You consider buying a lot on which you will build a small apartment complex. The asking price for the lot is $500,000 and the estimated cost to build the apartment complex is $1,000,000 (construction should take one year). One year from the date you intend to purchase the lot the city is going to make an important decision regarding the use of the land just across from your lot. You believe that there is a 30% chance that the decision would be favorable to you and a 70% chance that it would be unfavorable. In case of a favorable or unfavorable outcome your complex should generate an NOI of $250,000 or $200,000 respectively. For simplicity, you may assume that at any time you can sell your complex for a 9% CAP and your required rate of return is 10%.

a. Calculate the value of the lot using the traditional approach.

b. Calculate the value of the lot using the real option approach.

c. Should you buy the lot?

d. In case that you decided to buy the lot, should you build the apartment complex right away or wait for the city to make its decision first?

Mooney Ltd. completed the construction of an office building for £2,400,000 on December 31, 2019. The company estimated that the building would have a residual value of £0 and a useful life of 40 years. A more detailed review of the expenditures related to the building indicates that £300,000 of the total cost was used for personal property and £180,000 for land improvements. The personal property has a depreciable life of 5 years and land improvements have a depreciable life of 10 years.

Instructions

a. Compute depreciation expense for 2020 using component depreciation and the straight‐line method.

b. assume a yearly accounting period ending on 31 May 2020. Prepare the adjusting journal entry for depreciation on that date.

c. Prior to the IFRS requirement to depreciate components separately, all of the £2,400,000 may well have been depreciated using the useful life and residual value of the building. Calculate the depreciation expense for the calendar year 2020 under this scenario. Compare this with what you calculated for Instruction a). If management were opportunistic, would they have preferred the result just calculated or the result in a)? Explain why.

Please answer the following questions:

Select the correct option:

1. Acceptable depreciation methods under IFRS include

2. The activity method of depreciation

3. In measuring an impairment loss, IFRS uses

Answer True or False:

4. Under IFRS and U.S. GAAP, interest costs incurred during construction must be capitalized.

5. An accelerated depreciation method is appropriate when the asset's economic usefulness is the same each year.

6. IFRS permits the same depreciation methods as U.S. GAAP, with the exception of the units-of-production method, which is not allowed under IFRS.

7. As with U.S. GAAP, IFRS requires that both direct and indirect costs in self-constructed assets be capitalized.

After spending 500,000 to study the potential market for a new specialty chemical, hart industries is considering a new plant requiring an initial investment in new construction and equipment. The company will purchase 6,000,000 in new plant equipment. The IRS will allow hart to depreciate the plant equipment to a salvage value of zero on a straight-line basis over a six-year useful life. At the end of five years they expect to sell the plant and equipment for 2,000,000. The firm estimates revenue year1= 26M, Year2= 25M, Year3= 25M, Year4= 25M, Year5= 25M. Variable cost will be 70% of revenue. Fixed costs for the project are estimated to be 3,000,000 annually. Initial net working capital requirements for the project are expected to be 700,000. In addition, the company will increase required working capital 50,000 each year. at the end of five year project the net working capital will no longer be required. The company tax rate is 30%. What is harts cash flows from assets for the 5 years of the project? If your required return rate is 10%, what is the projects NPV and IRR? Should the company accept the project?

You must analyze a potential new product—a caulking compound that Cory Materials’ R&D people

developed for use in the residential construction industry. Cory’s marketing manager thinks they

can sell 115,000 tube per year at a price of $3.25 per year for 3 years, after which the product will

be obsolete. The required equipment would cost $150,000, plus another $25,000 for shipping and

installation. Current assets would increase by $35,000 while current liabilities would rise by

$15,000. Variable costs would be 60% of sales revenues, fixed costs (excluding depreciation)

would be $70,000 per year, and fixed assets would be depreciated under MACRS with a 3-year life.

The relative depreciation rates would be 33.33%, 44.44%, 14.82% and 7.41%. When production

ceases after 3 years, the equipment will have a market value of $15,000. Cory’s tax rate is 40%

and it uses a 10% wacc for average-risk projects.

a.

Calculate the project’s NPV, IRR, MIRR, PI, payback and discounted payback.

Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $197 million. The equipment will be fully depreciated using the straight-line method over its economic life of five years. Earnings before interest, taxes, and depreciation collected from the toll road are projected to be $29.3 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 23 percent. The required rate of return for the project under all-equity financing is 15 percent. The pretax cost of debt for the joint partnership is 8.7 percent. To encourage investment in the country’s infrastructure, the U.S. government will subsidize the project with a $130 million, 15-year loan at an interest rate of 5.2 percent per year. All principal will be repaid in one balloon payment at the end of Year 15.

