PROJECT SUMMARY

A multiprime contract for the construction of a new high school for the New State Building Commission

KEY PLAYERS

Concrete Services Corp. (CSP)

Concrete Contractors

CSP did not have much experience working on public projects, but it did have vast experience as a concrete subcontractor.

Steel Contractor Inc. (SCI)

Steel contractor responsible for supplying the steel columns and erecting the steel frame of the building

Corporal Construction and Management Services, Inc. (CCMS)

Management service responsible for creating and managing the schedule for the project, including:

• Reviewing and coordinating work schedules to eliminate any potential conflicts
• Visiting the job site regularly
• Communicating with the different trades throughout the duration of the project
• Conducting job site meetings to resolve any conflicts that do arise

CCMS is the project’s construction manager under the standard CM Agreement and General Conditions issued by the New State Building Commission. They are a relatively new company and did not have much experience in a construction management role.

Paul Manager

Assigned by CCMS as the lead project manager on the construction project

CCMS needed to quickly fill the lead construction management role on the project or face termination, so they hired Paul Manager. Paul was recommended to CCMS by the owner of SCI.

THE CHALLENGE

Throughout the project, CSP complained to Paul that SCI was hindering its work progress because SCI was experiencing delays in erecting the steel and often did not get the steel columns delivered in time. On a regular basis, the CSP crew would show up for work and would be forced to wait around because SCI had not completed its erection of the steel due to delays in the delivery of SCI’s materials.

When CSP brought the situation to Paul Manager’s attention, Paul told CSP not to worry about it and that he was confident that SCI would come through and complete its scope of work in a timely manner. Paul Manager never conducted a job site meeting to address the situation and he never documented any of CSP’s concerns. On one occasion, CSP’s concrete pump was crushed by one of SCI’s cranes because Paul had arranged to have both crews on the job at the same time working in the same area.

The construction project’s completion date was delayed several months, in part due to an unusually rainy season, but also due in part to schedule delays experienced by several of the contractors on the project.

CSP filed a lawsuit in federal district court alleging that CCMS’s mismanagement of its oversight responsibilities caused CSP to experience a number of delays and to work inefficiently, resulting in extra costs. As evidence of CCMS’s mismanagement of the entire project, CSP alleged that:

• CCMS abandoned the critical path schedule, forcing contractors to do work out of sequence
• Access to the job site often prevented its crew from working at all
• The process for submitting and approving extra work orders took too long, and they often remained unresolved

Question

1. What management technique would you recommend to Paul to mitigate the risk of future disputes?

2. What documentation could either side provide to support their claim?

ABC company is considering producing a new range of smartphones that will require it to build a new factory. Feasibility studies have been done on the factory which cost $5 million. The studies have found the following:

1. The factory will cost $25 million and will have a useful life of 20 years.

2. The land where the factory will go is currently used as a carpark for workers and it is assumed that the company will have to pay $200000 per year for their workers to park in a nearby carpark.

3. The factory will be depreciated on a straight line basis and will have a salvage value of $0 but it is believed that most of it can be sold for scrap after 20 years for $50000.

4. Due to the nature of the business they are in, they will have to perform some environmental tests to make sure that some of the chemicals they are using are not entering the ground water around the factory. These tests will be performed every 5 years and cost $625000.

5. Through the building of this factory and the selling of the phones it produces, it’s revenue will increase by $5 million in year 1 and remain at this level for the operational life of the factory.

6. The extra costs that the company accrues per year due to the project are $435000 for labour, $50000 for overhead like power and water bills and marketing costs for the new line of phones will be $500000 per year but will decrease by $15000 per year as the phone gains greater penetration.

7. The company’s current cost of capital is 8% per year.

8. The tax rate is 30%.

9. The project requires an initial investment in working capital of $1000000 that is returned in year 20.

Use the above information to answer the following. I AM ONLY LOOKING FOR AN ANSWER TO C.

