated to cost $5 million in 2020 dollars. It is anticipated that Option A infrastructure could be used for 5 years, then sold for $1 million (in 2028 dollars; this estimate does not need to be adjusted). Estimated additional revenues are $4.2 million per year, and estimated additional operating costs are $1 million per year (both in 2020 dollars). Option B is estimated to cost $8 million in 2020 dollars. Aliya anticipates that Option B could be used for 5 years, then sold for $0.5 million (also in 2028 dollars). Estimated additional revenues are $5.5 million per year, and estimated additional operating costs are $1.8 million per year (both in 2020 dollars). For both options: Capital cost annual inflation is estimated to be 3%. Future revenues and future operating costs are expected to rise at 2% per year. The combined federal and provincial incremental tax rate is 45%. Use a CCA depreciation rate of 45% and a discount rate of 10% (reflecting the MARR of the firm).

a) What is the gain or loss on disposal of Option A?

b) What is the gain or loss on disposal of Option B?

c) Determine the net present worth of the after-tax cash flow for each option, assuming 2023 is year 0.

d) Which option should Ying recommend, or should she recommend not to purchase either?

This is all the information I have, let me still know any specific information you need.

John’s Custom Computer Shop (JCCS) assembles computers for both individual and corporate customers. The company is organized into two divisions: Personal and Business. Once a computer is built, it is shipped to the customer. Billing for all customers is handled by the corporate Accounts Receivable Department. Accounts Receivable performs two major activities: billing and dispute resolution. Billing refers to preparing and sending the bills as well as processing the payments. Dispute resolution occurs when a customer refuses to pay, usually due to an error in billing. The costs of the Accounts Receivable Department are allocated to the two divisions based on the number of bills prepared. Kyle, the manager of the business division, has complained that the allocated costs from Accounts Receivable are beginning to make the business division look unprofitable and has asked you to recommend some changes to the allocation system. If he agrees with your recommendation, he will pass them on to the chief financial officer. Data on costs and activities in the Accounts Receivable Department follow:

Data on costs and activities in the Accounts Receivable Department follow:

he Accounts Receivable department incurred the following costs during the year:

Suppose the company implements an activity-based cost system for Accounts Receivable with two activities, billing and dispute resolution. What is the cost that will be allocated from Accounts Receivable to Personal? To Business? Use the number of bills prepared as the cost driver for billing costs and the number of disputes for dispute resolution costs.

McCormick & Company is considering a project that requires an initial investment of $24 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $4.3 million. The company will produce bulk units at a cost of $130 each and will sell them for $420 each. There are annual fixed costs of $500,000. Unit sales are expected to be $150,000 each year for the next six years, at which time the project will be abandoned. At that time, the plant and equipment is expected to be worth $8 million (before tax) and the land is expected to be worth $5.4 million (after tax).To supplement the production process, the company will need to purchase $1 million worth of inventory. That inventory will be depleted during the final year of the project. The company has $100 million of debt outstanding with a yield to maturity of 8 percent, and has $150 million of equity outstanding with a beta of 0.9. The expected market return is 13 percent, and the risk-free rate is 5 percent. The company's marginal tax rate is 40 percent.

Questions Below

2. What will be the value of the plant and equipment for tax purposes in year six? Will it be sold for a gain or a loss, and what will the tax effect be?

3. What is the weighted average cost of capital (WACC)?

4. What is the salvage cash flow of the new equipment? Include the income tax effect.

Aliya works for an irrigation district that is considering two options for building new infrastructure to expand irrigation. The infrastructure won’t be built for 3 years (so, capital costs will be incurred in 2023). Option A is estimated to cost $5 million in 2020 dollars. It is anticipated that Option A infrastructure could be used for 5 years, then sold for $1 million (in 2028 dollars; this estimate does not need to be adjusted). Estimated additional revenues are $4.2 million per year, and estimated additional operating costs are $1 million per year (both in 2020 dollars). Option B is estimated to cost $8 million in 2020 dollars. Aliya anticipates that Option B could be used for 5 years, then sold for $0.5 million (also in 2028 dollars). Estimated additional revenues are $5.5 million per year, and estimated additional operating costs are $1.8 million per year (both in 2020 dollars). For both options: Capital cost annual inflation is estimated to be 3%. Future revenues and future operating costs are expected to rise at 2% per year. The combined federal and provincial incremental tax rate is 45%. Use a CCA depreciation rate of 45% and a discount rate of 10% (reflecting the MARR of the firm).

a) What is the gain or loss on disposal of Option A?

b) What is the gain or loss on disposal of Option B?

c) Determine the net present worth of the after-tax cash flow for each option, assuming 2023 is year 0.

d) Which option should Ying recommend, or should she recommend not to purchase either?

