Capital Budgeting

Problem 1

Precision Instruments operates a machine that was purchased at a cost of $580,000 three years ago. Its current market value is $240,000 less than the original purchase price. An improved version of the equipment is now available for $600,000. The firm has spent $20,000 on a study examining the feasibility of replacing the old machine with the new and found that the new machine is capable of performing the same functions as the old one. Both machines belong to CCA class 10 (CCA rate = 30%) and have an expected remaining useful life of four years, but while the older machine will be worth only $60,000 by that time, the new machine can be sold for $250,000 in four years. Management believes that the company will have other class 10 assets in four years when the new equipment would be sold. The cost of operating the old machine is expected to be $100,000 next year (i.e. t = 1) with this cost increasing at 4% per year over the next three years. Management estimates that the cost of operating the new machine will be $50,000 in its first year of operation (i.e. t = 1) and will increase at the same rate as the old machine. In addition, the more efficient new machine will immediately reduce the amount of net working capital (NWC) required by $30,000. The firm’s marginal corporate tax rate is 35% and the required rate of return is 12%. Should the firm replace the machine?

Dog Up! Franks is looking at a new sausage system with an installed cost of $507086. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $73250. The sausage system will save the firm $170394 per year in pretax operating costs, and the system requires an initial investment in net working capital of $37679. If the tax rate is 32 percent and the discount rate is 11 percent, what is the NPV of this project?

8. If the cost of goods sold is $100,000, sales are $200,000, merchandise purchases are $37,000, and ending merchandise inventory is $10,000, then the beginning merchandise inventory must be:

9.

A merchandiser plans to sell 14,600 units next month at a selling price of $110 per unit. It also gathered the following cost estimates for next month:

What is the estimated net operating income for next month?

10. if the net operating income is $10,000, the contribution margin is $40,000, and the variable expenses are $31,000, then the sales must be:

11. If the conversion costs are $70,000, manufacturing overhead costs are $21,500, and direct material costs are $37,000, then the prime costs must be:

Periodic Inventory by Three Methods; Cost of Merchandise Sold

The units of an item available for sale during the year were as follows:

There are 80 units of the item in the physical inventory at December 31. The periodic inventory system is used.

Determine the inventory cost and the cost of merchandise sold by three methods. Round interim calculations to one decimal and final answers to the nearest whole dollar.

8. Project R has a cost of $ 10,000 and in expected to produce cash flows per year of $ 4,000 for 3 years. Project S has a cost of $20,000 and in expected to produce cash flows of $ 7,000 per year for 4 years. Calculate the 2 projects' NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 11%. Which project should be selected ?

1. What is an opportunity cost? How does the idea relate to the definition of economics? Which of the following decisions would entail the greater opportunity cost: Allocating a square block in the heart of New York City for a surface parking lot or allocating a square block at the edge of a typical suburb for such a lot? Explain.

2. Cite three examples of recent decisions that you made in which you, at least implicitly, weighed marginal cost and marginal benefit.

3. What is meant by the term “utility” and how does the idea relate to purposeful behavior?

Equipment acquired on January 8 at a cost of $101,300 has an estimated useful life of 13 years, has an estimated residual value of $9,000, and is depreciated by the straight-line method.

a. What was the book value of the equipment at December 31 the end of the fourth year?
$

b. Assume that the equipment was sold on April 1 of the fifth year for $64,700.

1. Journalize the entry to record depreciation for the three months until the sale date. If an amount box does not require an entry, leave it blank. Round your answers to the nearest whole dollar if required.

2. Journalize the entry to record the sale of the equipment. If an amount box does not require an entry, leave it blank. Do not round intermediate calculations.

You are analyzing the cost of debt for a firm. You know that the firm’s 14-year maturity, 6.6 percent coupon bonds are selling at a price of $964.67. The bonds pay interest semiannually. If these bonds are the only debt outstanding for the firm, answer the following questions.   What is the current YTM of the bonds? What is the after-tax cost of debt for this firm if it has a marginal tax rate?

1) Which of the following statements is true?

A. A common cost can be easily traced to a cost object. B. Some of the prime costs are period costs. C. Discretionary fixed costs may not be altered in the short term by current managerial decisions. D. All sunk costs should be ignored in making a decision. E. None of the product costs are fixed costs.

2)

Basil company produces special raincoats. Their manufacturing overhead costs are all fixed. The cost structure of all expenses are inflexible, except sales force cost. The company has no sales force of its own; at the moment, it relies completely on independent sales agents to market its products.

Starting in 2018, Basil is considering employing its own sales force. In their plan, salespersons will be paid a small fixed salary and a commission lower than the current. Compared with year 2017, such a plan will increase the fixed marketing expenses but reduce commissions as follows:

Determine the 2018 sales at which net income would be equal regardless of whether Basil Company sells through agents (at the 2017 commission rate) or employs its own sales force (as the 2018 plan suggested). Choose the closest answer.

a)51,750 b) 15,000 c) 28,250 d) 20,250 e)19,538

Show work

Dudek Industries uses a job order costing system and applies Manufacturing Overhead (MOH) based on Direct Labor Hours (DLHs) at a predetermined overhead rate of $8.55 per DLH. The company provided the following information for the most recent month of operations:

Before closing any over- or under-applied MOH, the unadjusted Cost of Goods Sold balance for the month would be closest to:

None of the above

Rosemary Corporation uses direct labor-hours to allocate their manufactuing overhead cost with capacity-based method. At the end of year, they attribute the under/over-applied manufacuturing overhead entirely to cost of goods sold. They find that they need to credit cost of goods sold by $25650 for this adjustment.

None of the above

Bob owns 1,000 shares of IBM that he acquired in 2012 for a cost of $35,000. Bob buys 10 of the IBM calls (IBM 75 July 20, 2018 @$4). Chang sells 10 IBM calls (IBM 75 July 20, 2018 @$4). Chang also owns 1,000 shares of IBM that she purchased in 2016 for $27,000. On July 20, IBM is trading for $80 per share so all of the options are exercised. What are the taxable results to both Bob and Chang?