What is the adjusted present value of this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

P11.16 Sung Corporation, a manufacturer of steel products, began operations on October 1, 2019. Sung's accounting department has begun to prepare the capital asset and depreciation schedule that follows. You have been asked to assist in completing this schedule. In addition to determining that the data already on the schedule are correct, you have obtained the following information from the company's records and personnel:

• 1. Depreciation is calculated from the first day of the month of acquisition to the first day of the month of disposition.
• 2. Land A and Building A were acquired together for $820,000. At the time of acquisition, the land had an appraised value of $90,000 and the building had an appraised value of $810,000.
• 3. Land B was acquired on October 2, 2019, in exchange for 2,500 newly issued common shares. At the date of acquisition, the shares had a fair value of $30 each. During October 2019, Sung paid $16,000 to demolish an existing building on this land so that it could construct a new building.
• 4. Construction of Building B on the newly acquired land began on October 1, 2020. By September 30, 2021, Sung had paid $320,000 of the estimated total construction costs of $450,000. It is estimated that the building will be completed and occupied by July 2022.
• 5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when it was donated estimated its fair value at $30,000 and the residual value at $3,000.
• 6. Machine A's total cost of $164,900 includes an installation expense of $600 and normal repairs and maintenance of $14,900. Its residual value is estimated at $6,000. Machine A was sold on February 1, 2021.
• 7. On October 1, 2020, Machine B was acquired with a down payment of $5,740 and the remaining payments to be made in 11 annual instalments of $6,000 each, beginning October 1, 2020. The prevailing interest rate was 8%. The following data were determined from present-value tables and are rounded:

  PV of $1 at 8%				PV of an Ordinary Annuity of $1 at 8%
  10 years		0.463		10 years		6.710
  11 years		0.429		11 years		7.139
  15 years		0.315		15 years		8.559

  Sung Corporation Capital Asset and Depreciation Schedule For Fiscal Years Ended September 30, 2020, and September 30, 2021
  Assets		Acquisition Date		Cost		Residual Value		Depreciation Method		Estimated Life in Years		Depreciation Expense, Year Ended September 30
  												2020		2021
  Land A		Oct. 1, 2019		$ (1)		N/A		N/A		N/A		N/A		N/A
  Building A		Oct. 1, 2019		(2)		$40,000		Straight-line		(3)		$17,450		(4)
  Land B		Oct. 2, 2019		(5)		N/A		N/A		N/A		N/A		N/A
  Building B		Under construction		$320,000 to date		—		Straight-line		30		—		(6)
  Donated Equipment		Oct. 2, 2019		(7)		3,000		150% declining- balance		10		(8)		(9)
  Machine A		Oct. 2, 2019		(10)		6,000		Double-declining- balance		8		(11)		(12)
  Machine B		Oct. 1, 2020		(13)		—		Straight-line		20		—		(14)
  N/A = Not applicable

Instructions

a. For each numbered item in the schedule, give the correct amount. Round each answer to the nearest dollar.

b.  When would it be appropriate for management to use different depreciation policies as they have done for Machines A and B?

The Thompson Corporation, a manufacturer of steel products, began operations on October 1, 2019. The accounting department of Thompson has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company's records and personnel: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
2. Land A and Building A were acquired from a predecessor corporation. Thompson paid $772,500 for the land and building together. At the time of acquisition, the land had a fair value of $103,200 and the building had a fair value of $756,800.
3. Land B was acquired on October 2, 2019, in exchange for 2,600 newly issued shares of Thompson’s common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $21 per share. During October 2019, Thompson paid $10,000 to demolish an existing building on this land so it could construct a new building.
4. Construction of Building B on the newly acquired land began on October 1, 2020. By September 30, 2021, Thompson had paid $170,000 of the estimated total construction costs of $260,000. Estimated completion and occupancy are July 2022.
5. Certain equipment was donated to the corporation by the city. An independent appraisal of the equipment when donated placed the fair value at $14,400 and the residual value at $1,600.
6. Equipment A’s total cost of $102,000 includes installation charges of $510 and normal repairs and maintenance of $10,600. Residual value is estimated at $5,000. Equipment A was sold on February 1, 2021.
7. On October 1, 2020, Equipment B was acquired with a down payment of $3,600 and the remaining payments to be made in 10 annual installments of $3,600 each beginning October 1, 2021. The prevailing interest rate was 7%.

Required:
Supply the correct amount for each answer box on the schedule. (Round your intermediate calculations and final answers to the nearest whole dollar.)

Problem 11-10

Skysong Corporation, a manufacturer of steel products, began operations on October 1, 2016. The accounting department of Skysong has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel.

Complete the schedule below. (Round answers to 0 decimal places, e.g. 45,892.)

SKYSONG CORPORATION

Fixed-Asset and Depreciation Schedule

For Fiscal Years Ended September 30, 2017, and September 30, 2018