Assume monetary benefits of an information system of $40,000 the first year and increasing benefits of $10,000 a year for the next five years (year 1 = $50,000, year 2 = $60,000, year 3 = $70,000, year 4 = $80,000, year 5 = $90,000). Onetime development costs were $80,000 and recurring costs were $45,000 over the duration of the system’s life. The discount rate for the company was 11 percent. Using a six-year time horizon, calculate the net present value of these costs and benefits. Also calculate the overall return on investment and then present a break-even analysis. At what point does breakeven occur?
In: Finance
You are negotiating to make a 7-year loan of $25,000 to Breck Inc. To repay you, Breck will pay $2,000 at the end of Year 1, $5,000 at the end of Year 2, and $7,000 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7. Breck is essentially riskless, so you are confident the payments will be made. You regard 7.5% as an appropriate rate of return on a low risk but illiquid 7-year loan. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?
In: Finance
consider P. Ltd, a one-asset firm with no liabilities. Assume that the asset will generate end-of-year cash flows of $100 each year for three years and then will have zero value. The interest rate in the economy is 10%.
Question: 1.prepare the b/s, and i/s for year 1, year2, and year 3.
2. if the firm has one more asset. the asset will generate end of year cash flows of $200 each year for three years and then will have zero value. the interest rate in the economy is 10%, prepare the b/s, and i/s for year 1, year2, and year 3.
In: Accounting
A bond trader bought each of the following bonds at a yield to maturity of 8 percent. Few weeks after the purchase of the bonds, interest rates fell to 7 percent. Maturity Coupon Price at 8% Price at 7% Percentage change 10-year 10% annual coupon 10-year zero 5-year zero 30-year zero R100 Perpetuity Required: Complete missing information in the above table.
Maturity
Coupon
Price at 8%
Price at 7%
Percentage change
10-year
10% annual coupon
10-year
zero
5-year
zero
30-year
zero
R100
Perpetuity
In: Finance
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 10 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
Project A Cashflow: Year 0: $-32,000.00 Year 1: $22,000.00 Year 2: $42,000.00 Year 3: $13,000.00
Project B Cashflow: Year 0: $-42,000.00 Year 1: $22,000.00 Year 2: $8,000.00 Year 3: $62,000.00
Use the payback decision rule to evaluate these projects; which one(s) should it be accepted or rejected?
In: Finance
"An oil producer is trying to decide if and when it should
abandon an oil field. For simplicity, assume the producer will
abandon immediately (year 0), at the end of year 1, at the end of
year 2, or stay at least through the next two years. The major
uncertainty is the price of oil, which can go up or down in any
year. In each year, there is a 0.33 probability the oil price will
go up and a 0.67 probability the oil price will go down. The oil
producer decides whether or not to abandon the oil field and then
observes whether the price of oil increases or decreases in the
following year. The NPV includes all the relevant costs of
abandoning the oil field and producing oil and the revenue gained
from producing oil. It also already incorporates the producer's
MARR. After the producer makes a decision at the end of year 2, we
assume there is no more uncertainty. If the producer abandons the
oil field at the end of a year, the price of oil in the following
years does not impact the producer's NPV.
Solve a decision tree to calculate what the oil producer should do
immediately, at the end of year 1, and at the end of year 2. You
should assume an expected-value decision maker.
Enter the expected NPV of the best alternative. The best
alternative may have a negative expected NPV.
