Business

Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your answers to 2 decimal places.)

 

A machine can be purchased for $210,000 and used for 5 years, yielding the following net incomes. In projecting net incomes, double-declining balance depreciation is applied, using a 5-year life and a zero salvage value.

 

  Year 1 Year 2 Year 3 Year 4 Year 5
  Net incomes   $ 13,000     $ 28,000     $ 53,000     $ 40,500     $ 103,000  

 

 

Compute the machine’s payback period (ignore taxes). (Round your intermediate calculations to 3 decimal places and payback period answer to 3 decimal places.)

 

Exercise 25-3 Payback period computation; even cash flows LO P1

Compute the payback period for each of these two separate investments:

 

 

a. A new operating system for an existing machine is expected to cost $240,000 and have a useful life of four years. The system yields an incremental after-tax income of $69,230 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $9,000.
b. A machine costs $180,000, has a $13,000 salvage value, is expected to last seven years, and will generate an after-tax income of $38,000 per year after straight-line depreciation.

 

Exercise 25-4 Accounting rate of return LO P2

 

A machine costs $300,000 and is expected to yield an after-tax net income of $9,000 each year. Management predicts this machine has a 9-year service life and a $60,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return. (Round your answer to 2 decimal places.)

 

Exercise 25-5 Payback period and accounting rate of return on investment LO P1, P2

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $480,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 192,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.

 

 

       
  Sales $ 300,000  
  Costs      
    Materials, labor, and overhead (except depreciation)   160,000  
    Depreciation on new equipment   40,000  
    Selling and administrative expenses   30,000  
 


 
  Total costs and expenses   230,000  
 


 
  Pretax income   70,000  
  Income taxes (30%)   21,000  
 


 
  Net income $ 49,000  
 




 

Exercise 25-6 Computing net present value LO P3

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $368,000 with a 4-year life and no salvage value. It will be depreciated on a straight-line basis. K2B Co. concludes that it must earn at least a 8% return on this investment. The company expects to sell 147,200 units of the equipment’s product each year. The expected annual income related to this equipment follows. (PV of $1FV of $1PVA of $1, and FVA of $1(Use appropriate factor(s) from the tables provided.)

 

       
  Sales $ 230,000  
  Costs      
     Materials, labor, and overhead (except depreciation)   81,000  
     Depreciation on new equipment   92,000  
     Selling and administrative expenses   23,000  
 


 
  Total costs and expenses   196,000  
 


 
  Pretax income   34,000  
  Income taxes (30%)   10,200  
 


 
  Net income $ 23,800  
 




 

 

 

Compute the net present value of this investment. (Round “PV Factor” to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount.)

 

 

Exercise 25-8 NPV and profitability index LO P3

Following is information on two alternative investments being considered by Jolee Company. The company requires a 6% return from its investments. (FV of $1PV of $1FVA of $1PVA of $1FVAD of $1 and PVAD of $1). (Use appropriate factor(s) from the tables provided.))

 

  Project A Project B
  Initial investment   $ (186,325 )     $ (148,960 )  
  Expected net cash flows in year:                    
1     53,000         33,000    
2     50,000         59,000    
3     92,295         57,000    
4     94,400         79,000    
5     56,000         29,000    

 

 

1(a) For each alternative project compute the net present value. (Round “PV Factor” to 4 decimal places. Round your intermediate and final answers to the nearest dollar amount.)

 

Exercise 25-11 Keep or replace LO A1

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $38,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $48,000. Variable manufacturing costs are $33,000 per year for this machine. Information on two alternative replacement machines follows.

 

  Alternative A Alternative B
  Cost $ 117,000   $ 117,000  
  Variable manufacturing costs per year   22,100     10,500  

 

 

Calculate the total change in net income if Alternative A is adopted. (Cash outflows should be indicated by a minus sign.)

