Suppose a firm expects that a $20 million expenditure on R&D in the current year will result in a new product that can be sold next year. Selling that product next year would increase the firm’s revenue next year by $30 million and its costs next year by $29 million.

Instructions: Enter your answer as a whole number.

a. What is the expected rate of return on this R&D expenditure?

b. Suppose the firm can get a bank loan at 6 percent interest to finance its $20 million R&D project. Will the firm undertake the project?

      (Click to select)  Yes  No

c. Now suppose the interest-rate cost of borrowing falls to 4 percent. Will the firm undertake the project?

      (Click to select)  Yes  No

d. Now suppose that the firm has savings of $20 million—enough money to fund the R&D expenditure without borrowing. If the firm has the chance to invest this money either in the R&D project or in government bonds that pay 3.5 percent per year, which should it do?

      (Click to select)  Government bonds  R&D

e. What if the government bonds were paying 6.5 percent per year?

      (Click to select)  R&D  Government bonds

10. You are offered an annuity that will pay you $200,000 once every year, at the end of each year, for 25 years (i.e. the first payment will arrive one year from now, the last payment will arrive 25 years from now). Suppose your annual discount rate is i= 5.25%, how much are you willing to pay for this annuity? Hint: this is the same as the present value of an annuity.

Albert Co. is considering a four-year project that will require an initial investment of $15,000. The base-case cash flows for this project are projected to be $15,000 per year. The best-case cash flows are projected to be $22,000 per year, and the worst-case cash flows are projected to be –$1,500 per year. The company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows.

1. What would be the expected net present value (NPV) of this project if the project’s cost of capital is 14%?

A. $19,607

B. $17,429

C. $20,697

D. $21,786

Albert now wants to take into account its ability to abandon the project at the end of year 2 if the project ends up generating the worst-case scenario cash flows. If it decides to abandon the project at the end of year 2, the company will receive a one-time net cash inflow of $4,500 (at the end of year 2). The $4,500 the company receives at the end of year 2 is the difference between the cash the company receives from selling off the project’s assets and the company’s –$1,500 cash outflow from operations. Additionally, if it abandons the project, the company will have no cash flows in years 3 and 4 of the project.

2. Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment option into account.

$21,074

$24,586

$23,415

$25,757

3. What is the value of the option to abandon the project?     

The records of Phoenix Corporation revealed the following data for the current year.

1. Refer to Phoenix Corporation.  Assume, for this question only, actual overhead is $98,700 and applied overhead is $93,250. Manufacturing overhead is:
   1. overapplied by $12,900.
   2. underapplied by $18,350.
   3. overapplied by $5,450
   4. underapplied by $5,450

2. Refer to Phoenix Corporation. Assume that Phoenix has underapplied overhead of $10,000 and that this amount is immaterial. What is the balance in Cost of Goods Sold after the underapplied overhead is closed?
   1. 133,650
   2. 123,650
   3. 143,650
   4. 137803
3. Refer to Phoenix Corporation. Assume that Phoenix has overapplied overhead of $25,000 and that this amount is material. What is the balance in Cost of Goods Sold after the overapplied overhead is closed?
   1. 123267
   2. 144033
   3. 158650
   4. 108650

Midlands Inc. had a bad year in 2019. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 78,000 units of product: net sales $1,560,000; total costs and expenses $1,789,800; and net loss $229,800. Costs and expenses consisted of the following. Total Variable Fixed Cost of goods sold $1,129,600 $635,000 $494,600 Selling expenses 513,200 90,000 423,200 Administrative expenses 147,000 55,000 92,000 $1,789,800 $780,000 $1,009,800 Management is considering the following independent alternatives for 2020. 1. Increase unit selling price 25% with no change in costs and expenses. 2. Change the compensation of salespersons from fixed annual salaries totaling $201,000 to total salaries of $39,000 plus a 5% commission on net sales. 3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50. (a) Compute the break-even point in dollars for 2019. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answer to 0 decimal places, e.g. 2,510.) Break-even point $Enter the break-even point in dollars rounded to 0 decimal places (b) Compute the break-even point in dollars under each of the alternative courses of action for 2020. (Round contribution margin ratio to 3 decimal places e.g. 0.251 and final answers to 0 decimal places, e.g. 2,510.) Break-even point 1. Increase selling price $Enter a dollar amount 2. Change compensation $Enter a dollar amount 3. Purchase machinery $Enter a dollar amount Which course of action do you recommend? Select an option

The TropicalFlowers Company is evaluating an asset that may increase sales by $120,000 every year for 4 years. There is no expected change in net operating working capital. The company's cost of capital is 6%. The proposed asset costs $400,000, will require $20,000 to modify for operations, and falls in the 3-year class MACRS for depreciation rates: .33, .45, .15, and .07 for years 1 through 4, respectively. At the end of the 4 years, it is expected that the asset may sell for $30,000. The company's tax rate is 21%. SHOW ALL WORK FOR FULL CREDIT. a) (2 pts) What is the initial outlay for this project? b) (8 pts) What are the operating cash flows in Years 1 through 4? c) (2 pts) As part of the terminal cash flow in Year 4, what is the after-tax salvage value of the asset? d) (4 pts) What is the net present value of this proposed asset investment? Should it be accepted or rejected? SHOW ALL WORK ON THE TI BAII Plus Calculator.

SHOW ALL WORK on the TI BAII Plus Calculator!!!!!

Bank A is offering a 1-year CD at a nominal compound interest rate of 5.59% with an APY of 5.75%. Bank B is offering a 1-year CD at a nominal compound interest rate of 5.67% with an APY of 5.75%. Showing your computations, explain in some detail how each of these banks is evidently employing one of the standard compounding frequencies (semi-annually, quarterly, monthly, weekly, or daily) to legally advertise identical APY’s even though each bank uses a different nominal compound interest rate in computing the actual interest on its CD.

At the end of every year you deposit $2,000 into an account that earns 8% interest per year. What will be the balance in your account immediately after the 30th deposit?

Waterways Corporation is preparing its budget for the coming year, 2020. The first step is to plan for the first quarter of that coming year. The company has gathered information from its managers in preparation of the budgeting process.

Waterways likes to keep 10% of the next month’s unit sales in ending inventory. All sales are on account. 85% of the Accounts Receivable are collected in the month of sale, and 15% of the Accounts Receivable are collected in the month after sale. Accounts receivable on December 31, 2019, totaled $185,400.

Direct Materials

Direct materials cost 80 cents per pound. Two pounds of direct materials are required to produce each unit.

Waterways likes to keep 5% of the materials needed for the next month in its ending inventory. Raw Materials on December 31, 2019, totaled 11,370 pounds. Payment for materials is made within 15 days. 50% is paid in the month of purchase, and 50% is paid in the month after purchase. Accounts Payable on December 31, 2019, totaled $104,580.

Other Information

The Cash balance on December 31, 2019, totaled $102,000, but management has decided it would like to maintain a cash balance of at least $700,000 beginning on January 31, 2020. Dividends are paid each month at the rate of $2.60 per share for 5,280 shares outstanding. The company has an open line of credit with Romney’s Bank. The terms of the agreement requires borrowing to be in $1,000 increments at 9% interest. Waterways borrows on the first day of the month and repays on the last day of the month. A $490,000 equipment purchase is planned for February.

Question:

For the first quarter of 2020, prepare a direct materials budget. (Round cost per pound to 2 decimal places, e.g. 0.25 and all other answers to 0 decimal places, e.g. 2,520.)

24.09%

25.36%

26.63%

25.87%

24.85%