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P.4 Eldon Engine, Inc., produces engines for the watercraft industry. An outside manufacturer has offered to supply several component parts used in the engine assemblies, which are currently being produced by Eldon. The supplier will charge Eldon $290 per engine for the set of parts. Eldon’s current costs for those part sets are direct materials, $150; direct labor, $70; and manufacturing overhead applied at 100% of direct labor. Variable manufacturing overhead is considered to be 20% of the total, and fixed overhead will not change if the part sets are acquired from the outside supplier.
If Eldon Engine, Inc., accept the offer to purchase the parts, what would be the net advantage or disadvantage per engine of purchasing?
P.7 *Required Charts6.4 and 6.5 are at the bottom of the page*
South Bay Manufacturing Ltd. is considering the investment of $86,000 in a new machine. The machine will generate cash flow of $15,000 per year for each year of its eleven-year life and will have a salvage value of $8,000 at the end of its life. The company’s cost of capital is 10%.
(a) using the Table 6-4 and Table 6-5, calculate the net present value of the proposed investment. (Ignore income taxes.) (Round pv factor to 4 decimal places, intermediate calculations and the final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)
Net present value =
P.9 Lake Regional Hospital is considering the acquisition of a new diagnostic scanning machine. The investment required to get the machine operational will be $1,897,000. The machine will be capable of performing 8,900 scanning procedures per year, but based on the experience of other hospitals, management estimates that the machine will be used at 80% of its capacity. The hospital’s cost of capital is 10%; the machine has an estimated useful life of eight years and no salvage value. Use the appropriate factors from Table 6-5 to answer the following questions.
(a)Assuming a constant cash flow every year, calculate the annual net cash flow required from the scanner if the IRR of the investment is to equal 10%. (Hint: The annual net cash flow requirement is an annuity.) (Round pv factor to 4 decimal places and the final answer to the nearest dollar amount. Omit the “$” sign in your response.)
Annuity required =
(b)If the direct cash costs of operating the scanner equal 46% of the annual net cash flow requirement calculated in part a, what price should the hospital charge per scanning procedure in order to achieve an 10% ROI? (Intermediate calculations and the final answer to the nearest dollar amount. Omit the “$” sign in your response.)
Price per scanning procedure =
H.1
Requirement 1:
What would be the total relevant cost per gallon that Delmar Beverage should consider in evaluating the special sales order from SaveMore? (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Total relevant cost per gallon =
Requirement 2:
How would Delmar Beverage’s daily operating income be affected by the acceptance of this offer? (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Daily increase or decrease in operating income =
Requirement 3:
Assume that Delmar Beverage is currently producing 2,275 gallons of root beer daily.
(a)What would be the total relevant cost per gallon that Delmar Beverage should consider in evaluating the special sales order from SaveMore? (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Total relevant cost per gallon =
(b) How would Delmar Beverage’s daily operating income be affected by the acceptance of this offer? (Input all amounts as positive value. Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Daily decrease or increasein operating income =
H.2
H.3
(a) Use Table 6-4 to calculate the net present value of the proposed investment in the new sewing machine. (Round pv factor to 4 decimal places and the final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)
Net present value $
(b) Calculate the present value ratio of the investment. (Round your answer to 3 decimal places.)
Present value ratio
(c)What is the internal rate of return of this investment, relative to the cost of capital? (Omit the “%” sign in your response.)
The internal rate of return of this investment is greater than, lesser than, or equal to the cost of capital of 8%.
(d) Calculate the payback period of the investment. (Round your answer to 3 decimal places.)
Payback period __________ years
H.5 – 9
5. Using Table 6-4 and Table 6-5, calculate the net present value of projects B, C, and D, using 18% as the cost of capital for Heard, Inc. (Round pv factor to 4 decimal places and the final answers to the nearest dollar amount. Negative amounts should be indicated by a minus sign. Omit the “$” sign in your response.)
Project Net present value
B =
C =
D =
6.Using Table 6-4 and Table 6-5, calculate the present value ratio for projects B, C, D, and E. (Round your answers to 2 decimal places.)
Project Present value ratio
B =
C =
D =
E =
7. Which projects would you recommend for investment if the cost of capital is 18% and
(a) $120,000 is available for investment?
Project A
Project B
Project C
Project D
Project E
8.
(b) $353,000 is available for investment? (Select all that apply.)
Project A
Project B
Project C
Project D
Project E
9.
(c) $586,000 is available for investment? (Select all that apply.)
Project A
Project B
Project C
Project D
Project E
H.10
Requirement 1:
(a) Calculate the accounting rate of return for the first year of the product. Assume straight-line depreciation. (Round your answer to the nearest whole percentage. Omit the “%” sign in your response.)
Accounting rate of return =
Requirement 2:
(a) Using Table 6-4, calculate the net present value of the product using a cost of capital of 18% and assuming that cash flows occur at the end of the respective years. (Round pv factor to 4 decimal places, do not round intermediate calculations and round the final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)
Net present value =
H.11Busy Beaver Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $110,000 investment in a machine that had an estimated useful life of five years and an estimated salvage value of $23,000. The machine was expected to increase net income (and cash flows) before depreciation expense by $28,000 per year. The criteria for approving a new investment are that it have a rate of return of 10% and a payback period of three years or less.
Requirement 1:
(a)Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. (Round your answer to 1 decimal place. Omit the “%” sign in your response.)
Accounting rate of return __________ %
Requirement 2:
(a) Calculate the payback period for this investment. (Round your answer to 2 decimal places.)
Payback period ____________ years
Requirement 3:
(a)Using Table 6-4, calculate the net present value of this investment using a cost of capital of 10%. (Round pv factor to 4 decimal places, intermediate calculations and the final answer to the nearest dollar amount. Negative amounts should be indicated by a minus sign. Omit the “$” sign in your response.)