This is all the information I have, let me still know any specific information you need.

Maggie bought a house which was quite a dump in 1989 for $75,000. She fixed it up with paint and wallpaper but in 1996 she did a major renovation which cost $50,000. In 1993, she bought a dump of a cottage for $35,000 because it was both on a lake and near some good cross-country ski trails. She winterized it immediately for $10,000. Over time, the dumpy cottage has become quite attractive with the addition of a new roof, siding, windows and doors all of which cost $15,000 in 1995. In addition, she is fond of landscaping and has created quite a beautiful garden. I might add that Maggie has only $40,000 in RRSPs since she prefers to sink her money into her living space.

In July 2006, Maggie lost her job and received $60,000 in severance pay. She put as much as she could into her RRSP (included in the $40,000 above) and put the rest in GICs to help finance her plan. Maggie had been taking courses for several years to become a Master Gardener.

When she lost her job, she decided to live out her dream of having a gardening business where she would design gardens for others with cottages near her and maintain them if they needed it because they mostly come to their cottages on the weekend to relax. In the winter, she will keep the lanes clear (with her snow blower) and check up on the cottages now and again. She gave her corporate clothes to her friend Kate with the proviso that she could stay with her when she comes to the City (which won’t be often because she is very fed up).

When she lost her job, she immediately started renting out the house for $1,600 a month plus utilities. She still has to pay the $2,400 a year taxes and maintenance but figures the house will be her retirement fund. When she started renting out the house, it immediately ceased to be her principal residence – her cottage is now her principal residence. In July 2006, her house was worth $300,000 and the cottage is worth $140,000.

Questions:

a.     Maggie’s house increases in value at about 3% a year from 2006 and she sells it in 2017. How much is her taxable capital gain on the house ignoring real estate commissions?

b.    Maggie’s cottage also increases 3% a year in value. If she also sells it in 2017 in order to buy a bed and breakfast, how much is her taxable capital gain?

Explain the relationship among cost, cost objective, cost accumulation, and cost allocation.

Exercise 4

On January 1, 2017, Park Rapids Lumber Company issued $80 million in 20-year, 10% bonds payable. Interest is payable semiannually on June 30th and December 31st. Bond discounts and premiums are amortized straight-line at each interest payment date.

a. Record the journal entry when the bonds were issued on January 1, 2017, make the necessary the journal entry to record the payment of bond interest on June 30, 2017, under each of the following assumptions:

1. The bonds were issued at 98. Round your answers to the nearest dollar.

2. The bonds were issued at 101. Round your answers to the nearest dollar.

b. Compute the net bond liability at December 31, 2017, under assumptions 1 and 2 above. Round to the nearest dollar.

c. Under which of the above assumptions, 1 or 2 would the investor’s effective rate of interest be higher? Explain.

Exercise 5

Speed World Cycles sells high-performance motorcycles and Motocross racers. One of Speed World’s most popular models is the Kazomma 900 dirt bike. During the current year, Speed World purchased eight of these cycles at the following costs:

Purchase Date                               Units Purchased      Unit Cost   Total Cost

July 1                                                                 2                  $4,950          $9,900

July 22                                                              3                    5,000           15,000

August 3                                                  3                        5,100           15,300

                                                                  ------                         ------------

                                                                      8                                             $40,200

On July 28, Speed World sold four Kazomma 900 dirt bikes to the Vince Wilson racing team. The remaining four bikes remained in inventory at September 30, the end of Speed World’s fiscal year.

Assume that Speed World uses a perpetual inventory system.

a. Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using the following cost flow assumptions:

1. Average cost

2. FIFO

3. LIFO

Show the number of units and the unit costs of each layer comprising the cost of goods sold and ending inventory.

b. Using the cost figures computed in part a. answer the following questions:

1. Which of the three cost flow assumptions will result in Speed World Cycles reporting the highest net income for the current year? Would this always be the case? Explain.

2. Which of the three cost flow assumptions will minimize the income taxes owed by Speed World Cycles for the year? Would you expect this usually to be the case? Explain.

3. May Speed World Cycles use the cost flow assumption that results in the highest net income for the current year in its financial statements, but use the cost flow assumption that minimizes taxable income for the current year in its income tax return? Explain.