Factor Company is planning to add a new product to its line. To
manufacture this product, the company needs to buy a new machine at
a $491,000 cost with an expected four-year life and a $15,000
salvage value. All sales are for cash, and all costs are
out-of-pocket, except for depreciation on the new machine.
Additional information includes the following. (PV of $1, FV of $1,
PVA of $1, and FVA of $1) (Use appropriate factor(s) from
the tables provided.)
| Expected annual sales of new product | $ | 1,930,000 | |
| Expected annual costs of new product | |||
| Direct materials | 475,000 | ||
| Direct labor | 677,000 | ||
| Overhead (excluding straight-line depreciation on new machine) | 336,000 | ||
| Selling and administrative expenses | 166,000 | ||
| Income taxes | 32 | % | |
Required:
1. Compute straight-line depreciation for each
year of this new machine’s life.
2. Determine expected net income and net cash flow
for each year of this machine’s life.
3. Compute this machine’s payback period, assuming
that cash flows occur evenly throughout each year.
4. Compute this machine’s accounting rate of
return, assuming that income is earned evenly throughout each
year.
5. Compute the net present value for this machine
using a discount rate of 6% and assuming that cash flows occur at
each year-end. (Hint: Salvage value is a cash inflow at
the end of the asset’s life.)
In: Accounting
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information:
| Present Truck |
New Truck |
|||||
| Purchase cost new | $ | 33,000 | $ | 42,000 | ||
| Remaining book value | $ | 20,000 | - | |||
| Overhaul needed now | $ | 19,000 | - | |||
| Annual cash operating costs | $ | 16,000 | $ | 14,500 | ||
| Salvage value-now | $ | 9,000 | - | |||
| Salvage value-five years from now | $ | 8,000 | $ | 8,000 | ||
If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above.
The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 6% discount rate.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the net present value of the “keep the old truck” alternative?
2. What is the net present value of the “purchase the new truck” alternative?
3. Should Bilboa Freightlines keep the old truck or purchase the new one?
In: Accounting
Greensboro Company purchased a machine five years ago for $350,000. On its tax return, Greensboro depreciated the asset using the straight-line method to a zero salvage value over ten years. Now, this used machine could be sold for $120,000.
A new machine has recently become available that will cost $950,000 and last for five years. If purchased, the new machine will save $300,000 per year in before tax operating costs and be depreciated by the straight-line method over five years to a zero salvage value for income tax purposes..
At the end of five years, Greensboro estimates the new machine could be sold for $50,000 while the old machine, if kept, would only sell for $18,000.
Greensboro requires a 15% after-tax rate of return and its relevant income tax rate is 30%.
No excel if possible
In: Finance
The controller of Tri Con Global Systems Inc. has developed a new costing system that traces the cost of activities to products. The new system is able to measure post-manufacturing activities, such as selling, promotional, and distribution activities, and allocate these activities to products in a manner that provides a more complete view of the company's product costs. This system produces better strategic information about the relative profitability of product lines. In the course of implementing the new costing system, the controller realized that the company's current period GAAP net income would increase significantly if the new product cost information were used for inventory valuation on the financial statements. The controller has been under intense pressure to improve the company's net income, and this would be an easy and effective way for her to help meet the company's short-term net income goals. As a result, she has decided to use the new costing system to determine GAAP net income. Instructions: Answer the questions below using 150 words or more for both questions. After this, make sure to reply to one of your peer's responses using 50 words or more. Pencil Why does the company's net income increase when the new costing system is applied? Pencil Is the controller acting ethically by using the new costing system for GAAP net income? Explain your answer.
In: Statistics and Probability
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information:
|
Present Truck |
New Truck |
|||||
| Purchase cost new | $ | 31,000 | $ | 39,000 | ||
| Remaining book value | $ | 18,000 | - | |||
| Overhaul needed now | $ | 17,000 | - | |||
| Annual cash operating costs | $ | 16,000 | $ | 13,500 | ||
| Salvage value-now | $ | 8,000 | - | |||
| Salvage value-five years from now | $ | 7,000 | $ | 8,000 | ||
If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above.
