Calexico Hospital plans to invest in a new MRI machine. The cost of the MRI is $1.6 million. The MRI has an economic life of 5 years, and it will be depreciated over a five-year life to a $200,000 salvage value. Additional revenues attributed to the new MRI will be in the amount of $1.5 million per year for 5 years. Additional operating expenses, excluding depreciation expense, will amount to $1 million per year for 5 years. Over the life of the machine, net working capital will increase by $30,000 per year for 5 years. Version

1 a. Assuming that the hospital is a non-profit entity, what is the project’s net present value (NPV) at a discount rate of 8%, and what is the project’s IRR? b. Assuming that the hospital is a for-profit entity and the tax rate is 30%, what is the project’s NPV at a cost of capital of 8%, and what is the project’s IRR?

b. Assuming that the hospital is a for-profit entity and the tax rate is 30%, what is the project’s NPV at a cost of capital of 8%, and what is the project’s IRR?

Cost of Units Completed and in Process

The charges to Work in Process—Assembly Department for a period, together with information concerning production, are as follows. All direct materials are placed in process at the beginning of production.

a. Based on the above data, determine the different costs listed below.

If required, round your interim calculations to two decimal places.

b. Did the production costs change from the preceding period?
Yes

c. Assuming that the direct materials cost per unit did not change from the preceding period, did the conversion costs per equivalent unit increase, decrease, or remain the same for the current period?
Increase

LEASE AND LAND PURCHASE ANALYSIS

The purposes of this exercise are to:

(1) compare the cost of cash and crop share leasing

(2) estimate the maximum cash rent that you can afford to pay

(3) estimate the economic value of farm land based on its projected future earnings

(4) look at the cash flow implications of financing a land purchase

A. Crop Share Versus Cash Rent Lease Analysis

Use information from 3 years of crop production records to compare how much it actually cost (or would have cost) to rent land under a crop share lease compared to a cash lease.

The indirect cost of a crop share lease can be computed by estimating:

the value of the land owner's share (50%) of the gross income, minus

the value of the land owner's share (50%) of the input costs (seed, fertilizer, pesticides and drying).

1. You have the following cost and revenue information on a project that invests in the conversion of a coal-fired electricity generating plan into a gas-fired unit.

Cost of new equipment: $200 million.

The equipment will be depreciated over 8 years on a straight-line basis to zero book value.

Proceeds from the sale of old equipment which has a book value of $15 m is 40 million,

Expensable installation cost: 0.50 million.

Estimated Revenue from the sale of electricity in the first year: $65 million and it remains the same for all 5 years;

Cost of gas: $25 million;

Operating and other expenses: $4 million;

Initial working capital expenses: $1 million;

Project’s assets estimated resale value: $65 million.

The project is subject to a tax rate of 30%,

Anticipated clean-up expense: $1.0 million.

The investment is eligible for $1.0 million investment tax credit.

The weighted average cost of capital (WACC) of the project is 5%.

Using these data,

1. calculate the following cash flows associated with the project: (i) Net initial investment outlay; (ii) Net operating cash flows (NOCF) also known as CFAT and (iii) net salvage value, and
2. assuming that the net operating cash flows will remain the same for all 8 years, calculate the NPV and the IRR of the project.

Net initial investment outlay:

-I_o – W –(1-t)E₀ + [S_o – t(S₀-B₀] + I_c

Net operating cash flow:

(1-t)(R – C) + t(D)

Net salvage value:

S – t(S – B) – (1 – t)REX + W

On an income statement prepared according to the recommended USAR format, the cost of utilities is listed further down the statement than the cost of labor because...

2. A chef invests $40,000 of their own money, and $160,000 borrowed from a bank, to open their new restaurant. What percentage of this cehf's new operation was equity funded?

Consider the cost schedule given in the following table and P = $26 for a perfectly competitive firm:

            Output Total Variable Costs                 Total Costs (STC)

            0                                  $0                                $30

            1                                  20                                50

            2                                  30                                60

            3                                  48                                78

            4                                  90                                120

            5                                  170                              200

Draw three separate graphs using the SATC, AVC, and SMC curves, and on each one indicate (i) the profit maximizing level of output, (ii) the profit/loss per unit, (iii) the total profit/loss, and (iv) whether the firm should stay open or shut down (and why) when:

P = $42

P = $18

P = $12.50

The following cost and inventory data are taken from the accounting records of a Company for the year just completed:

Costs incurred:

Direct labor cost ................................................... $140,000
Purchases of raw materials .................................. $236,000
Manufacturing overhead ...................................... $160,000
Advertising expense ............................................. $180,000
Sales salaries ....................................................... $100,000
Depreciation, office equipment ............................ $6,000

Inventories: Beginning the Year End the Year
Raw materials ............................ $14,000 $30,000
Work in process .......................... $20,000 $10,000
Finished goods ............................ $40,000 $70,000

Required:
1. Prepare the cost of goods sold section of Company’s income statement for the year.

1. Calculate the lease payments in arrears if the equipment cost is $500,000 and the lessor’s rate is 10%. Assume a five equal annual repayments and a residual of 20% at the end of year five. The lessee’s debt rate is 6%.

2. Shine Ltd is considering purchasing or leasing new equipment. If it purchases the equipment it will cost $500,000 and if it leases the equipment it will be required to pay six rentals of $115,000 each. The equipment can be depreciated over three years on a straight-line basis for tax purposes. The residual value is expected to be zero and the tax rate is 30%. What is the incremental cash flow in Year 3 for leasing the equipment rather than buying it for Year 3? Assume that rental payments are paid at the beginning of each period.

3. Polycorp is about to lease mining equipment worth $1,500,000. The corporate tax rate is 20% and the equipment can be depreciated on a diminishing value basis of 30% over 4 years (salvage value is zero). Polycorp’s cost of debt is 8%. Calculate the present value of the tax savings from the depreciation foregone? Assume tax is paid in the year of income. Assume the remaining balance is added to the depreciation for year four.