Case #2

Hoyoh Skateboards Company (HSC) is looking to acquire another skateboard manufacturer, FreeLife Limited. Freelife Ltd. recently filed for bankruptcy and management at HSC believes that they can generate a profit from this bankrupt company. FreeLife Ltd. has accounts with all of the major sporting goods chains in Canada, a segment of the market where HSC not present.

FreeLife Ltd. manufactures two product lines: traditional boards and long boards. Traditional boards for $159 each and the long boards for $315 each. In the past year, FreeLife Ltd. produced and sold 245,000 traditional boards and 36,000 long boards.

FreeLife Ltd. uses the absorption method of costing and provided the information below to HSC. The controller of FreeLife Ltd., when presenting this financial information, suggested that Hoyoh discontinue the traditional board product line after the acquisition. The company uses just-in-time (JIT) to manage inventories and, as a result, beginning and ending inventories are kept near zero (note: at the beginning and end of the prior year, inventories had zero values).

Total production costs for the past year for each product line are as follows:

After reviewing the FreeLife Ltd.’s operational and financial information, HSCs management is certain they can eliminate 40% of FreeLife’s fixed manufacturing overhead and 80% of the fixed selling and administrative costs.

Required:
(A) Using the absorption costing approach, calculate the total manufacturing cost per unit for

each product line without the cost savings projected by HSC. What is a likely reason for FreeLife Ltd. controller’s suggestion to eliminate the traditional boards?

2. (B) Prepare a segmented income statement using variable costing (i.e., contribution margin income statement). Your income statement should reveal the overall impact of Hoyoh management’s expected savings resulting from the merger. Would you suggest that the traditional boards be discontinued under Hoyoh’s control?

3. (C) What is a significant disadvantage of JIT with regard to inventory management? If FreeLife Ltd. did have large beginning and ending inventories, what might management have done during the prior year to improve the appearance of the company’s income statement while looking for a buyer of the company?

Maria Gutierrez and Devin Duzan recently graduated from the same university. After graduation they decided not to seek jobs at established organizations but, rather, to start their own small business hoping they could have more flexibility in their personal lives for a few years. Maria’s family has operated Mexican restaurants and taco trucks for the past two generations, and Maria noticed there were no taco truck services in the town where their university was located. To reduce the amount they would need for an initial investment, they decided to start a business operating a taco cart rather than a taco truck, from which they would cook and serve traditional Mexican-styled street food.

They bought a used taco cart for $15,000. This cost, along with the cost for supplies to get started, a business license, and street vendor license brought their initial expenditures to $20,000. They took $5,000 from personal savings they had accumulated by working part time during college, and they borrowed $15,000 from Maria’s parents. They agreed to pay interest on the outstanding loan balance each month based on an annual rate of 4 percent. They will repay the principal over the next few years as cash becomes available. They were able to rent space in a parking lot near the campus they had attended, believing that the students would welcome their food as an alternative to the typical fast food that was currently available.

After two months in business, September and October, they had average monthly revenues of $20,000 and out-of-pocket costs of $16,000 for rent, ingredients, paper supplies, and so on, but not interest. Devin thinks they should repay some of the money they borrowed, but Maria thinks they should prepare a set of forecasted financial statements for their first year in business before deciding whether or not to repay any principal on the loan. She remembers a bit about budgeting from a survey of accounting course she took and thinks the results from their first two months in business can be extended over the next 10 months to prepare the budget they need. They estimate the cart will last at least five years, after which they expect to sell it for $5,000 and move on to something else in their lives. Maria agrees to prepare a forecasted (pro forma) income statement, balance sheet, and statement of cash flows for their first year in business, which includes the two months already passed.Page 535

Required

Prepare the annual pro forma financial statements that you would expect Maria to prepare based on her comments about her expectations for the business. Assume no principal will be repaid on the loan.

Review the statements you prepared for the first requirement and prepare a list of reasons why actual results for Devin and Maria’s business probably will not match their budgeted statements.

B&B Technologies is considering expanding its operations to include production and sales of high capacity storage devices. The assistant to the CFO has collected a lot of information which is described below. Unfortunately, some of the information may be of questionable relevance, but that is for you to decide. You have asked to present a net present value based analysis to help management decide on the desirability of getting into the storage device business.

