Sonic, Inc., sells business software. Currently, all of its programs come on disks. Due to their complexity, some of these applications occupy as many as seven disks. Not only are the disks cumbersome for customers to load, but they are relatively expensive for Sonic to purchase. The company does not intend to discontinue using disks altogether. However, it does want to reduce its reliance on the disk medium.
Two proposals are being considered. The first is to provide software on computer chips. Doing so requires a $300,000 investment in equipment. The second is to make software available through a computerized “software bank.” In essence, programs would be downloaded directly from Sonic using telecommunications technology. Customers would gain access to Sonic’s mainframe; specify the program they wish to order; and provide their name, address, and credit card information. The software would then be transferred directly to the customer’s hard drive, and copies of the user’s manual and registration material would be mailed the same day. This proposal requires an initial investment of $240,000.
The following information pertains to the two proposals. Due to rapidly changing technology, neither proposal is expected to have any salvage value or an estimated life exceeding six years.
| Computer Chip Equipment | Software Bank Installation | |
| Estimated incremental annual revenue of investment | 300,000 | 160,000 |
| Estimated incremental annual expense of investment (including taxes and depreciation) | 250,000 | 130,000 |
The only difference between Sonic’s incremental cash flows and its incremental income is attributable to depreciation. A minimum return on investment of 15 percent is required.
a. Compute the payback period of each proposal.
b. Compute the return on average investment of each proposal.
c. Compute the net present value of each proposal using the tables in Exhibits 26–3 and 26–4.
e. Which of Sonic’s employees would most likely underestimate the benefits of investing in the software bank? Why?
| Computer Chip | Software Bank | ||||
| Investement | 300,000 | Investement | 240,000 | ||
| Service life, years | 6 | Service life, years | 6 | ||
| Salvage Value at end of life | - | Salvage Value at end of life | - | ||
| Est. Incremental annual revenue | 300,000 | Est. Incremental annual revenue | 160,000 | ||
| Est. incremental annual expense (including tax & depr) | 250,000 | Est. incremental annual expense (including tax & depr) | 130,000 | ||
| RRR | 15% | RRR | 15% | ||
| Depreciation | 50,000 | Depreciation | 40,000 | ||
| a | Computer Chip | Software Bank | |||
| The supporting calculations for the payback figure are: | The supporting calculations for the payback figure are: | ||||
| Incremental annual revenue of investment | 300,000 | Incremental annual revenue of investment | 160,000 | ||
| Less: Incremental annual expenses of investment | (250,000) | Less: Incremental annual expenses of investment | (130,000) | ||
| Incremental annual income of investment | 50,000 | Incremental annual income of investment | 30,000 | ||
| Add: Depreciation expense | 50,000 | Add: Depreciation expense | 40,000 | ||
| Incremental annual cash flow of investment | 100,000 | Incremental annual cash flow of investment | 70,000 | ||
| Payback | 3.00 | years | Payback | 3.43 | |
| b | Computer Chip | Software Bank | |||
| Average Net Income | 50,000 | Average Net Income | 30,000 | ||
| Average Investment | 150,000 | Average Investment | 120,000 | ||
| Return on Investment | 33.3% | Return on Investment | 25.0% | ||
| c | Computer Chip | Software Bank | |||
| PV of Cash Flows | 378,400 | PV of Cash Flows | 264,880 | ||
| Cost of Investment | (300,000) | Cost of Investment | (240,000) | ||
| Net Present Value | 78,400 | Net Present Value | 24,880 | ||
| Factor @ 6yr, 15% | 3.784 |
In: Accounting
Use the following time-series data to answer the given questions. Time Period Value 1 27 2 30 3 58 4 63 5 59 6 67 7 70 8 86 9 101 10 97 a. Develop forecasts for periods 5 through 10 using 4-month moving averages. b. Develop forecasts for periods 5 through 10 using 4-month weighted moving averages. Weight the most recent month by a factor of 4, the previous month by 2, and the other months by 1. c. Compute the errors of the forecasts in parts (a) and (b) and observe the differences in the errors forecast by the two different techniques. (Round your answers to 3 decimal places.) a. Time Period Value 4-Month Moving Average Forecast 1 27 - 2 30 - 3 58 - 4 63 - 5 59 6 67 7 70 8 86 9 101 10 97 b. Time Period Value 4-Month Weighted Moving Average Forecast 1 27 - 2 30 - 3 58 - 4 63 - 5 59 6 67 7 70 8 86 9 101 10 97 c. Time Period Value Forecast Error, 4-Month Moving Average Forecast Error, 4-Month Weighted Moving Average Differences in error 1 27 - - - 2 30 - - - 3 58 - - - 4 63 - - - 5 59 6 67 7 70 8 86 9 101 10 97 In each time period, the four-month moving average produces errors of forecast than the four-month weighted moving average.
