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acct 212 home work 8 chapter 25

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acct 212 home work 8 chapter 25

1.

award:

3 out of

3.00 points

Exercise 25-1 Payback period computation; even cash flows L.O. 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 $300,000 and have a useful life of four years. The system yields an incremental after-tax income of $86,538 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $12,000. (Round your intermediate calculations to the nearest dollar amount and final answer to 2 decimal places.)

b.

A machine costs $180,000, has a $16,000 salvage value, is expected to last nine years, and will generate an after-tax income of $47,000 per year after straight-line depreciation. (Round your intermediate calculations to the nearest dollar amount and final answer to 2 decimal places.)

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Difficulty: Medium

Exercise 25-1 Payback period computation; even cash flows L.O. P1

2.

award:

2 out of

2.00 points

Exercise 25-2 Payback period computation; uneven cash flows L.O. P1

Wenro Company is considering the purchase of an asset for $70,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year.

Year 1

Year 2

Year 3

Year 4

Year 5

Total

Net cash flows

$

20,000

$

10,000

$

20,000

$

30,000

$

9,000

$

89,000

Compute the payback period for this investment. (Round your intermediate calculations to 3 decimal places and final answer to 1 decimal place.)

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Difficulty: Medium

Exercise 25-2 Payback period computation; uneven cash flows

3.

award:

2 out of

2.00 points

Exercise 25-3 Payback period computation; declining-balance depreciation L.O. P1

A machine can be purchased for $320,000 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 $60,000 salvage value.

Year 1

Year 2

Year 3

Year 4

Year 5

Net incomes

$

22,000

$

52,000

$

102,000

$

77,000

$

202,000

Compute the machine’s payback period (ignore taxes). (Round your intermediate calculations to 3 decimal places and final answer to 2 decimal places.)

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Difficulty: Medium

Exercise 25-3 Payback period computation; declining-balance depreciation L.O. P1

Learning Objective: 25-P1 Compute payback period and describe its use.

4.

award:

2 out of

2.00 points

Exercise 25-4 Accounting rate of return L.O. P2

A machine costs $500,000 and is expected to yield an after-tax net income of $19,000 each year. Management predicts this machine has a 10-year service life and a $100,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return. (Round your answer to the nearest whole number. Omit the “%” sign in your response.)

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Difficulty: Medium

Exercise 25-4 Accounting rate of return L.O. P2

Learning Objective: 25-P2 Compute accounting rate of return and explain its use.

5.

award:

3 out of

3.00 points

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

K2B 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 $160,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 64,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.

Sales

$

100,000

Costs

Materials, labor, and overhead (except depreciation)

53,000

Depreciation on new equipment

13,333

Selling and administrative expenses

10,000

Total costs and expenses

76,333

Pretax income

23,667

Income taxes (50%)

11,834

Net income

$

11,833

1.

Compute the payback period. (Round your answer to 2 decimal places.)

2.

Compute the accounting rate of return for this equipment. (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

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Difficulty: Medium

Learning Objective: 25-P2 Compute accounting rate of return and explain its use.

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

Learning Objective: 25-P1 Compute payback period and describe its use.

.

award:

3 out of

3.00 points

Exercise 25-6 Computing net present value L.O. P3|

K2B 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 $384,000 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 9% return on this investment. The company expects to sell 153,600 units of the equipment’s product each year. The expected annual income related to this equipment follows. (Use .mhhe.com/connect/0078110874/Images/tableb.3.jpg”>Table B.3)

Sales

$

240,000

Costs

Materials, labor, and overhead (except depreciation)

84,000

Depreciation on new equipment

96,000

Selling and administrative expenses

24,000

Total costs and expenses

204,000

Pretax income

36,000

Income taxes (30%)

10,800

Net income

$

25,200

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. Omit the “$” sign in your response.)

rev: 08_13_2011

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Difficulty: Medium

Exercise 25-6 Computing net present value L.O. P3|

Learning Objective: 25-P3 Compute net present value and describe its use.

7.

award:

2.40 out of

4.00 points

Exercise 25-8 NPV and profitability index L.O. P3

Following is information on two alternative investments being considered by Jin Company. The company requires a 8% return from its investments. (Use .mhhe.com/connect/0078110874/Images/tableb.1.jpg”>Table B.1)

Project A

Project B

Initial investment

$

(177,325

)

$

(141,960

)

Expected net cash flows in year:

1

49,000

28,000

2

41,000

48,000

3

82,295

67,000

4

81,400

77,000

5

61,000

31,000

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. Omit the “$” sign in your response.)

