Managerial Accounting 5 Questions and Exercises due
Saturday at Noon CDT
Exercise 1
Emerald Bay Furniture Company’s managers have gathered
all of the capital investment proposals for the year, and they are ready to
make their final selections. The following proposals and related
rate-of-return amounts were received during the period:
Project
Capital Investment
Rate of Return
AB
$450,000
19%
CD
500,000
28%
EF
654,000
12%
GH
800,000
32%
IJ
320,000
23%
KL
240,000
18%
MN
180,000
16%
OP
400,000
26%
QR
560,000
14%
ST
1,200,000
22%
UV
1,600,000
20%
Assume that the company’s minimum rate of return is 15
percent of the $5,000,000 is available for capital investments during the year.
List
the acceptable capital investment proposals in the order of probability.Which
proposals should be selected for this year? Why?
Exercise 9
Eco Wet, Inc., a manufacturer of gears for lawn sprinklers,
is thinking about adding a new fully automated machine. This machine can
produce gears that the company now produces on its third shift. The
machine has an estimated useful life of ten years and will cost $500,000.
The residual value of the new machine is $50,000. Gross cash revenue from
the machine will be about $420,000 per year, and related operating expenses,
including depreciation, should total $400,000. Depreciation is estimated
to be $80,000 annually. The payback period should be five years or
less. Use the payback period method to determine whether the company
should invest in the new machine. Show the computations that support your
answer.
Exercise 12
Assume the same facts for Exercise 11 for Sound Perfection,
Inc. Management decided that the only capital investments the yield at least a
25 percent return will be accepted. Using the accounting rate-of-return
method, decide whether the company should invest in the machine. Show the
computations that support your method.
(Exercise 11: Sound Perfection, Inc., a manufacturer of
stereo speakers, is thinking about adding a new machine. This machine can
produce speaker parts that the company now buys from outsiders. The
machine has an estimated useful life of 14 years and will cost $450,000.
The residual value of the new machine is $50,000. Gross cash revenue from the
machine will be about $300,000 per year, and related cash expenses should total
$210,000. Depreciation is estimated to be $30,000 annually. Sound
Perfection’s management has decided that only capital investments that yield at
least a 20 percent return will be accepted. Using the accounting
rate-of-return method, decide whether the company should invest in the
machine. Show the computations that support your decision.)
Problem 4
Edge Company’s production vice president believes keeping
up-to-date with technological changes that makes the company successful and
feels that a machine introduced recently would fill an important need.
The machine has an estimated useful life of four years, a purchase price of
$250,000, and a residual value of $25,000. The company controller has
estimated average annual net income of $11,250 and the following cash flows for
the new machine:
Year
Cash
Inflows
Cash
Outflows
Net
Cash Flows
1
$325,000
250,000
$75,000
2
320,000
250,000
70,000
3
315,000
250,000
65,000
4
310,000
250,000
60,000
The company uses a 12 percent minimum rate of return and a
three-year payback period for capital investment evaluation purposes.
REQUIRED
Analyze
the data about the machine. Use the following evaluation approaches
in your analysis:
The
net present value method (Round to the nearest dollar.)The
accounting rate-of-return method. (Round percentage to one decimal place.)The
payback period method (Round to one decimal place.)
Summarize
the information generated in requirement 1 and make a recommendation.
Problem 5
City Sights, Ltd., operates a tour and sightseeing
business. Its trademark is the use of trolley buses. Each vehicle
has its own identity and is specially made for the company. Gridlock, the
oldest bus, was purchased 15 years ago and has 5 years of its estimated useful
life remaining. The company paid $250,000 for Gridlock, and the business
could be sold today for $20,000. Gridlock is expected to generate average
annual net cash inflows of $25,000 for the remainder of its estimated useful
life.
Management wants to replace Gridlock with a modern looking vehicle called
Phantom. Phantom has a purchase price of $140,000 and an estimated useful
life of 20 years. Net cash inflows for Phantom are projected to be
$40,000 per year.
Assume that (1) all cash flows occur at year end, (2) each vehicle’s residual
value equals 10 percent of its purchase price, and (3) the minimum rate of
return is 10 percent.
REQUIRED
Compute
the present value of future cash flows from Gridlock.Compute
the net present value of cash flows if Phantom were purchased.Show
City Sights keep Gridlock or purchase Phantom?
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