The company owns a vacant building near its current manufacturing facility; this building could be used for the expansion, or it could be leased to an interested customer and generate a lease revenue of $250,000, starting this year. The firm could increase the lease charge by 5% every year. The company has some unused equipment that has a book value of $40,000 zero and a market value of $30,000. This equipment could either be sold or be modified to produce storage devices; the modification would cost $10,000. The old equipment and modification costs would be depreciated straight-line over five years. Producing storage devices would also require the purchase of new equipment costing $900,000. For purposes of depreciation, the new equipment would be in the 7-year MACRS class. This equipment would have a useful life of six years, at the end of which it would have a scrap value of 10% of the purchase price.

Producing storage devices would require an ongoing investment in working capital. Net working capital is expected to be 10% of expected sales for the coming year and would vary with sales, but remain at 10% of expected sales for the coming year. All working capital would be recovered at the end of the six-year life of the investment.

The production facility is expected to generate sales revenues of $1,000,000 in the first year; sales are expected to increase at 10% p.a. for three years and then decline by 5% p.a. over the last two years of the project. Operating costs are expected to be 40% of sales. The firm’s effective tax rate of 20% is expected to remain unchanged over the planning period, and the appropriate required rate of return for this investment is 8%.

Question

1. Estimate the net present value and the internal rate of return for this investment.

2. Now suppose the following changes occur: (i) Sales in the first year turn out to be $900,000, (ii) the CGS to sales ratio is 45%, (iii) the NWC to sales ratio is 15%, (iv) the scrap value of the new equipment in year 6 is 5% of the original cost, and (v) the required rate of return is 10%. What is the net present value and the internal rate of return with all of the above changes? Should B&B Technologies get into the storage device business?

B&B Technologies is considering expanding its operations to include production and sales of high capacity storage devices. The assistant to the CFO has collected a lot of information which is described below. Unfortunately, some of the information may be of questionable relevance, but that is for you to decide. You have asked to present a net present value based analysis to help management decide on the desirability of getting into the storage device business.

The company owns a vacant building near its current manufacturing facility; this building could be used for the expansion, or it could be leased to an interested customer and generate a lease revenue of $250,000, starting this year. The firm could increase the lease charge by 5% every year. The company has some unused equipment that has a book value of $40,000 and a market value of $30,000. This equipment could either be sold or be modified to produce storage devices; the modification would cost $10,000. The old equipment and modification costs would be depreciated straight-line over five years. Producing storage devices would also require the purchase of new equipment costing $900,000. For purposes of depreciation, the new equipment would be in the 7-year MACRS class. This equipment would have a useful life of six years, at the end of which it would have a scrap value of 10% of the purchase price.

Producing storage devices would require an ongoing investment in working capital. Net working capital is expected to be 10% of expected sales for the coming year and would vary with sales, but remain at 10% of expected sales for the coming year. All working capital would be recovered at the end of the six-year life of the investment. The production facility is expected to generate sales revenues of $1,000,000 in the first year; sales are expected to increase at 10% p.a. for three years and then decline by 5% p.a. over the last two years of the project. Operating costs are expected to be 40% of sales. The firm’s effective tax rate of 20% is expected to remain unchanged over the planning period, and the appropriate required rate of return for this investment is 8%.

Tasks:

1. Estimate the net present value and the internal rate of return for this investment.

2. Now suppose the following changes occur: (i) Sales in the first year turn out to be $900,000, (ii) the CGS to sales ratio is 45%, (iii) the NWC to sales ratio is 15%, (iv) the scrap value of the new equipment in year 6 is 5% of the original cost, and (v) the required rate of return is 10%. What is the net present value and the internal rate of return with all of the above changes? Should B&B Technologies get into the storage device business?

a) If the potential is taken as zero at an infinite distance from the charges, how can points near the charges also have zero potential?

b) Explain why equipotentials and E field lines must always be perpendicular.

c) Where are the most negative potentials located in the space surrounding several point charges of opposite signs?

d) At a given point in an electric field, does the E vector point toward higher or lower potential?

e) At a given point in an electric field, does the E vector point toward higher or lower potential energy for a positive charge at that point? Explain why.

f) At a given point in an electric field, does the E vector point toward higher or lower potential energy for a negative charge at that point? Explain why.

g) If a positive charge is released from rest in an electric field, will it move toward lower or higher potentials? What if a negative charge is released from rest?

h) If a negative charge is placed in a closed orbit (not necessarily circular) around a single positive charge, is the potential constant everywhere on the orbit? If not, is there any energy quantity that is constant along the entire orbit?