A. Calculate the free cash flows that come from this project for the 20 years it is operational. ​

B. Calculate the NPV, IRR and payback period of the project. Should they go ahead with the project? ​

C. Calculate the break even point for the following variables:​ (ANSWER IN EXCEL)

a. The cost of capital.

b. The yearly revenue.

c. The labour cost.

Problem 10-07 (Algorithmic)

Aggie Power Generation supplies electrical power to residential customers for many U.S. cities. Its main power generation plants are located in Los Angeles, Tulsa, and Seattle. The following table shows Aggie Power Generation's major residential markets, the annual demand in each market (in megawatts or MWs), and the cost to supply electricity to each market from each power generation plant (prices are in $/MW).

1. If there are no restrictions on the amount of power that can be supplied by any of the power plants, what is the optimal solution to this problem? Which cities should be supplied by which power plants? What is the total annual power distribution cost for this solution? If required, round your answers to two decimal places.
   
   The optimal solution is to produce  MWs in Los Angeles,  MWs in Tulsa, and  MWs in Seattle. The total distribution cost of this solution is $  .
   
2. If at most 3800 MWs of power can be supplied by any one of the power plants, what is the optimal solution? What is the annual increase in power distribution cost that results from adding these constraints to the original formulation? If required, round your answers to two decimal places.
   
   What is the optimal solution to produce ____ MWs in Los Angeles?
3. What is the optimal solution to produce ____ MWs in Tulsa?
4. What is the optimal solution to produce ____ MWs in Seattle?
5. What is the total distribution cost of this solution?
6. What is the increase in cost associated with the additional constraints?

Increased inequality in the distribution of income contributes to

A) The same percentage of income received by the highest and lowest quintiles of households

B) A smaller percentage of income received by the highest 20% of households

C) A greater percentage of income received by the highest 20% of households

D) A greater percentage of income received by the lowest 20% of households

Problem 2-16 Plantwide Predetermined Overhead Rates; Pricing [LO2-1, LO2-2, LO2-3]

Landen Corporation uses a job-order costing system. At the beginning of the year, the company made the following estimates:

During the year, Job 550 was started and completed. The following information is available with respect to this job:

Required:

1. Assume that Landen has historically used a plantwide predetermined overhead rate with direct labor-hours as the allocation base. Under this approach:

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost of Job 550.

c. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?

2. Assume that Landen’s controller believes that machine-hours is a better allocation base than direct labor-hours. Under this approach:

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost of Job 550.

c. If Landen uses a markup percentage of 200% of its total manufacturing cost, what selling price would it establish for Job 550?

(Round your intermediate calculations to 2 decimal places. Round your "Predetermined Overhead Rate" answers to 2 decimal places and all other answers to the nearest whole dollar.)

Problem 2-18 Job-Order Costing for a Service Company [LO2-1, LO2-2, LO2-3]

Speedy Auto Repairs uses a job-order costing system. The company’s direct materials consist of replacement parts installed in customer vehicles, and its direct labor consists of the mechanics’ hourly wages. Speedy’s overhead costs include various items, such as the shop manager’s salary, depreciation of equipment, utilities, insurance, and magazine subscriptions and refreshments for the waiting room.

The company applies all of its overhead costs to jobs based on direct labor-hours. At the beginning of the year, it made the following estimates:

Required:

1. Compute the predetermined overhead rate.

2. During the year, Mr. Wilkes brought in his vehicle to replace his brakes, spark plugs, and tires. The following information was available with respect to his job:

Compute Mr. Wilkes’ total job cost.

3. If Speedy establishes its selling prices using a markup percentage of 60% of its total job cost, then how much would it have charged Mr. Wilkes?

The management of Ethan plc is trying to decide on a cost of capital to apply to the evaluation of investment projects. The company has an issued share capital of 500,000 ordinary K1 shares, with a current market value cum-div of K1.17 per share. It has also issued K200,000 of 10% debentures, which are redeemable at par in five years’ time and have a current market value of K105.30 cum-interest, and K100,000 of K1 irredeemable 6% preference shares, currently priced at K0.40 per share ex-div. The preference dividend has just been paid, and the ordinary dividend and debenture interest are due to be paid in the near future.
Management considers the current capital structure of the company to be similar to their plans for its long-term capital structure.
The ordinary share dividend will be K60,000 this year, and the Directors have published their view that earnings and dividends will increase by 5% a year into the indefinite future. The company pays tax at 25% per year in the same year as profits.
Required:
a) Calculate the WACC.
b) Discuss the importance of the cost of capital in project appraisal and highlight the impact
that a wrong discount rate would have on decision making.