 

 

Exercise 25-12 Scrap or rework LO A1

A company must decide between scrapping or reworking units that do not pass inspection. The company has 10,000 defective units that cost $5.70 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $3.50 each and then sold for the full price of $9.50 each. If the units are sold as is, the company will have to build 10,000 replacement units at a cost of $5.70 each, and sell them at the full price of $9.50 each.

 

(1) What is the incremental income from selling the units as scrap and reworking and selling the units?

 

 

Exercise 25-13 Decision to accept additional business or not LO A1

Farrow Co. expects to sell 500,000 units of its product in the next period with the following results.

 

         
  Sales (500,000 units)   $ 7,500,000  
  Costs and expenses        
      Direct materials     1,000,000  
      Direct labor     2,000,000  
      Overhead     500,000  
      Selling expenses     750,000  
      Administrative expenses     1,285,000  
   


 
  Total costs and expenses     5,535,000  
   


 
  Net income   $ 1,965,000  
   




 

 

The company has an opportunity to sell 50,000 additional units at $12 per unit. The additional sales would not affect its current expected sales. Direct materials and labor costs per unit would be the same for the additional units as they are for the regular units. However, the additional volume would create the following incremental costs: (1) total overhead would increase by 16% and (2) administrative expenses would increase by $215,000.

 

 

Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit.

 

Exercise 25-14 Make or buy decision LO A1

Gilberto Company currently manufactures one of its crucial parts at a cost of $3.30 per unit. This cost is based on a normal production rate of 80,000 units per year. Variable costs are $1.80 per unit, fixed costs related to making this part are $80,000 per year, and allocated fixed costs are $40,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Gilberto is considering buying the part from a supplier for a quoted price of $3.00 per unit guaranteed for a three-year period.

 

 

Calculate the total incremental cost of making 80,000 units. (Round cost per unit answers to 2 decimal places.)

 

 

 

Exercise 25-15 Sell or process decision LO A1

Cobe Company has already manufactured 25,000 units of Product A at a cost of $25 per unit. The 25,000 units can be sold at this stage for $410,000. Alternatively, the units can be further processed at a $240,000 total additional cost and be converted into 5,600 units of Product B and 11,400 units of Product C. Per unit selling price for Product B is $106 and for Product C is $54.

 

 

1. Prepare an analysis that shows whether the 25,000 units of Product A should be processed further or not.

 

Exercise 25-16 Analysis of income effects from eliminating departments LO A1

[The following information applies to the questions displayed below.]

Suresh Co. expects its five departments to yield the following income for next year.

 

  Dept. M Dept. N Dept. O Dept. P Dept. T
  Sales   $ 41,000     $ 15,700       $ 34,500     $ 38,000       $ 15,700    
  Expenses                                              
    Avoidable     4,100       13,800         11,300       7,000         18,400    
    Unavoidable     17,000       7,700         2,700       14,000         5,400    
   


   



   


   



   



 
    Total expenses     21,100       21,500         14,000       21,000         23,800    
   


   



   


   



   



 
  Net income (loss)   $ 19,900   $ (5,800 )     $ 20,500   $ 17,000     $ (8,100 )  
   




   






   




   






   






 

 

 

Recompute and prepare the departmental income statements (including a combined total column) for the company under each of the following separate scenarios.

 

 

 

Exercise 25-17 Sales mix determination and analysis LO A1

Colt Company owns a machine that can produce two specialized products. Production time for Product TLX is two units per hour and for Product MTV is five units per hour. The machine’s capacity is 2,000 hours per year. Both products are sold to a single customer who has agreed to buy all of the company’s output up to a maximum of 3,400 units of Product TLX and 1,980 units of Product MTV. Selling prices and variable costs per unit to produce the products follow.

 

  Product TLX   Product MTV  
  Selling price per unit   $ 11.50       $ 6.90    
  Variable costs per unit     3.45         4.14    

 

Determine the company’s most profitable sales mix and the contribution margin that results from that sales mix. (Round cost per unit answers to 2 decimal places.)

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