Assume revenues decrease and expenses increase with the age of the machine as given in the table below and it can be sold for $200,000 at the end of year five. Calculate NPV, payback, BCR, and IRR, should the equipment be purchased if the discount rate is 6% or 10%?

           Revenue   Expense

   Year 0       -      $1,500,000 (investment)

   Year 1       $850,000   $200,000

   Year 2       $750,000   $250,000

   Year 3       $650,000   $300,000

   Year 4       $550,000   $350,000

   Year 5       $450,000   $400,000

EXERCISE 2: Cost and Benefit Analysis Techniques

Assuming economic benefits of an information system at $95,000 at year 1, $125,000 at year 2, and $145,000 at year 3, development costs are $235,000 and operating costs are $15,000 at year 1, $16,000 at year 2, and $18,000 at year 3, a discount rate of 5%, and a 3-year time horizon,

1. net present value (NPV)?
2. ROI?
3. break-even point (BEP)?

Please show all work.

ALL COMPONENTS / QUESTIONS MUST BE FULLY ANSWERED -- DO NOT USE THE SIMILAR TEXTBOOK SOLUTIONS ALREADY IN PLACE

IF YOU ARE UNABLE TO ANSWER ALL COMPONENTS, PLEASE DO NOT ANSWER. INCOME STATEMENTS SHOULD BE IN THE MOST BASIC FORM. OPENING AND CLOSING INVENTORY, ETC., ARE NOT TO BE INCLUDED.  

Ciroc Company manufactures and sells one specific product. The following information pertains to each of Ciroc's first three years of operations:

Variable costs per unit:
Manufacturing:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $ 32
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20
Variable manufacturing overhead . . . . . . . . . . $ 4
Variable selling and administrative . . . . . . . . . $ 3
Fixed costs per year:
Fixed manufacturing overhead . . . . . . . . . . . . $ 660,000
Fixed selling and administrative expenses . . . $ 120,000
During its first year of operations, Ciroc produced 100,000 units and sold 80,000 units. During its second year of operations, it produced 75,000 units and sold 90,000 units. In its third year, Ciroc produced 80,000 units and sold 75,000 units. The selling price of the company’s product is $ 75 per unit.

Required: (ALL COMPONENTS OF ALL 4 QUESTIONS MUST BE ANSWERED -- DO NOT USE THE TEXTBOOK SOLUTIONS ALREADY FOUND IN THIS BOOK)

1. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):
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 -- Do not include OPENING and CLOSING inventory.

2. Assume the company uses variable costing and a LIFO inventory flow assumption (LIFO meanslast-in first-out. In other words, it assumes that the newest units in inventory are sold first):
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 -- Do not include OPENING and CLOSING inventory.

3. Assume the company uses absorption costing and a FIFO inventory flow assumption (FIFO meansfirst-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

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 -- Do not include OPENING and CLOSING inventory.

4. Assume the company uses absorption costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):
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 -- Do not include OPENING and CLOSING inventory.

Assume the following year 2 income statement for Johnstone Corporation, which was a C corporation in year 1 and elected to be taxed as an S corporation beginning in year 2. Johnstone’s earnings and profits at the end of year 1 were $10,650. Marcus is Johnstone’s sole shareholder, and he has a stock basis of $42,500 at the end of year

What is Johnstone's accumulated adjustments account at the end of year 2, and what amount of dividend income does Marcus recognize on the year 2 distribution in each of the following alternative scenarios? (Leave no answer blank. Enter zero if applicable.)

a. Johnstone distributed $6,500 to Marcus in year 2.

b. Johnstone distributed $10,500 to Marcus in year 2.

c. Johnstone distributed $16,500 to Marcus in year 2.

d. Johnstone distributed $26,500 to Marcus in year 2.

Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $490,800. The equipment was expected to have a useful life of three years, or 5,700 operating hours, and a residual value of $40,500. The equipment was used for 2,280 hours during Year 1, 1,767 hours in Year 2, and 1,653 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method.

Note: For all methods, round the answer for each year to the nearest whole dollar.

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the three-year life of the equipment?

Assume the following year 2 income statement for Johnstone Corporation, which was a C corporation in year 1 and elected to be taxed as an S corporation beginning in year 2. Johnstone’s earnings and profits at the end of year 1 were $10,780. Marcus is Johnstone’s sole shareholder, and he has a stock basis of $43,000 at the end of year 1. Johnstone Corporation Income Statement December 31, Year 2 Year 2 (S Corporation) Sales revenue $ 162,000 Cost of goods sold (38,000 ) Salary to owners (63,000 ) Employee wages (53,500 ) Depreciation expense (7,000 ) Miscellaneous expenses (4,300 ) Interest income 11,520 Overall net income $ 7,720 What is Johnstone's accumulated adjustments account at the end of year 2, and what amount of dividend income does Marcus recognize on the year 2 distribution in each of the following alternative scenarios? (Leave no answer blank. Enter zero if applicable.)

a) Johnstone distributed $6,600 to Marcus in year 2.

b) Johnstone distributed $10,600 to Marcus in year 2.

c) Johnstone distributed $16,600 to Marcus in year 2.

d) Johnstone distributed $26,600 to Marcus in year 2.

Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $306,000. The equipment was expected to have a useful life of three years, or 7,800 operating hours, and a residual value of $25,200. The equipment was used for 3,120 hours during Year 1, 2,418 hours in Year 2, and 2,262 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method.

Note: For all methods, round the answer for each year to the nearest whole dollar.

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the three-year life of the equipment?

Cost of owning and cost of leasing tables are reproduced below.

Using the appropriate table from the Chapter 12 Appendix, record the present value factor at 10% for each year and compute the present value cost of owning and the present value of leasing. Which alternative is more desirable at this interest rate? Do you think your answer would change if the interest rate were six percent instead of ten percent?

Cost of Owning- Anywhere Clinic - Comparative Present Value

Cost of Leasing- Anywhere Clinic - Comparative Present Value

Variable costs per unit: Manufacturing: Direct materials $ 27 Direct labor $ 13 Variable manufacturing overhead $ 2 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 320,000 Fixed selling and administrative expenses $ 90,000 During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $58 per unit.

1. Lessee enters into a five-year lease of office space on January 1, and concludes that the agreement is an operating lease. Lessee pays initial direct costs of $5,000. The agreement provides the following:

Complete the following table to show the impact on each year of Lessee’s income statement and balance sheet. Prepare the journal entries for the Lessee at the commencement of the lease and at the end of year 1.