The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 11% discount rate.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the net present value of the “keep the old truck” alternative?
2. What is the net present value of the “purchase the new truck” alternative?
3. Should Bilboa Freightlines keep the old truck or purchase the new one?
In: Accounting
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information:
| Present Truck |
New Truck |
|||||
| Purchase cost new | $ | 30,000 | $ | 39,000 | ||
| Remaining book value | $ | 17,000 | - | |||
| Overhaul needed now | $ | 16,000 | - | |||
| Annual cash operating costs | $ | 15,500 | $ | 14,000 | ||
| Salvage value-now | $ | 9,000 | - | |||
| Salvage value-five years from now | $ | 8,000 | $ | 10,000 | ||
If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above.
The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 9% discount rate.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the net present value of the “keep the old truck” alternative?
2. What is the net present value of the “purchase the new truck” alternative?
3. Should Bilboa Freightlines keep the old truck or purchase the new one?
In: Accounting
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information:
| Present Truck |
New Truck |
|||||
| Purchase cost new | $ | 27,000 | $ | 36,000 | ||
| Remaining book value | $ | 14,000 | - | |||
| Overhaul needed now | $ | 13,000 | - | |||
| Annual cash operating costs | $ | 14,000 | $ | 11,500 | ||
| Salvage value-now | $ | 9,000 | - | |||
| Salvage value-five years from now | $ | 5,000 | $ | 8,000 | ||
If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above.
The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 13% discount rate.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the net present value of the “keep the old truck” alternative?
2. What is the net present value of the “purchase the new truck” alternative?
3. Should Bilboa Freightlines keep the old truck or purchase the new one?
In: Accounting
Saskatoun Shoes Inc. is a large footwear manufacturer located in Saskatoon, Saskatchewan. It sells its products to wholesalers across Canada and internationally. Currently, the production process has a scrap rate of 16% and a return rate of 2%. Scrap costs are related to wasted material and are usually $14 per unit. Warranty costs average $40 per unit returned. The company is looking to invest in new equipment to improve its production processes and the quality of their shoes. It has the following three options to choose from. Your role is to help the company make the right choice.
Option 1: Invest $500,000 in new equipment. The new process will require an additional cost of $1.5 raw material per unit produced. However, it will reduce scrap return 40% from current levels.
Option 2: Invest $175,000 in new equipment. The new process will require an additional cost of $3 raw material per unit produced. However, it will reduce scrap return 94% from current levels.
Option 3: Invest $ 2.2 million in new equipment. The new process will require no additional cost of raw material per unit produced. However, it will reduce scrap return 50% from current levels.
Q Which option would you recommend if the current production level is 1.5 million units?
In: Accounting
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information:
| Present Truck |
New Truck |
|||||
| Purchase cost new | $ | 28,000 | $ | 38,000 | ||
| Remaining book value | $ | 15,000 | - | |||
| Overhaul needed now | $ | 14,000 | - | |||
| Annual cash operating costs | $ | 14,500 | $ | 13,000 | ||
| Salvage value-now | $ | 10,000 | - | |||
| Salvage value-five years from now | $ | 9,000 | $ | 12,000 | ||
If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above.
The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 13% discount rate.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the net present value of the “keep the old truck” alternative?
2. What is the net present value of the “purchase the new truck” alternative?
3. Should Bilboa Freightlines keep the old truck or purchase the new one?
In: Accounting
Problem 13-28 Net Present Value Analysis [LO13-2]
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information:
| Present Truck |
New Truck |
|||||
| Purchase cost new | $ | 33,000 | $ | 40,000 | ||
| Remaining book value | $ | 24,000 | - | |||
| Overhaul needed now | $ | 23,000 | - | |||
| Annual cash operating costs | $ | 22,000 | $ | 20,500 | ||
| Salvage value-now | $ | 7,000 | - | |||
| Salvage value-five years from now | $ | 25,000 | $ | 14,000 | ||
If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above.
The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 8% discount rate.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the net present value of the “keep the old truck” alternative?
2. What is the net present value of the “purchase the new truck” alternative?
3. Should Bilboa Freightlines keep the old truck or purchase the new one?
In: Accounting