Problem 9-4
Comparison of Depreciation Methods

Italian Construction Company purchased a new crane for $360,500 at the beginning of year 1. The crane has an estimated residual value of $35,000 and an estimated useful life of six years. The crane is expected to last 10,000 hours. It was used 1,800 hours in year 1; 2,000 hours in year 2; 2,500 hours in year 3; 1,500 hours in year 4; 1,200 hours in year 5; and 1,000 hours in year 6.

1. Compute the annual depreciation and carrying value for the new crane for each of the six years under each of the following methods. When calculating the rate for double-declining-balance, round the percentage to two decimal places, like 16.67% or 33.33%. Round your answers to the nearest whole dollar.

a. Straight-line:

b. Production:

c. Double-declining-balance:

2. If the crane is sold for $250,000 after year 3, what would be the amount of gain or loss under each method?

3-year horizon

10-year bond

face value 100

5% coupon

initial y-t-m 5.75%

first reinvestment rate 4%

second reinv rate 4.2%

y-t-m in three years 5.8%

rather than reinvesting the first coupon at 4% for two years, invest it for one year at 4% and then combine those proceeds with the second coupon to reinvest at 4.2%. Calculate ROR

Problem 3-18 Common-Size and Common-Base-Year Financial Statements

In addition to common-size financial statements, common-base-year financial statements are often used. Common-base year financial statements are constructed by dividing the current-year account value by base-year account value. Thus, the result shows the growth rate in the account.
  
Prepare the common-size balance sheet and common-base-year balance sheet for the company. Use 2016 as the base-year. (Do not round intermediate calculations. Enter all common-size answers as a percent. Round your common-size answers to 2 decimal places, e.g., 32.16, and common-base-year answers to 4 decimal places, e.g., 32.1616.)
  

Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $61 per unit.

Required:

1. Compute the company’s break-even point in unit sales.

2. Assume the company uses variable costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Compute the company’s break-even point in unit sales.

Compute the unit product cost for Year 1, Year 2, and Year 3. Assume the company uses variable costing.

Prepare an income statement for Year 1, Year 2, and Year 3. Assume the company uses variable costing.

Compute the unit product cost for Year 1, Year 2, and Year 3. Assume the company uses absorption costing. (Round your intermediate calculations and final answers to 2 decimal places.)

Prepare an income statement for Year 1, Year 2, and Year 3. Assume the company uses absorption costing. (Round your intermediate calculations to 2 decimal places.)

Suppose you are given the yield curve as follows:

i₁ = 2%; i₂ = 3%; i₃ = 4%; i₄ = 5%. i₅ = 7%, i₁₀ = 10%. These represent the 1-year, 2-year, 3-year and 4-year, 5-year, 10-year bond yields today. Under the pure expectations theory, find a) the expected future one-year rates that will prevail from year 1 to year 2 b) from year 2 to year 3; & c) from year 3 to year 4.

Discuss how financial advisors use the shape of the curve in above questions as part of investment advice.

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2. Consider the following data for a hypothetical economy that produces two goods, milk and honey.

1. Compute nominal GDP for each year in this economy.
2. Using year 1 as the base year, compute real GDP for each year. What is the percentage change in real GDP from year 1 to year 2?
3. Using year 1 as the base year, compute the price deflator for each year.
4. Now compute the GDP deflator for each year, using year 2 as the base year.
5. Explain why the measures of real GDP growth (and growth in the deflator) depend on the choice of base year.

Monty Industries is considering the purchase of new equipment costing $1,300,000 to replace existing equipment that will be sold for $194,000. The new equipment is expected to have a $223,000 salvage value at the end of its 4-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 32,600 units annually at a sales price of $27 per unit. Those units will have a variable cost of $15 per unit. The company will also incur an additional $70,000 in annual fixed costs.

Identify the amount and timing of all cash flows related to the acquisition of the new equipment. (Enter negative amounts using a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)