Carrington would invest in software and some hardware upgrades that will allow them to better analyze the traffic coming in to their website. Total acquisition costs for this option are estimated to be $400,000. This improved analytics capability is expected to lead to increased revenue of $80,000 in year 1, $120,000 in year 2, $250,000 in year 3, $350,000 in year 4, and $500,000 in year 5. The estimated cost of this obtaining this revenue will be 20% per revenue dollar related to sales staff that will analyze this data and use it to generate new client relationships. Carrington will also incur fixed cost of $10,000 per year related to software updates and hardware maintenance. Carrington will set aside $250,000 in working capital for this project and this capital will be recovered at the end of 5 yrs. The salvage value of the new equipment will be $9,000 at the end of 5 yrs. Carrington uses a 10% hurdle rate to evaluate all projects, Acquisition costs qualify for modified accelerated depreciation of 50,30, and 20% in the first three yrs, Being profitable company income would be taxed at Carrington's tax rate of 30%, and all dollar values referenced in this case are in nominal dollars so for analysis ignore the effect of inflation.

1. Calculate the payback period, internal rate of return, and NPV.

2. The data analytics program pays off a lot faster than expected. Revenue is projected to be $200,000 in yr 1, $250,000 in yr 2, $250,000 in yr 3, $300,000 in yr4, and $300,000 in yr 5.

3.A great tax plan. Congress is proposing a new corporate tax plan that reduces the federal tax rate that Carrington pays from 30% to 20%. However, this tax plan would also do away with MACRS and replace it with straight line depreciation for tax purposes ( over 5 yrs).

a. Using the original estimates for your designated option, estimate the effect of this tax plan on NPV.

b. Next, given the uncertainty related to the effect of the proposed tax plan on future business, use a 14% hurdle rate instead of the 10% hurdle rate used before in estimating the effect of the plan (i.e just redo 4A).

4. What are some qualitative concerns related to accepting this designated option. Discuss and list at least 2. Provide why each would be considered an advantage or disadvantage.

Multiple-Product Break-even, Break-Even Sales Revenue

Cherry Blossom Products Inc. produces and sells yoga-training products: how-to DVDs and a basic equipment set (blocks, strap, and small pillows). Last year, Cherry Blossom Products sold 13,500 DVDs and 4,500 equipment sets. Information on the two products is as follows:

Total fixed cost is $94,500.

Suppose that in the coming year, the company plans to produce an extra-thick yoga mat for sale to health clubs. The company estimates that 9,000 mats can be sold at a price of $17 and a variable cost per unit of $10. Total fixed cost must be increased by $31,500 (making total fixed cost $126,000). Assume that anticipated sales of the other products, as well as their prices and variable costs, remain the same.

A city maintains the following funds:

1. General

2.Special Revenue

3.Capital projects

4.Debt service

5.Enterprise

6.Internal service

7. Permanent (trust)

8. Agency

For each of the following transactions, indicate the fund in which each transaction would most likely be recorded:

a.The city collects $3million of taxes on behalf of the country in which it is located

b.It spends $4 million to pave city streets, using the proceeds of a city gasoline tax dedicated for road and highway improvements

c. It receives a contribution of $5 million. Per the stipulation of the donor, the money is to be invested in marketable securities, and the interest from the securities is to be used to maintain a city park.

d.It collects $800,000 in landing fees at the city airport

e.It earns $200,000 on investments set aside to make principal payments on the city's outstanding bonds. The bonds were issued to finance improvements to the city's tunnels and bridges.

f.It pays $4 million to a contractor for work on one of the bridges

g.It pays $80,000 in wages and salaries to police officers

h. It purchases from an outside supplier $40,000 of stationary that it will sell to its various operating departments

Gopher Gulch Corp. is a little two-store retailer operating in a local market. Its problem is that one store in the company is losing money while the other one is making money, based on company financial reports, causing the company as a whole to lose money. The most recent income statement for Gopher Gulch Corp. is given below:

                                      Store 1                       Store 2                           Total
Sales                                        $976,000                  $1,145,000                     $2,121,000

Variable costs                         (593,000)                     (685,000)                    (1,278,000)
Contribution margin                383,000                     460,000                          843,000

Traceable fixed costs            (470,000)                     (269,000)                        (739,000)

Store segment margin             ( 87,000)                    191,000                           104,000
Common fixed costs               (116,000)                       (85,000)                         (201,000)

Net operating income (loss)   $(203,000)                   $ 106,000                      $ (97,000)

Because of its poor showing, Gopher Gulch Corp. officials are considering closing Store 1. However, management and the workers at Store 1 say, “Not so fast!” A study by a consultant hired by Gopher Gulch Corp. officials show that if Store 1 is closed, 39 percent of its traceable fixed costs will continue unchanged. The study also shows that closing Store 1 would result in a 28 percent decrease in sales in Store 2. The company allocates common fixed costs, such as your corporate officials’ salaries and advertising costs, to the stores on the basis of square footage of the stores. Management and workers at Store 1 claim that Store 1 is being unfairly targeted for closure.