The management of Ethan plc is trying to decide on a cost of capital to apply to the evaluation of investment projects. The company has an issued share capital of 500,000 ordinary K1 shares, with a current market value cum-div of K1.17 per share. It has also issued K200,000 of 10% debentures, which are redeemable at par in five years’ time and have a current market value of K105.30 cum-interest, and K100,000 of K1 irredeemable 6% preference shares, currently priced at K0.40 per share ex-div. The preference dividend has just been paid, and the ordinary dividend and debenture interest are due to be paid in the near future.
Management considers the current capital structure of the company to be similar to their plans for its long-term capital structure.
The ordinary share dividend will be K60,000 this year, and the Directors have published their view that earnings and dividends will increase by 5% a year into the indefinite future. The company pays tax at 25% per year in the same year as profits.
Required:
a) Calculate the WACC.
b) Discuss the importance of the cost of capital in project appraisal and highlight the impact
that a wrong discount rate would have on decision making.

Allione plc is trying to decide on a cost of capital to apply to the evaluation of investment projects. The company has an issued share capital of 600,000 ordinary K1 shares, with a current market value cum-div of K1.18 per share. It has also issued K300,000 of 10% debentures, which are redeemable at par in five years’ time and have a current market value of K105.30 cum-interest, and K100,000 of K1 irredeemable 6% preference shares, currently priced at K0.40 per share ex-div. The preference dividend has just been paid, and the ordinary dividend and debenture interest are due to be paid in the near future. Management considers the current capital structure of the company to be similar to their plans for its long-term capital structure. The ordinary share dividend will be K50,000 this year, and the Directors have published their view that earnings and dividends will increase by 5% a year into the indefinite future. The company pays tax at 25% per year in the same year as profits.

Required:

a) Calculate the WACC.

b) Discuss the importance of the cost of capital in project appraisal and highlight the impact that a wrong discount rate would have on decision making.

2 The management of Ethan plc is trying to decide on a cost of capital to apply to the evaluation of investment projects. The company has an issued share 'capital of 500,000 ordinary $l shares, with a current market value cum-div of $l.17 per share. It has also issued $200,000 of 10 debentures, which are redeemable at par in five years' time and have a current market value of$105.30 cum-interest, and $lOO,OOO of $l irredeemable 6 preference shares, currently priced at $0.40 per share ex-div. The preference dividend has just been paid, and the ordinary dividend and debenture interest are due to be paid in the near future. Management considers the current capital structure of the company to be similar to their plans for its long-term capital structure. The ordinary share dividend will be $60,000 this year, and the Directors have published their view that earnings'and dividends will increase by 5 a year into the indefinite future. The company pays tax at 25 per year in the same year as profits. Required: a) Calculate the WACC. b) Discuss the importance of the cost of capital in project appraisal .and highlight the impact that a wrong discount rate would have on decision making.

The following accounting information pertains to Boardwalk Taffy and Beach Sweets. The only difference between the two companies is that Boardwalk Taffy uses FIFO, while Beach Sweets uses LIFO.

a-1. Compute the gross margin percentage for each company.
a-2. Identify the company that appears to be charging the higher prices in relation to its cost.
b-1. For each company, compute the inventory turnover ratio and the average days to sell inventory.
b-2. Identify the company that appears to be incurring the higher financing cost.
  

Compute the gross margin percentage for each company. (Round your answers to 1 decimal place.)

or each company, compute the inventory turnover ratio and the average days to sell inventory. (Use 365 days in a year. Round your "Inventory Turnover Ratios" to 1 decimal place and all other answers to the nearest whole number.)