Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $330,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,850,000. The cost of the machine will decline by $120,000 per year until it reaches $1,250,000, where it will remain.

If your required return is 12 percent, calculate the NPV if you purchase the machine today. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV          $  

If your required return is 12 percent, calculate the NPV if you wait to purchase the machine until the indicated year. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Should you purchase the machine?

Yes

No

If so, when should you purchase it?

Today

One year from now

Two years from now

Exercise 6-9 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2, LO6-3] Walsh Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations:

Variable costs per unit: Manufacturing: Direct materials $ 27 Direct labor $ 12 Variable manufacturing overhead $ 4 Variable selling and administrative $ 3 Fixed costs per year:

Fixed manufacturing overhead $ 240,000 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 $59 per unit. Required:

1. Assume the company uses variable costing: a. Compute the unit product cost for Year 1 and Year

2. b. Prepare an income statement for Year 1 and Year 2.

2. Assume the company uses absorption costing: a. Compute the unit product cost for Year 1 and Year 2. b. Prepare an income statement for Year 1 and Year 2.

Required information

[The following information applies to the questions displayed below.]

Oak Mart, a producer of solid oak tables, reports the following data from its second year of business.

1. Prepare the current-year income statement for the company using variable costing.

2. Prepare the current-year income statement for the company using absorption costing.

Vail Book Mart sells books and other supplies to students in a state where the sales tax rate is 8 percent. Vail Book Mart engaged in the following transactions for Year 1. Sales tax of 8 percent is collected on all sales.

1. Book sales, not including sales tax, for Year 1 amounted to $277,000 cash.
2. Cash sales of miscellaneous items in Year 1 were $146,000, not including tax.
3. Cost of goods sold was $212,000 for the year.
4. Paid $129,000 in operating expenses for the year.
5. Paid the sales tax collected to the state agency.

Required
a. What is the total amount of sales tax Vail Book Mart collected and paid for the year?

b. Prepare the journal entries for the preceding transactions. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.):

- Book sales, not including sales tax, for Year 1 amounted to $277,000 cash.

- Cash sales of miscellaneous items in Year 1 were $146,000, not including tax.

- Cost of goods sold was $212,000 for the year.

- Paid $129,000 in operating expenses for the year.

- Paid the sales tax collected to the state agency.

c. What is Vail Book Mart’s net income for the year?

The U.S. Census Bureau publishes data on factory orders for all manufacturing, durable goods, and nondurable goods industries. Shown below are factory orders in the United States over a 13- year period ($ billion). First, use the data to develop forecasts for years 6 through 13 using a 5-year moving average. Then, use the data to develop forecasts for years 6 through 13 using a 5-year weighted moving average. Weight the most recent year by 6, the previous year by 4, the year before that by 2, and the other years by 1. Answer the following questions: a) What is the forecast for year 13 based on the 5-year moving average? b) What is the forecast for year 13 based on the 5-year weighted moving average? c) What is the MAD for the moving average forecast? d) What is the MAD for the weighted moving average forecast? e) Which forecasting model is better? Year Factory orders 1 2,512.70 2 2,739.20 3 2,874.90 4 2,934.10 5 2,865.70 6 2,978.50 7 3,092.40 8 3,052.60 9 3,145.20 10 3,114.10 11 3,257.40 12 3,654.00 13

The U.S. Census Bureau publishes data on factory orders for all manufacturing, durable goods, and nondurable goods industries. Shown below are factory orders in the United States over a 13- year period ($ billion). First, use the data to develop forecasts for years 6 through 13 using a 5-year moving average. Then, use the data to develop forecasts for years 6 through 13 using a 5-year weighted moving average. Weight the most recent year by 6, the previous year by 4, the year before that by 2, and the other years by 1. Answer the following questions: a) What is the forecast for year 13 based on the 5-year moving average? b) What is the forecast for year 13 based on the 5-year weighted moving average? c) What is the MAD for the moving average forecast? d) What is the MAD for the weighted moving average forecast? e) Which forecasting model is better? Year Factory orders 1 2,512.70 2 2,739.20 3 2,874.90 4 2,934.10 5 2,865.70 6 2,978.50 7 3,092.40 8 3,052.60 9 3,145.20 10 3,114.10 11 3,257.40 12 3,654.00 13

Assume the company that you work for is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, the company that you work for would terminate the project after four years. The company that you work for has a cost of capital is 13 percent, and the project has the same risk as other existing projects. In addition, the project has a salvage value of NOK 5,000,000 at the end of year 4, while the book value of the project at the end of year 4 is NOK 3,000,000. Assume Norwegian tax rate is 21%, which is the same as in the US. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK): Year 1 Year 2 Year 3 Year 4 NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK17,000,000 The current exchange rate of the Norwegian kroner is $.135. You forecast exchange rate for the Norwegian kroner over the project's lifetime are listed below: Year 1 Year 2 Year 3 Year 4 $.13 $.14 $.12 $.15 What is the net present value of the Norwegian project?.

The scenic company is about to launch a new product. The test market results indicate that potential customers like the new product. Based on extensive research the following estimates have been developed for the first 3 years. These estimates are for the market as a whole. During year 1 you will be the only firm in the market:

                  Year 1                Year 2                Year 3

Price          Volume               Volume               Volume

$10            30,000                50,000                80,000

$14            20,000                35,000                50,000

$18            10,000                15,000                20,000      

$22            5,000                 10,000                15,000

Assume that the estimated direct cost of building the first unit is $12 and that a 95% experience rate will occur. If you set the price at $10, competition will not enter until year 3 and will take 30,000 units in that year. If you price at $14, competition will enter in year 2 and take away 5,000 units in year 2 and 25,000 units in year 3. If you set the price at $18 or $22 competition will enter in year 2 and they will take away half of the units in each of those years. What would be the total contribution to profits over the 3 year period for each of these pricing options. Show all of your work.

CONCEPT CHECK for DEPRECIATION Depreciation Methods — Year 1 Cost of machine (purchased Jan 1) 83,000 Salvage value 3,000 Useful life in years 5 Useful life in machine hours 100,000 A. Using the information provided above, calculate this truck’s depreciation for Year 1 and Year 2 using the following methods: Year 1 Year 2 1. Straight-line ________________ _______________ 2. Double-declining balance ________________ _______________ 3. Units of activity ________________ _______________ (Year 1 actual hours is 25,000 hrs) (Year 2 actual hrs is 19,000 hrs) B. Using the Units of activity method (as in (3) above), Calculate the BOOK VALUE of the machine at the end of YEAR 2 _______________. What is the _____________ if the machine is sold at the end of Year 2 for $38,000 ? $ ___________ Gain or Loss C. If the straight-line method was used and the machine had been purchased on October 1 instead of January 1, how much depreciation would have been taken in year 1? $_____________ D. An asset is purchased on May 1, 2007 for $38,000 with a salvage value of $2,000. What will be the depreciation for the first year using straight-line deprecation if the useful life is estimated to be 4 years? _________________ What will be the book value at the end of 2008? _____________