- If the producer decides to abandon the oil field immediately, the
NPV is -$43,000
- If the producer decides to abandon at the end of year 1 and the
oil price goes up, the NPV is $0
- If the producer decides to abandon at the end of year 1 and the
oil price goes down, the NPV is -$60,000
- If the producer decides to abandon at the end of year 2 and the
oil price goes up in years 1 and 2, the NPV is $72,000
- If the producer decides to abandon at the end of year 2 and the
oil price goes up in year 1 and goes down in year 2, the NPV is
$37,000
- If the producer decides to abandon at the end of year 2 and the
oil price goes down in year 1 and goes up in year 2, the NPV is
-$4,000
- If the producer decides to abandon at the end of year 2 and the
oil price goes down in years 1 and 2, the NPV is -$120,000
- If the producer decides to not abandon the oil field and the oil
price goes up in years 1 and 2, the NPV is $41,000
- If the producer decides to not abandon and the oil price goes up
in year 1 and goes down in year 2, the NPV is $21,000
- If the producer decides not to abandon and the oil price goes
down in year 1 and goes up in year 2, the NPV is -$37,000
- If the producer decides not to abandon and the oil price goes
down in years 1 and 2, the NPV is -$86,000"
In: Finance
"An oil producer is trying to decide if and when it should abandon an oil field. For simplicity, assume the producer will abandon immediately (year 0), at the end of year 1, at the end of year 2, or stay at least through the next two years. The major uncertainty is the price of oil, which can go up or down in any year. In each year, there is a 0.49 probability the oil price will go up and a 0.51 probability the oil price will go down. The oil producer decides whether or not to abandon the oil field and then observes whether the price of oil increases or decreases in the following year. The NPV includes all the relevant costs of abandoning the oil field and producing oil and the revenue gained from producing oil. It also already incorporates the producer's MARR. After the producer makes a decision at the end of year 2, we assume there is no more uncertainty. If the producer abandons the oil field at the end of a year, the price of oil in the following years does not impact the producer's NPV. Solve a decision tree to calculate what the oil producer should do immediately, at the end of year 1, and at the end of year 2. You should assume an expected-value decision maker. Enter the expected NPV of the best alternative. The best alternative may have a negative expected NPV.
- If the producer decides to abandon the oil field immediately, the NPV is -$41,000 - If the producer decides to abandon at the end of year 1 and the oil price goes up, the NPV is $0 - If the producer decides to abandon at the end of year 1 and the oil price goes down, the NPV is -$59,000 - If the producer decides to abandon at the end of year 2 and the oil price goes up in years 1 and 2, the NPV is $64,000 - If the producer decides to abandon at the end of year 2 and the oil price goes up in year 1 and goes down in year 2, the NPV is $36,000 - If the producer decides to abandon at the end of year 2 and the oil price goes down in year 1 and goes up in year 2, the NPV is -$5,000 - If the producer decides to abandon at the end of year 2 and the oil price goes down in years 1 and 2, the NPV is -$112,000 - If the producer decides to not abandon the oil field and the oil price goes up in years 1 and 2, the NPV is $65,000 - If the producer decides to not abandon and the oil price goes up in year 1 and goes down in year 2, the NPV is $13,000 - If the producer decides not to abandon and the oil price goes down in year 1 and goes up in year 2, the NPV is -$22,000 - If the producer decides not to abandon and the oil price goes down in years 1 and 2, the NPV is -$69,000"
In: Finance
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Operating results for the first three years of activity were as follows (absorption costing basis):
| Year 1 | Year 2 | Year 3 | ||||
| Sales | $ | 1,000,000 | $ | 800,000 | $ | 1,000,000 |
| Cost of goods sold | 780,000 | 540,000 | 832,500 | |||
| Gross margin | 220,000 | 260,000 | 167,500 | |||
| Selling and administrative expenses | 170,000 | 150,000 | 170,000 | |||
| Net operating income (loss) | $ | 50,000 | $ | 110,000 | $ | (2,500) |
|
In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfax’s Sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that inventory was excessive and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below: |
| Year 1 | Year 2 | Year 3 | |
| Production in units | 50,000 | 60,000 | 40,000 |
| Sales in units | 50,000 | 40,000 | 50,000 |
| Additional information about the company follows: |
| a. |
The company’s plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $3.00 per unit, and fixed manufacturing overhead expenses total $630,000 per year. |
| b. |
Fixed manufacturing overhead costs are applied to units of product on the basis of each year’s production. That is, a new fixed manufacturing overhead rate is computed each year. |
| c. |
Variable selling and administrative expenses were $2 per unit sold in each year. Fixed selling and administrative expenses totaled $70,000 per year. |
| d. | The company uses a FIFO inventory flow assumption. |
|
Starfax’s management can’t understand why profits doubled during Year 2 when sales dropped by 20%, and why a loss was incurred during Year 3 when sales recovered to previous levels.
|
In: Accounting
Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:
| Variable costs per unit: | ||
| Manufacturing: | ||
| Direct materials | $ | 23 |
| Direct labor | $ | 15 |
| Variable manufacturing overhead | $ | 6 |
| Variable selling and administrative | $ | 1 |
| Fixed costs per year: | ||
| Fixed manufacturing overhead | $ | 240,000 |
| Fixed selling and administrative expenses | $ | 180,000 |
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 $52 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.