Your uncle, the CEO of Gopher Gulch Corp., knows that you are a student in the prestigious Delta State University Integrated Master of Business Administration (IMBA) Program, and so has turned to you for advice on what to do.

Required

• Compute Gopher Gulch Corp’s total net operating income (loss) if Store 1 is closed. (Hint: The answer will entail determining the lost contribution margins for Store 1 and Store 2 offset by the amount of fixed costs shed by closing Store 1. Pay close attention to the percentages listed above.)

• Compare the total net income (loss) when the two stores are open with the total net operating income (loss) when only Store 2 is open. Is the total net operating income greater (total net operating loss smaller) when two stores are open or when only Store 2 is open?

• Based on your calculations above, what should you tell your uncle regarding Store 1? In other words, should Store 1 be closed or do store management and workers have a basis for their claims and both stores should remain open?

• Given the profit or loss overall for the company, what is your recommendation to your uncle regarding the capital invested in Gopher Gulch Corp.? In other words, “eyeball” the value of the assets of the company versus the profit (loss) generated by those assets. Should the company continue to operate one (or both) stores, or should the company get what money it can for the assets and invest that money elsewhere (such as in another business, bonds, stocks, T-bills, etc.)?

Ok, you are this “hotshot” turn-around specialist who will soon have a Delta State University IMBA degree. For you to turn around your uncle’s company as a retail operation, you must get a handle on the company’s costs -- variable, traceable fixed, and common fixed.

Required

• Variable costs for each store individually is what percentage of that store’s sales revenue?

• Total fixed costs for each store individually is what percentage of total sales revenue for that store?

• Do fixed costs for each store individually appear to be reasonable, unreasonable, or cannot be determined. Explain your answer.

• Is net operating income as a percentage of sales revenue for Store 2 “reasonable?” Explain your answer.

• Traceable fixed costs for each store individually is what percentage of the individual store’s sales revenue?

• What percentage of total company sales revenue does each store provide?

• What percentage total common fixed costs for Gopher Gulch Corp. is charged individually to each of the stores?

• Does the allocation of common fixed costs to each store appear to be equitable in light of the sales revenue generated individually by each store?

• On what basis do you believe that common costs should be allocated in Gopher Gulch Corp.? (Be specific.)

• Based on your review of various costs for each of the stores individually, why do you think Store 1 has a net operating loss?

• As a turnaround specialist, what steps do you recommend to turn Gopher Gulch Corp. around into a profitable retail company? (Be specific.)

• Do the costs relative to sales revenue appear to your “practiced professional eye” to be excessive, low, or within a “reasonable range”?

• Analyze the distribution of the costs between the two stores. Do you see anything that seems awry?

• What effect does what you identified in the question immediately before this one have on determination of store operating costs?

• In answering the questions above, you have examined sales revenue, various categories of cost, costs relative to sales revenue, the distribution of costs between stores, and the contribution margins of each store. After doing all of these analyses, what is your advice to your uncle on how best to make Gopher Gulch Corp. profitable, or is that not even possible?

Problem 21.27 Wildhorse Pharma just received revenues of $3,166,600 in Australian dollars (A$). Management has the following exchange rates: A$2.69500/£ and $1.5906/£. What is the U.S. dollar value of the company’s revenues? (Round intermediate calculation to 4 decimal places, e.g. 15.2578 and final answer to the nearest whole dollar, e.g. 5,275.) Revenue $

1:

-Balance of account = Debits – __________

-Asset accounts have a normal __________ balance.

-The dividends account has a normal __________ balance.

-Revenue accounts have a normal __________ balance.

-Expense accounts have a normal __________ balance.

-Liabilities and retained earnings accounts normally have a __________ balance.

-The retained earnings account includes income statement accounts and the __________ account.