10. Suppose a company has proposed a new 4-year project. The project has an initial outlay of $60,000 and has expected cash flows of $18,000 in year 1, $23,000 in year 2, $26,000 in year 3, and $34,000 in year 4. The required rate of return is 14% for projects at this company. What is the Payback for this project? (Answer to the nearest tenth of a year, e.g. 1.2)

11. Suppose a company has proposed a new 4-year project. The project has an initial outlay of $64,000 and has expected cash flows of $20,000 in year 1, $24,000 in year 2, $28,000 in year 3, and $34,000 in year 4. The required rate of return is 14% for projects at this company. What is the discounted payback for this project? (Answer to the nearest tenth of a year, e.g. 3.2)

12.

Suppose a company has proposed a new 4-year project. The project has an initial outlay of $27,000 and has expected cash flows of $7,000 in year 1, $9,000 in year 2, $11,000 in year 3, and $14,000 in year 4. The required rate of return is 15% for projects at this company. What is the net present value for this project? (Answer to the nearest dollar.)

Problem 7-18 Variable and Absorption Costing Unit Product Costs and Income Statements [LO7-1, LO7-2]

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 $72 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.

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.

Bay Properties is considering starting a commercial real estate division. It has prepared the following? four-year forecast of free cash flows for this? division:

Assume cash flows after year 4 will grow at

4%

per? year, forever. If the cost of capital for this division is

10%?,

what is the continuation value in year 4 for cash flows after year? 4? What is the value today of this? division???

What is the continuation value in year 4 for cash flows after year? 4?

Make journal entries

• for the issuance of the bond
• for interest expense for Year 1 and Year 2
• for the amortization of premium for year 1 and year 2.
  1. The straight-line method
     1. Interest expense for year ‘t’

= interest payment for year ‘t’ - amortization of premium for year ‘t’ or + amortization of discount for year ‘t’

2. Amortization of discount or premium on BP for year ‘t’

= initial balance of discount or premium / # of years in the outstanding period

$7,387/5 years = $1,478/year

Interest expense                               10,478

                           Cash                                      9,000

                           Discount on BP                       1,478

Must make the above journal entries at the end of each year for 5 years

KRJ Corporation reported (in $ millions) tax expense of $950 for the year. Taxes payable at the beginning of the year was $150 and at the end of the year it was $153. Deferred taxes at the beginning of the year was $114 and at the end of the year it was $123. The company also reported deferred tax assets at the beginning of the year of $87 and at the end of the year it was $74. How much cash (in $ millions) was paid for taxes for during the year?

15–20... If the adjusting entry for supplies used is not recorded at the end of a year, how will the following be affected at the end of the year? (Answer using one of the following: not affected, overstated, or understated.)

      15.    Assets at end of year .............................................................................................

      16.    Liabilities at end of year .........................................................................................

      17.    Stockholders’ equity at end of year .....................................................................

      18.    Revenues for year ..................................................................................................

      19.    Expenses for year ..................................................................................................

      20.    Net income for year ................................................................................................

Upper Division of Lower Company acquired an asset with a cost of $580,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows:

The cost of the asset is expected to increase at a rate of 20 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes. Required: a. What is the ROI for each year of the asset's life, using a historical cost approach? (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).)

b. What is the ROI for each year of the asset's life if both the investment base and depreciation are determined by the current cost of the asset at the start of each year? (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).)

Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 4-year tax life, would be depreciated by the straight-line method over its 4-year life, and would have a zero salvage value. At the end of the project, the equipment would be sold for $8,000 cash. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project’s 4-year life. What is the project’s NPV?

Discount rate 10.0%

investment cost $65,000

Sales revenues, each year $65,500

Operating costs (excl. deprec.), each year           $25,000

Tax rate 30.0%

Ans:

Cash flow in Capital investment at Year 0 = $

Cash flow in Capital investment at Year 4 = $

OCF for Year 1 = $

OCF for Year 2 = $

OCF for Year 3 = $

OCF for Year 4 = $

Total CF for Year 0 = $

Total CF for Year 1 = $

Total CF for Year 2 = $

Total CF for Year 3 = $

Total CF for Year 4 = $    

NPV for the project = $

Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 4-year tax life, would be depreciated by the straight-line method over its 4-year life, and would have a zero salvage value. At the end of the project, the equipment would be sold for $8,000 cash. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project’s 4-year life. What is the project’s NPV?

Discount rate 10.0%

investment cost $65,000

Sales revenues, each year $65,500

Operating costs (excl. deprec.), each year           $25,000

Tax rate 30.0%

Ans:

Cash flow in Capital investment at Year 0 = $

Cash flow in Capital investment at Year 4 = $

OCF for Year 1 = $

OCF for Year 2 = $

OCF for Year 3 = $

OCF for Year 4 = $

Total CF for Year 0 = $

Total CF for Year 1 = $

Total CF for Year 2 = $

Total CF for Year 3 = $

Total CF for Year 4 = $    

NPV for the project = $

Case Study:

A manufacturing company is evaluating two options for new equipment to introduce a new product to its suite of goods. The details for each option are provided below:

Option 1

• $65,000 for equipment with useful life of 7 years and no salvage value.
• Maintenance costs are expected to be $2,700 per year and increase by 3% in Year 6 and remain at that rate.
• Materials in Year 1 are estimated to be $15,000 but remain constant at $10,000 per year for the remaining years.
• Labor is estimated to start at $70,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

Option 2

• $85,000 for equipment with useful life of 7 years and a $13,000 salvage value
• Maintenance costs are expected to be $3,500 per year and increase by 3% in Year 6 and remain at that rate.
• Materials in Year 1 are estimated to be $20,000 but remain constant at $15,000 per year for the remaining years.
• Labor is estimated to start at $60,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

The company’s required rate of return is 8%.

Management has turned to its finance and accounting department to perform analyses and make a recommendation on which option to choose. They have requested that the four main capital budgeting calculations be done: NPV, IRR, Payback Period, and ARR for each option.

For this assignment, compute all required amounts and explain how the computations were performed. Evaluate the results for each option and explain what the results mean. Based on your analysis, recommend which option the company should pursue.