Determining Cost Relationships

Midstate Containers Inc. manufactures cans for the canned food industry. The operations manager of a can manufacturing operation wants to conduct a cost study investigating the relationship of tin content in the material (can stock) to the energy cost for enameling the cans. The enameling was necessary to prepare the cans for labeling. A higher percentage of tin content in the stock increases the cost of material. The operations manager believed that a higher tin content in the can stock would reduce the amount of energy used in enameling. During the analysis period, the amount of tin content in the stell can stock was increased for every month, from April to September. The following operating reports were available from the controller:

Differences in materials unit costs were entirely related to the amount of tin content. In addition, inventory changes are negligible and are ignored in the analysis.

A) Calculate the Total cost per unit for each month. Round your answers to the nearest cent

B) Interpret your results

The calculations reveal that the tin content and energy costs are _________ related. That is, as the materials cost increased due to higher tin content, the energy costs ________ by more. Thus, the recommendation should be to __________ raw can stock with the tin content at the $0.33-per-unit level (September level). This is the material that __________ the total production cost for this set of data. Additional data could be used to determine the optimal tin content or the point where energy cost savings fail to overcome additional material costs.

For each of the problems below, provide detailed working.

Part I A business investor is considering a new food venture on an isolated construction site. He has been given permission to operate on the site for a period of 15 years. He has compiled the following information about the new proposed business venture: Startup equipment: $450,000 Working capital required for new kitchen: $105,000 Expected annual cash inflow from food sales: $375,000 Expected annual cash expenses associated with the new business: $250,000 Restaurant upgrade required after 5 years: $55,000 At the end of the 15-year period, the equipment would be sold for its salvage value of $125,000. The company is required to pay taxes at the rate of 30%. It will calculate depreciation using the straight-line method, but it will not use the salvage value when computing depreciation for tax purposes.

Required:

a) Assuming a 15% after-tax cost of capital, compute net present value (NPV) of the new venture. – 20 marks

b) On the basis of your computations should this business be opened or not. – 10 marks You must show all working

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 $80.6 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 $12.7 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 40 percent. The required rate of return for the project under all-equity financing is 13 percent. The pretax cost of debt for the joint partnership is 9.1 percent. To encourage investment in the country’s infrastructure, the U.S. government will subsidize the project with a $25.6 million, 15-year loan at an interest rate of 5.6 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? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Problem 21-2 (Essay)

Cleveland Inc. leased a new crane to Abriendo Construction under a 5-year noncancelable contract starting January 1, 2017. Terms of the lease require payments of $33,000 each January 1, starting January 1, 2017. Cleveland will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of $240,000, and a cost to Cleveland of $240,000. The estimated fair value of the crane is expected to be $45,000 at the end of the lease term. No bargain-purchase or -renewal options are included in the contract. Both Cleveland and Abriendo adjust and close books annually at December 31. Collectibility of the lease payments is reasonably certain, and no uncertainties exist relative to unreimbursable lessor costs. Abriendo’s incremental borrowing rate is 10%, and Cleveland’s implicit interest rate of 9% is known to Abriendo.

1. Identify the type of lease involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor.

2. Discuss what should be presented in the balance sheet, the income statement, and the related notes of both the lessee and the lessor at December 31, 2017.

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 $81.8 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 $13.9 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 34 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 10.3 percent. To encourage investment in the country’s infrastructure, the U.S. government will subsidize the project with a $26.8 million, 15-year loan at an interest rate of 6.8 percent per year. All principal will be repaid in one balloon payment at the end of Year 15. The company issued subsidized debt instead of issuing debt at the terms it normally would. Assume the face amount and maturity of the debt issue are the same. Calculate the gain or loss from subsidized debt.

Please do not use excel or copy

Estimate the present market value of a 10-unit apartment house given the following information pertaining to the property.

Each apartment has 1000 square feet of living area, 3 bedrooms, and kitchen appliances. Tenants pay their own utilities. The value of the land is $250,000. The estimate replacement value is $100 per square foot for this type of construction. Total operating expenses insurance and property taxes for the year, $25,000. The rental income, $6000 month/allow 5% for vacancy and non-payment. Management fees are 6% of total rents collected. The building is 20 years old and has an estimate future useful life of 20 more years. A first mortgage is available at 6% for 75% of the purchase price. Equity will be used as the other 25% of the purchase price and the owner requires a return of 12% on the equity investment.

Compute the following:

A) Net income before capitalization

B) Capitalization rate adjusted for recapture

C) Estimated value of this property using the income approach

D) Estimated value using the replacement cost approach

Show all work.

Roads Ltd is a construction company that builds roads and related civil projects. The company recently faced increased calls from investors to pay dividends due to the perceived lack of new profitable projects in a low growth economy. The company has, in spite of weak business sentiment, maintained a stable profit margin. At a recent meeting, the board resolved to adopt a residual approach to dividend payments. You have been tasked with recommending the dividend that should be paid at the end of the 2018 financial year. The company expects to have earnings available to common shareholders of R 60 million and it will have five million shares in issue at the end of the financial year. Its project schedule for the next financial year is as follows: Project A B C D IRR 18% 15% 14% 11% Cost (Rm) 20 15 21 16 The company has a WACC of 8% and a target debt ratio of 60%. Required: Determine the amount of earnings available to common shareholders that could be paid out as a divided according to the residual policy. Create a brief report for the board showing the projects that would be undertaken and also determine the dividend that could be paid.

16. Each of the following is an example of an asset's involuntary conversion except

A) a condemnation of property.

B) a theft of the asset.

C) the sale of a fully depreciated asset.

D) a fire damaging an asset.

17. During self-construction of an asset by Samuelson Company, the following were among the costs incurred:

Fixed overhead for the year

Portion of $1,000,000 fixed overhead that be allocated to asset if it were normal

Variable overhead attributable to self con

What amount of overhead should be included in the cost of the self-constructed asset?

A) $90,000

B) $ -0-

C) $140,000

D) $50,000

18. The major difference between the service life of an asset and its physical life is that

A) service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.

B) physical life is always longer than service life.

C) service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.

D) physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value.

A construction project has indirect costs totaling $40,000 per week. Major activities of the project, their expected time, and crashing costs per week are:

What would be your recommended lowest cost duration for this project? Show your work. For each step specify what activity is crashed and show why.