Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.91 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,150,000 in annual sales, with costs of $845,000. The project requires an initial investment in net working capital of $370,000, and the fixed asset will have a market value of $245,000 at the end of the project.

a. If the tax rate is 22 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.)

year 0 cash low

year 1 cash flow

year 2 cash flow

year 3 cash flow

b. If the required return is 11 percent, what is the project's NPV?

npv = ?

Dividends

Keener Company has had 700 shares of 9%, $100 par preferred stock and 46,000 shares of $5 stated-value common stock outstanding for the last 3 years. During that period, dividends paid totaled $5,200, $33,800, and $38,100 for each year, respectively.

Required:

Compute the amount of dividends that Keener must have paid to preferred shareholders and common shareholders in each of the 3 years, given the following 3 independent assumptions:
If an amount is zero, enter "0".

1. Preferred stock is nonparticipating and noncumulative.

2. Preferred stock is nonparticipating and cumulative.

3. Preferred stock is fully participating and cumulative.

Huntley Corp. provides the following information about its pension plan for the year 2021:

                                                                                                                           2021

Fair value of plan assets, first of year $134,100

Defined benefit obligation (DBO) (assumed

To equal the ABO for funding purposes under ASPE), first of year 212,700

Current service cost for year                                                                               13,000

Interest or discount rate on the DBO/plan assets                                                  10%

Actual earnings on plan assets for year                                                                12,000

Employer contributions for year (funding), September 31, 2021                        24,000

Benefits paid to retirees by trustee for year                                                         10,500

Actuarial loss due to change in actuarial assumptions                                         28,530

Plan assets, end of year                                                                                      159,600

DBO, end of year                                                                                             265,000

Funded status, end of year – over- or (under)- funded                                   (105,400)

Instructions

1. Prepare a pension worksheet and general journal entries under IFRS for 2021. (7 points)
2. Prepare a pension worksheet and general journal entries under ASPE (the Immediate Recognition approach) for 2021. (7 points)

Cotter Manufacturing is considering investing in new technology which will reduce manufacturing costs in future years. There are three possible types of technology called BX124R or BX125R. Regardless of which technology is chosen (if chosen at all), the initial cost will be $3,500,000. The life of either technology is expected to be 5 years. The projected cost savings (cash flows) from BX124R are listed as follows: Year 1: $1,500,000; Year 2: $1,800,000; Year 3: $950,000; Year 4: $1,975,000; Year 5: $1,300,000. The projected cost savings (cash flows) from BX125R are listed as follows: Year 1: $900,000; Year 2: $600,000; Year 3: $570,000; Year 4: $1,075,000; Year 5: $3,000,000. Cotter’s cost of capital is 8%.

A) Calculate the NPV BX124R and BX125R.

B) Compute each the IRR for BX124R and BX125R.

C) Calculate the project’s payback period for BX124R and BX125R.

D) As the management accountant, would you recommend an investment in this technology (if the projects were independent)? What if the projects were mutually exclusive?

Corporation has provided the following data for its two most recent years of operation:

A. The unit product cost under variable costing in Year 1 is?

B. The net operating income (loss) under variable costing in Year 1 is?

C. The unit product cost under absorption costing in Year 2 is?

D. Assuming first-in first-out, net operating income (loss) under absorption costing in Year 2 is?

1. You are trying to value Resources Limited. Your projections for the next four years are based on the following assumptions

(Total 50 Marks)

FIN3013 August

•  Sales will be 600 million in Year 1.

•  Sales will grow at 7 percent in Years 2 and 3 and 9 percent in

  Year 4.

•  Operating profits (EBIT) will be 23 percent of sales in each year.

•  Interest expense will be 17 million in Year 1 and increase by 2 million every year until Year 4.

•  Income tax rate is 40 percent.

•  Earnings retention ratio will stay at 0.70.

•  The per-share dividend growth rate will be constant from Year 4 forward, and the final growth rate will be 300 basis points less than the growth rate from Year 3 to Year 4.

  The company has 10 million shares outstanding. The required return on the stock is estimated to be 13 percent.

1. (a) Estimate the value of the stock at the end of Year 4.

2. (b) Estimate the current value of the stock.

This project involves a new type of widget. We think we can sell 6,000 units of the widget per year at a price of $950 each. Variable costs will run about $400 per unit and the product should have a four-year life.

Fixed costs for the project $450,000 per year and we will need to invest a total of $1,200,000 in manufacturing equipment. The equipment will be depreciated using MACRS over 7 years. In year four, the equipment will be worth half of what we paid for it.

We will invest $1,150,000 in net working capital at the start. After that, net working capital requirements will be 25% of sales. Assume a 34% tax rate.

Year MACRS Percentage

Year 1 14.29%
Year 2 24.49%
Year 3 17.49%
Year 4 12.49%

Should we undertake this project?

Prepare a pro forma income statement for each year. Then calculate OCF. Draw this on a timeline. Then calculate NPV assuming a 28% required return.

Correlation

To determine how the number of housing starts is affected by mortgage rates an economist recorded the average mortgage rate and the number of housing starts in a large country for the past 10 years. These data are listed here.

1. What is the dependent and independent variable?

2. Prepare a scatter plot. What is the direction of correlation?

3. What is the equation of the regression line?

4. What is the coefficient of determination (r²) and interpret the meaning of it?

5. Calculate the correlation coefficient (r) and interpret the meaning of it.

6. Predict the number of housing starts if the interest rate is 8.65.

7. Would it be possible to use this regression model to predict the number of housing starts for an interest rate of 2.45? Why?

Listed below are several transactions that took place during the second and third years of operations for RPG Company.

Year 2 Year 3

Amounts billed to customers for services rendered $400,000 $500,000

Cash collected from credit customers 310,000 450,000

Cash disbursements:

Payment of rent 85,000 0

Salaries paid to employees for services rendered during the year 145,000 165,000

Travel and entertainment 35,000 45,000

Advertising 17,500 40,000

In addition, you learn that the company incurred advertising costs of $30,000 in year 2, owed the advertising agency $5,500 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period, year 2 and year 3.

Required:

1. Calculate accrual net income for both years.

2. Determine the amount due the advertising agency that would be shown as a liability on RPG's balance sheet at the end of year 2.