You are the head of Corporate Investments for Everspring, Corp., which has a cost of capital (discount rate) of 10%. You are deciding on whether to invest your firm’s money in the three projects below. All cash flows for each project are shown; all projects are abandoned after Year 5.
Project A Project B Project C
Initial Investment ($100,000) ($500,000)
($6,500,000)
Year 1 $30,000 ($100,000) $1,000,000
Year 2 $40,000 $200,000 $1,500,000
Year 3 $50,000 $200,000 $2,000,000
Year 4 $60,000 $200,000 $2,500,000
Year 5 $70,000 $200,000 $3,000,000
1. Assume each year’s cash flows occur evenly over the year. If your required payback period is 30 months, in which projects would you invest?
2. Assume each year’s cash flows occur at the end of the year. What is the net present value (NPV) of Project A?
3. Assume each year’s cash flows occur at the end of the year. What is the internal rate of return (IRR) of Project B?
4. Assume each year’s cash flows occur at the end of the year. What is the profitability index (PI) of Project C?
In: Accounting
During calendar-year 2019, The Hammond Corporation had the following information in its accounting records: Paid cash dividends of $42,000. Issued common stock for $30,000 in cash. Cash balance, December 31, 2019 - $________. Acquired land costing $80,000, in exchange for a long-term note payable. A building with an adjusted cost basis of $42,000 was destroyed by fire. Increase in the inventory account during the year - $5,000. Depreciation expense for the year was $28,000. Amortization expense for a trademark was $1,000. A 2016 investment in bonds, originally purchased for $33,000, was sold for $38,000. Hammond’s earnings for the year from an equity-method investee was $6,000. Issued preferred stock for $50,000 in cash. Increase in net accountants receivable account during the year - $9,000. Decrease in accounts payable account during the year - $20,000. Retired debentures payable at their face value for $130,000 in cash. Increase in the deferred income tax liability balance during the year - $3,000. Cash balance, January 1, 2019 - $55,000. Net sales for the year were $320,000. Net income for the year was $22,000. Using the information above, prepare a statement of cash flows (indirect method) for The Hammond Corporation, for the year ended December 31, 2019.
In: Accounting
During calendar-year 2019, The Hammond Corporation had the following information in its accounting records: Paid cash dividends of $42,000. Issued common stock for $30,000 in cash. Cash balance, December 31, 2019 - $________. Acquired land costing $80,000, in exchange for a long-term note payable. A building with an adjusted cost basis of $42,000 was destroyed by fire. Increase in the inventory account during the year - $5,000. Depreciation expense for the year was $28,000. Amortization expense for a trademark was $1,000. A 2016 investment in bonds, originally purchased for $33,000, was sold for $38,000. Hammond’s earnings for the year from an equity-method investee was $6,000. Issued preferred stock for $50,000 in cash. Increase in net accountants receivable account during the year - $9,000. Decrease in accounts payable account during the year - $20,000. Retired debentures payable at their face value for $130,000 in cash. Increase in the deferred income tax liability balance during the year - $3,000. Cash balance, January 1, 2019 - $55,000. Net sales for the year were $320,000. Net income for the year was $22,000. Using the information above, prepare a statement of cash flows (indirect method) for The Hammond Corporation, for the year ended December 31, 2019.
In: Accounting
Gadgets&Co sells refrigerators. Any refrigerator that malfunctions within 3 years of purchase is replaced with a new one for free. Of all refrigerators, 3% fail during their first year of operation; 5% of the one-year-old refrigerators fail within their second year of operation, and 7% of the two-year-old refrigerators fail within their 3rd year of operation.
a) Estimate analytically the fraction of all refrigerators that will have to be replaced under the 3-year warranty scheme.
b) Construct and execute a simulation model (with 120 pseudo-realities) to estimate the fraction of all refrigerators that will have to be replaced under the 3-year warranty scheme. Explain and motivate your approach.
c) Assume that it costs $650 to replace a refrigerator, and Gadgets&Co sells 15,000 refrigerators per year. Estimate analytically the replacement cost savings per year that Gadgets&Co would achieve if they decreased their warranty period to 2 years. Explain and motivate your approach and results.
d) Use the results from part b to find a simulation-based estimate of the replacement cost savings per year that Gadgets&Co would achieve if they decreased their warranty period to 2 years. Explain and motivate your approach.
In: Accounting
Problem 10-12 NPV and Modified ACRS [LO1]
|
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.79 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,110,000 in annual sales, with costs of $799,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $225,000 at the end of the project. |
| If the tax rate is 35 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (MACRS schedule) (Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.) |
| Years | Cash Flow |
| Year 0 | $ |
| Year 1 | $ |
| Year 2 | $ |
| Year 3 | $ |
|
If the required return is 12 percent, what is the project's NPV? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) |
| NPV |
$ |
In: Finance
Problem 10-2A Depreciation methods LO P1
A machine costing $210,200 with a four-year life and an estimated $19,000 salvage value is installed in Luther Company’s factory on January 1. The factory manager estimates the machine will produce 478,000 units of product during its life. It actually produces the following units: 121,800 in 1st year, 123,600 in 2nd year, 121,200 in 3rd year, 121,400 in 4th year. The total number of units produced by the end of year 4 exceeds the original estimate—this difference was not predicted. (The machine must not be depreciated below its estimated salvage value.)