In: Statistics and Probability
An insurance company claims that for x thousand policies, its monthly revenue in dollars is given by R(x)=225x and its monthly cost in dollars is given by C(x)=180x+16,200
A) find the break even point
B) grap the revenue and cost equations on the same axes
C) from the graph estimate the revenue and cost when x=180
In: Finance
In 2018, X Company's revenue was $198,000, its total variable costs were $122,760, and its fixed costs were $92,400. In 2019, the relationship between revenue and variable costs will not change, but fixed costs will decrease by $14,784. Assuming a tax rate of 35%, what will revenue have to be in order for X Company to earn $41,600 after taxes in 2019?
In: Accounting
Change is inevitable! Our world is constantly changing, and we MUST change as well. We must embrace change and ride the wave of change in such turbulent times (Lamarre, 2006). Particularly within such volatile times. What is CHANGE? Is change positive, negative, or both? Explain.
In: Operations Management
1.
We know that average _______ cost is ______ when marginal cost is less than average total cost.
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variable; rising |
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fixed; rising |
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total; falling |
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total; rising |
2.
In the short run, if a company shuts down, which of the following will happen?
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Total revenue will be zero, but total fixed costs will still have to be paid. |
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Total revenue will be zero, and total costs will be zero. |
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Total economic profit will be zero, and total costs will be positive. |
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Total revenue will be zero, but total variable costs will still have to be paid. |
3.
Output levels will maximize total economic profits in the short run in which of the following situations?
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When total costs are minimized |
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When total revenues are maximized |
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When variable costs are minimized |
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When marginal costs and marginal revenues are equalized |
4.
Which of the following is true of the industry short-run supply curve?
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It is always equal to marginal physical product. |
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It is downward sloping. |
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It is the summation of the individual firm's supply curves. |
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It is impossible to compute without knowing about the position of the marginal revenue curve. |
In: Economics
Please prepare journal entries for the following cost flows.
(1). Sharon Company uses job-order costing system. In July, direct labor cost incurred $90,000 and indirect labor cost incurred $80,000.
(2). Sharon Company Job costing $52,000 according to their job cost sheets were completed during July and transferred to Finished Goods.
(3). Sharon Company sold the $38,000 in Finished Goods Inventory to customers for $52,000 on account.
(4). Process Cost Flows: The Flow of Applied Manufacturing Overhead Costs. Applied manufacturing overhead cost: bottling Department $65,000; and labelling Department $45,000
(5). Process Cost Flows: Transferred incomplete bottle water from the Bottling Department to the Labelling Department: $850,000
In: Accounting
Data on all residential homes sales in Ames Iowa between 2006 and 2010. The data set contains many explanatory variables on the quantity of physical attributes of residential homes in Iowa sold between 2006 and 2010. Most of the variables describe information a typical home buyer would like to know about a property (square footage, number of bedrooms, size of a lot, etc.)
Now use the Lot.Area
a. Use summary command to see descriptive statistics of Lot.Area
b. what is the mean and median of Lot.Area. Explain Comment on it.
c. Get the histogram of Lot.Area What do you observe?
d. Create new data set for Lot.Area where Lot.Area is than 20000.
e. Get the histogram of the new data for Lot.Area. What do you see? How is it distributed
(Need this in R Script commands)
In: Statistics and Probability
Use the table for the question(s) below. Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006. A simplified balance sheet for the firm appears below: Luther Industries Balance Sheet As of December 31, 2006 (millions of dollars) Assets Liabilities and Equity Cash 25 Accounts payable 60 Accounts receivable 85 Notes payable 425 Inventory 90 Accruals 45 Total current assets 200 Total current liabilities 530 Net plant, property, and equipment 6100 Long term debt 2725 Total assets 6300 Total liabilities 3255 Common equity 3045 Total liabilities and equity 6300 Luther's cash conversion cycle is closest to ________.
A. 66 days
B. 51 days
C. 129 days
D. 71 days
In: Finance
In: Economics