1(b)

For each alternative project compute the profitability index. (Round “PV Factor” to 4 decimal places. Round your intermediate and final answers to the nearest dollar amount.)

2

Assume If the company can only select one project, which should it choose?

rev: 08_13_2011

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Difficulty: Medium

Exercise 25-8 NPV and profitability index L.O. P3

Learning Objective: 25-P3 Compute net present value and describe its use.

8.

award:

1 out of

3.00 points

Exercise 25-11 Scrap or rework L.O. A1

A company must decide between scrapping or reworking units that do not pass inspection. The company has 17,000 defective units that cost $5.30 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 $9.90 each. If the units are sold as is, the company will also be able to build 17,000 replacement units at a cost of $5.30 each, and sell them at the full price of $9.90 each.

(1)

What is the incremental income from selling the units as scrap? (Omit the “$” sign in your response.)

(2)

What is the incremental income from reworking and selling the units? (Omit the “$” sign in your response.)

(3)

What must the company decide?

rev: 05_02_2012

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Worksheet

Difficulty: Medium

Exercise 25-11 Scrap or rework L.O. A1

Learning Objective: 25-A1 Evaluate short-term managerial decisions using relevant costs.

9.

award:

4 out of

4.00 points

Exercise 25-12 Keep or replace L.O. A1

Xu 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 $33,100 per year for this machine. Information on two alternative replacement machines follows.

Alternative A

Alternative B

Cost

$

124,000

$

112,000

Variable manufacturing costs per year

22,900

11,000

Calculate the total change in net income if Alternative A is adopted. (Input all amounts as positive values, except cash outflows and any negative total change in net income which should be indicated by a minus sign. Omit the “$” sign in your response.)

Calculate the total change in net income if Alternative B is adopted. (Input all amounts as positive values, except cash outflows and any negative total change in net income which should be indicated by a minus sign. Omit the “$” sign in your response.)

Should Xu keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xu purchase?

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Worksheet

Exercise 25-12 Keep or replace L.O. A1

Learning Objective: 25-A1 Evaluate short-term managerial decisions using relevant costs.

10.

award:

4 out of

4.00 points

Exercise 25-13 Decision to accept additional business or not L.O. A1

Feist 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 $12 per unit. (Leave no cells blank – be certain to enter “0” wherever required. Input all amounts as positive values. Omit the “$” sign in your response.)

Should the company accept or reject the offer?

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Difficulty: Medium

Exercise 25-13 Decision to accept additional business or not L.O. A1

Learning Objective: 25-A1 Evaluate short-term managerial decisions using relevant costs.

11.

award:

4 out of

4.00 points

Exercise 25-14 Make or buy decision L.O. A1

Santos Company currently manufactures one of its crucial parts at a cost of $5.40 per unit. This cost is based on a normal production rate of 50,000 units per year. Variable costs are $3.50 per unit, fixed costs related to making this part are $50,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Santos is considering buying the part from a supplier for a quoted price of $3.10 per unit guaranteed for a three-year period.

Calculate the total incremental cost of making 50,000 units. (Omit the “$” sign in your response.)

Calculate the total incremental cost of buying 50,000 units. (Omit the “$” sign in your response.)

Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

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Worksheet

Difficulty: Medium

Exercise 25-14 Make or buy decision L.O. A1

Learning Objective: 25-A1 Evaluate short-term managerial decisions using relevant costs.

12.

award:

3 out of

3.00 points

Exercise 25-15 Sell or process decision L.O. A1

Cantrell Company has already manufactured 23,000 units of Product A at a cost of $25 per unit. The 23,000 units can be sold at this stage for $520,000. Alternatively, the units can be further processed at a $400,000 total additional cost and be converted into 4,100 units of Product B and 7,500 units of Product C. Per unit selling price for Product B is $76 and for Product C is $52.

1.

Calculate the Incremental Net Income (or loss) if processed further. (Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)

2.

Indicate whether the 23,000 units of Product A should be processed further or not.

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Worksheet

Difficulty: Medium

Exercise 25-15 Sell or process decision L.O. A1

Learning Objective: 25-A1 Evaluate short-term managerial decisions using relevant costs.

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