Clayton Moore is the manager of an international money market fund managed out of London. Unlike many money funds that guarantee their investors a near? risk-free investment with variable interest? earnings, Clayton? Moore's fund is a very aggressive fund that searches out relatively high interest earnings around the? globe, but at some risk. The fund is? pound-denominated. Clayton is currently evaluating a rather interesting opportunity in Malaysia. Since the Asian Crisis of? 1997, the Malaysian government enforced a number of currency and capital restrictions to protect and preserve the value of the Malaysian ringgit. The ringgit was fixed to the U.S. dollar at RM3.80?/$ for seven years. In? 2005, the Malaysian government allowed the currency to float against several major currencies. The current spot rate today is RM 3.13481 divided by $. Local currency time deposits of? 180-day maturities are earning 8.898?% per annum. The London eurocurrency market for pounds is yielding 4.203?% per annum on similar? 180-day maturities. The current spot rate on the British pound is $ 1.5823 divided by pound?, and the? 180-day forward rate is $ 1.5563 divided by pound. The initial investment is pound1,000,000.00.

Clayton Moore is the manager of an international money market fund managed out of London. Unlike many money funds that guarantee their investors a near? risk-free investment with variable interest? earnings, Clayton? Moore's fund is a very aggressive fund that searches out relatively high interest earnings around the? globe, but at some risk. The fund is? pound-denominated. Clayton is currently evaluating a rather interesting opportunity in Malaysia. Since the Asian Crisis of? 1997, the Malaysian government enforced a number of currency and capital restrictions to protect and preserve the value of the Malaysian ringgit. The ringgit was fixed to the U.S. dollar at RM3.80?/$ for seven years. In? 2005, the Malaysian government allowed the currency to float against several major currencies. The current spot rate today is RM 3.13481 divided by $. Local currency time deposits of? 180-day maturities are earning 8.898?% per annum. The London eurocurrency market for pounds is yielding 4.203?% per annum on similar? 180-day maturities. The current spot rate on the British pound is $ 1.5823 divided by pound?, and the? 180-day forward rate is $ 1.5563 divided by pound. The initial investment is pound1,000,000.00.

Gerald Luna is a 45-year-old client with a 15-year history of type 2 diabetes mellitus and a 30-year history of alcoholism. His blood glucose is not well controlled on an oral hypoglycemic agent, and he drinks one six-pack of beer per day. Gerald works at a casino as a slot machine repairman. His wife of 25 years, Andrea, is also employed by the casino in the accounting department. Gerald and Andrea live on a reservation near the casino in a rural setting.

Gerald was involved in a car accident on the way to work. He was not restrained and was thrown from the car into the roadside brush. The crash was witnessed, and bystanders called 911. First responders arrived to find Gerald unconscious with labored breathing and a deformed right lower extremity. A witness stated that Mr. Luna just drove off the road and appeared to be asleep. No other vehicles were involved. The first responders established monitoring equipment, intubated Gerald at the scene, started intravenous fluids with 0.9% normal saline, and splinted his right lower extremity.

Evaluate the information in the case and determine the Top 3 Priority concerns or cues.

A square, 32.0- turn coil that is 11.0 cm on a side with a resistance of 0.770Ω is placed between the poles of a large electromagnet. The electromagnet produces a constant, uniform magnetic field of 0.550 T directed out of the screen. As suggested by the figure, the field drops sharply to zero at the edges of the magnet. The coil moves to the right at a constant velocity of 2.70 cm/s. A shaded, rectangular region of uniformly distributed dots signifying a magnetic field out of the screen, and a clear region to the right of the shaded region. Inside and near the middle of the shaded region is a smaller square coil moving to the right with velocity V. The coil is labeled as having N turns. What is the current ?1 through the wire coil before the coil reaches the right edge of the field? Define counterclockwise current as positive and clockwise current as negative. ?1= A What is the current ?2 through the wire coil while the coil is leaving the field? ?2= A What is the current ?3 through the wire coil after the coil leaves the field? ?3= A What is the total charge magnitude ∣Δ?∣ that flows past a given point in the coil as it leaves the field? ∣Δ?∣= C