Required:
Compute depreciation for each year (and total depreciation of all years combined) for the machine under each depreciation method. (Round your per unit depreciation to 2 decimal places. Round your answers to the nearest whole dollar.) Compute depreciation for each year (and total depreciation of all years combined) for the machine under each Straight-line depreciation. Compute depreciation for each year (and total depreciation of all years combined) for the machine under each Units of production. Compute depreciation for each year (and total depreciation of all years combined) for the machine under each Double-declining-balance.
In: Accounting
[The following information applies to the questions displayed below.]
O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:
| Variable costs per unit: | ||
| Manufacturing: | ||
| Direct materials | $ | 27 |
| Direct labor | $ | 15 |
| Variable manufacturing overhead | $ | 5 |
| Variable selling and administrative | $ | 3 |
| Fixed costs per year: | ||
| Fixed manufacturing overhead | $ | 540,000 |
| Fixed selling and administrative expenses | $ | 110,000 |
During its first year of operations, O’Brien produced 93,000 units and sold 76,000 units. During its second year of operations, it produced 77,000 units and sold 89,000 units. In its third year, O’Brien produced 85,000 units and sold 80,000 units. The selling price of the company’s product is $80 per unit.
Case 6-29 Part-3
3. Assume the company uses absorption costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):
a. Compute the unit product cost for Year 1, Year 2, and Year 3.
b. Prepare an income statement for Year 1, Year 2, and Year 3.
In: Accounting
1)If spot rates are 3.1% for one year, 3.5% for two years, and 3.8% for three years and 4.0% for four years, the price of a $100 face value, 4-year, annual-pay bond with a coupon rate of 5% is equal to:
2)
The following spot and forward rates are provided:
Current 1-year spot rate is 5.5%.
One-year forward rate one year from today is 6.63%.
One-year forward rate two years from today is 8.18%.
The value of a 3-year, 6% annual-pay, $100 par value bond is equal to:
3)The 3-year spot rate is 8.75%, and the 2-year spot rate is 8.65%. What is the 1- year forward rate two years from today
4)
|
Bond |
Coupon Rate |
Maturity (years) |
|
A |
6% |
9 |
|
B |
6% |
6 |
|
C |
8% |
6 |
All three bonds are currently trading at par value.
Which bond will most likely experience the greatest percentage change in price and which one most likely experience the lowest percentage change if the market discount rates for all three bonds increase by 1%? Provide explanations.
In: Finance
Required information
[The following information applies to the questions displayed below.]
O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:
| Variable costs per unit: | ||
| Manufacturing: | ||
| Direct materials | $ | 30 |
| Direct labor | $ | 15 |
| Variable manufacturing overhead | $ | 4 |
| Variable selling and administrative | $ | 2 |
| Fixed costs per year: | ||
| Fixed manufacturing overhead | $ | 500,000 |
| Fixed selling and administrative expenses | $ | 100,000 |
During its first year of operations, O’Brien produced 92,000 units and sold 76,000 units. During its second year of operations, it produced 76,000 units and sold 87,000 units. In its third year, O’Brien produced 83,000 units and sold 78,000 units. The selling price of the company’s product is $71 per unit.
Required:
1. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):
a. Compute the unit product cost for Year 1, Year 2, and Year 3.
b. Prepare an income statement for Year 1, Year 2, and Year 3.
In: Accounting
1)On 1/1/19, Investor paid $200,000 for 10,000 shares (which is 10% ownership) of Gamma common stock. Gamma reported net income of $65,000 for 2019. The fair value of the Gamma stock on 12/31/19 was $27/share. What amount will be reported in Investor’s balance sheet for the investment in Gamma at December 31?
2) Bob had net income of $200,000 and declared preferred dividends of $25,000 during the current year. He began the year with 20,000 common shares outstanding. He issued 30,000 shares on June 30 and repurchased 6,000 of the newly issued shares on November 1. Compute the weighted-average common shares outstanding for the year.
3)Compute Bob's basic EPS for the year.
4)Tim had net income of $500,000 for both last year and the current year. The shares outstanding for the prior year was 100,000 shares for the whole year. On December 1 of the current year, he declared a two-for-one stock split. There were no other stock transactions in either year. Compute the EPS that would be shown on a comparative income statement for Years 1 and 2 (In other words, what are EPS for Years 1 and 2 on a split-adjusted basis?)
In: Accounting