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?

"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"

"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"

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):

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 $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:

* $3 per unit variable; $250,000 fixed each year.

The company’s $37 unit product cost is computed as follows:

Production and cost data for the first two years of operations are:

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.

"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

Roche Brothers is considering a capacity expansion of its supermarket. The landowner will build the addition to suit in return for $175,000 upon completion and a​ five-year lease. The increase in rent for the addition is $8,000 per month. The annual sales projected through year 5 follow. The current effective capacity is equivalent to​ 500,000 customers per year. Assume 2% percent pretax profit on sales.

YEAR : 1 2 3 4 5

Customers: 550,000 610,000 685,000 700,000 725,000

Avg sales/customer: $51.00   $53.00 $58.00 $60.00 $66.00

a) . If Roche expands its capacity to serve​ 700,000 customers per year now​ (end of year​ 0), what are the projected annual incremental pretax cash flows attributable to this​ expansion?

The projected annual incremental pretax cash flows attributable to this expansion in year 0 are

​$_______. enter your response as an integer.

The projected annual incremental pretax cash flows attributable to this expansion in year 1 are $_______.

The projected annual incremental pretax cash flows attributable to this expansion in year 2 are $__________

The projected annual incremental pretax cash flows attributable to this expansion in year 3 are $________>

The projected annual incremental pretax cash flows attributable to this expansion in year 4 are $ ________.

The projected annual incremental pretax cash flows attributable to this expansion in year 5 are $________.

b) If Roche expands its capacity to serve​ 700,000 customers per year at the end of year​ 2, the landowner will build the same addition for $230,000 and a​ 3-year lease at $11,000 per month. What are the projected annual incremental pretax cash flows attributable to this expansion​alternative?

The projected annual incremental pretax cash flows attributable to this expansion in year 2 are $________

The projected annual incremental pretax cash flows attributable to this expansion in year 3 are $________..

The projected annual incremental pretax cash flows attributable to this expansion in year 4 are $________.

The projected annual incremental pretax cash flows attributable to this expansion in year 5 are $________.

Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis):

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 it had excess inventory and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below:

Additional information about the company follows:

1. The company’s plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $4.00 per unit, and fixed manufacturing overhead expenses total $540,000 per year.

2. A new fixed manufacturing overhead rate is computed each year based that year's actual fixed manufacturing overhead costs divided by the actual number of units produced.

3. Variable selling and administrative expenses were $3 per unit sold in each year. Fixed selling and administrative expenses totaled $80,000 per year.

4. The company uses 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.)

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.

Required:

1. Prepare a variable costing income statement for each year.

2. Refer to the absorption costing income statements above.

a. Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed.

b. Reconcile the variable costing and absorption costing net operating income figures for each year.

5b. If Lean Production had been used during Year 2 and Year 3, what would the company’s net operating income (or loss) have been in each year under absorption costing?

1:Prepare a variable costing income statement for each year.

2a: Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

2b: Reconcile the variable costing and absorption costing net operating income figures for each year. (Enter any losses or deductions as a negative value.)

5b: If Lean Production had been used during Year 2 and Year 3, what would the company’s net operating income (or loss) have been in each year under absorption costing? (Loss amounts should be indicated with a minus sign.)

When Crossett Corporation was organized in January Year 1, it immediately issued 4,300 shares of $50 par, 5 percent, cumulative preferred stock and 10,000 shares of $10 par common stock. Its earnings history is as follows: Year 1, net loss of $15,200; Year 2, net income of $119,000; Year 3, net income of $119,600. The corporation did not pay a dividend in Year 1.

Required
a. How much is the dividend arrearage as of January 1, Year 2?

b. Assume that the board of directors declares a $39,500 cash dividend at the end of Year 2 (remember that the Year 1 and Year 2 preferred dividends are due). How will the dividend be divided between the preferred and common stockholders? (Amounts to be deducted should be indicated with minus sign.)
  

Baker manufacturing needs a new machine that costs $200,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $70,000. A maintenance contract on the equipment would cost $6,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $59,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 21% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 8%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL?

MACRS RATES (year 1 0.3333) (year 2 0.4445) (year 3 0.1481) (year 4 0.0741)