Net present value =
E.2Braizen, Inc. produces a product with a $30 per-unit variable cost and an $80 per-unit sales price. Fixed manufacturing overhead costs are $100,000. The firm has a one-time opportunity to sell an additional 1,000 units at $60 each that would not affect its current sales. Assuming the company has sufficient capacity to produce the additional units, how would the acceptance of the special order affect net income?
Income would decrease by $30,000.
Income would increase by $30,000.
Income would increase by $140,000.
Income would increase by $40,000.
E.10Greenland Sports, Inc. has been asked to submit a bid to the National Hockey League on supplying 1,000 pairs of professional quality skates. The cost per pair of skates has been determined as follows:
Other non-manufacturing costs associated with each pair of skates are:
Assume the commission on the sale of skates to the National Hockey League would be reduced to $15 per pair and that available production capacity exists to produce the 1,000 pairs of skates. The lowest price the firm can bid is some price greater than:
$185.
$190.
$215.
$225.
E. 13Product Z sells for $18 per unit as is but if it is enhanced it can be sold for $24 per unit. The enhancement process will cost $50,000 for 10,000 units. If the 10,000 units of Product Z are sold as is without further processing, the company:
will incur an incremental profit of $10,000.
will incur an opportunity cost of $10,000.
will incur an incremental profit of $1 per unit.
will incur an incremental loss of $6 per unit.
E.14 Product X sells for $80 per unit in the marketplace and ABC Company requires a 35% minimum profit margin on all product lines. In order to compete in this market, the target cost for Product X must be equal to or lower than:
$28
$45
$52
$80
E.17 XYZ Company produces three products: A, B, and C. Product A has a contribution margin of $20 and requires 1 hour of machine time. Product B has a contribution margin of $30 and requires 2 hours of machine time. Product C has a contribution margin of $36 and requires 1.5 hours of machine time. If machine hours are considered scarce, in what product mix order should XYZ Company schedule the production of Products A, B, and C for the available machine hours?
First A, then B, then C.
First C, then A, then B.
First C, then B, then A.
First B, then C, then A.
E.24Discounting a future cash inflow at an 8% discount rate will result in a higher present value than discounting it at a:
7% rate.
8% rate.
9% rate.
all of the above
E.26 If the net present value of the investment is $8,510, then:
the rate of return is less than the cost of capital.
the present value of the cash flows are more than the investment.
the cost of capital is higher than the internal rate of return.
the present value of the cash flows is $8,510 less than the investment.
E.31 If an asset costs $16,000, has an expected useful life of 8 years, is expected to have a $2,000 salvage value and generates net annual cash inflows of $2,000 a year, the cash payback period is
8 years.
7 years.
6 years.
5 years.
E. 32-33Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow:
32. The estimated payback of the investment in the pasta equipment is:
3.0 years.
4.0 years.
6.0 years.
8.0 years.
33. The estimated accounting rate of return is:
12.5%.
18.0%.
25.0%.
33.3%.
E.34 In a capital budgeting decision, if a firm uses the net present value method and a 12% discount rate, what does a negative net present value indicate?
The proposal’s rate of return exceeds 12%.
The proposal’s rate of return is less than the minimum rate required.
The proposal earns a rate of return between 10% and 12%.
None of the above.
E.35
Requirement 1:
(a) What would be the incremental profit or loss per unit if Delta is refined into Super Delta? (Input the amount as positive value. Omit the “$” sign in your response.)
Incremental loss or profit =
(b) What would be the incremental profit or loss per unit if Pi is refined into Precision Pi? (Omit the “$” sign in your response.)
Incremental loss or profit =
Requirement 2:
(a) Should Delta be sold as is or refined into Super Delta?
(b) Should Pi be sold as is or refined into Precision Pi?
Requirement 3:
Identify any costs in the problem that are not relevant to this decision. (select one that apply)
The $752,000 cost incurred to produce the Alpha ore is not relevant.
Processing costs to refine Delta into Super Delta are not relevant.
Processing costs to refine Pi into Precision Pi are $335,200 not relevant.
Requirement 4:
What is the maximum profit that Mizzou Mining Company can expect to earn from the production of the 419,000 tons of Alpha? (Omit the “$” sign in your response.)
Maximum profit =
E.36
E.37
Increase or decrease
Loss or income
E.38Busy Beaver Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $98,000 investment in a machine that had an estimated useful life of five years and an estimated salvage value of $25,000. The machine was expected to increase net income (and cash flows) before depreciation expense by $26,000 per year. The criteria for approving a new investment are that it have a rate of return of 10% and a payback period of three years or less.
Requirement 1:
(a) Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. (Round your answer to 1 decimal place. Omit the “%” sign in your response.)
Accounting rate of return __________ %
(b) Based on this analysis, would the investment be made? Yes or No
Requirement 2:
(a) Calculate the payback period for this investment. (Round your answer to 2 decimal places.)
Payback period ________ years
(b) Based on this analysis, would the investment be made? Yes or No
Requirement 3:
(a)Using Table 6-4, calculate the net present value of this investment using a cost of capital of 10%. (Round pv factor to 4 decimal places, intermediate calculations and the final answer to the nearest dollar amount. Negative amounts should be indicated by a minus sign. Omit the “$” sign in your response.)
Net present value =
(b) Based on this analysis, would the investment be made? Yes or No
Requirement 4:
What recommendation would you make to the management of Busy Beaver Corp. about evaluating capital expenditure proposals?
The pay back period approach is the best technique.
The accounting rate of return approach is the best technique.
The net present value analytical approach is the best technique.