________________________________________________________________________
During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:
| Year 1 | Year 2 | ||||
| Sales (@ $60 per unit) | $ | 1,020,000 | $ | 1,620,000 | |
| Cost of goods sold (@ $37 per unit) | 629,000 | 999,000 | |||
| Gross margin | 391,000 | 621,000 | |||
| Selling and administrative expenses* | 301,000 | 331,000 | |||
| Net operating income | $ | 90,000 | $ | 290,000 | |
* $3 per unit variable; $250,000 fixed each year.
The company’s $37 unit product cost is computed as follows:
| Direct materials | $ | 10 |
| Direct labor | 11 | |
| Variable manufacturing overhead | 2 | |
| Fixed manufacturing overhead ($308,000 ÷ 22,000 units) | 14 | |
| Absorption costing unit product cost | $ | 37 |
Production and cost data for the first two years of operations are:
| Year 1 | Year 2 | |
| Units produced | 22,000 | 22,000 |
| Units sold | 17,000 | 27,000 |
Required:
1. Using variable costing, what is the unit product cost for both years?
2. What is the variable costing net operating income in Year 1 and in Year 2?
3. Reconcile the absorption costing and the variable costing net operating income figures for each year.
In: Accounting
"An oil producer is trying to decide if and when it should abandon an oil field. For simplicity, assume the producer will abandon immediately (year 0), at the end of year 1, at the end of year 2, or stay at least through the next two years. The major uncertainty is the price of oil, which can go up or down in any year. In each year, there is a 0.37 probability the oil price will go up and a 0.63 probability the oil price will go down. The oil producer decides whether or not to abandon the oil field and then observes whether the price of oil increases or decreases in the following year. The NPV includes all the relevant costs of abandoning the oil field and producing oil and the revenue gained from producing oil. It also already incorporates the producer's MARR. After the producer makes a decision at the end of year 2, we assume there is no more uncertainty. If the producer abandons the oil field at the end of a year, the price of oil in the following years does not impact the producer's NPV.
Solve a decision tree to calculate what the oil producer should
do immediately, at the end of year 1, and at the end of year 2. You
should assume an expected-value decision maker.
Enter the expected NPV of the best alternative. The best
alternative may have a negative expected NPV.
- If the producer decides to abandon the oil field immediately, the
NPV is -$37,000
- If the producer decides to abandon at the end of year 1 and the
oil price goes up, the NPV is $0
- If the producer decides to abandon at the end of year 1 and the
oil price goes down, the NPV is -$47,000
- If the producer decides to abandon at the end of year 2 and the
oil price goes up in years 1 and 2, the NPV is $61,000
- If the producer decides to abandon at the end of year 2 and the
oil price goes up in year 1 and goes down in year 2, the NPV is
$31,000
- If the producer decides to abandon at the end of year 2 and the
oil price goes down in year 1 and goes up in year 2, the NPV is
-$7,000
- If the producer decides to abandon at the end of year 2 and the
oil price goes down in years 1 and 2, the NPV is -$85,000
- If the producer decides to not abandon the oil field and the oil
price goes up in years 1 and 2, the NPV is $62,000
- If the producer decides to not abandon and the oil price goes up
in year 1 and goes down in year 2, the NPV is $19,000
- If the producer decides not to abandon and the oil price goes
down in year 1 and goes up in year 2, the NPV is -$21,000
- If the producer decides not to abandon and the oil price goes
down in years 1 and 2, the NPV is -$98,000"
The correct answer is between -14035.0 and -13757.0
In: Operations Management