Managerial Accounting Week 7 homework 3 questions

Question 1

Perit Industries has $130,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:

	Project A		Project B
Cost of equipment required	$	130,000	$	0
Working capital investment required	$	0	$	130,000
Annual cash inflows	$	22,000	$	33,000
Salvage value of equipment in six years	$	8,300	$	0
Life of the project		6 years		6 years

The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries’ discount rate is 14%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the net present value of Project A. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.)

2. Compute the net present value of Project B. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.)

3. Which investment alternative (if either) would you recommend that the company accept?

	1. Net present value project A 2. Net present value project B 3. Which investment alternative (if either) would you recommend that the company accept?

Question 2

Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 24% each of the last three years. Casey is considering a capital budgeting project that would require a $4,300,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 20%. The project would provide net operating income each year for five years as follows:

Sales			$	4,200,000
Variable expenses				1,920,000
Contribution margin				2,280,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	780,000
Depreciation		860,000
Total fixed expenses				1,640,000
Net operating income			$	640,000

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. What is the project’s net present value?

2. What is the project’s internal rate of return to the nearest whole percent?

3. What is the project’s simple rate of return?

4-a. Would the company want Casey to pursue this investment opportunity?

4-b. Would Casey be inclined to pursue this investment opportunity?

What is the project’s net present value? (Round your final answer to the nearest whole dollar amount.)

	Net present value

What is the project’s internal rate of return? (Round your answer to whole decimal place i.e. 0.123 should be considered as 12%.)

	Internal rate of return %

What is the project’s simple rate of return? (Round percentage answer to 1 decimal place.)

	Simple rate of return %

Would the company want Casey to pursue this investment opportunity?

	Yes No

Would Casey be inclined to pursue this investment opportunity?

	Yes No

Question 3

In five years, Kent Duncan will retire. He is exploring the possibility of opening a self-service car wash. The car wash could be managed in the free time he has available from his regular occupation, and it could be closed easily when he retires. After careful study, Mr. Duncan determined the following:

• A building in which a car wash could be installed is available under a five-year lease at a cost of $3,300 per month.
• Purchase and installation costs of equipment would total $305,000. In five years the equipment could be sold for about 10% of its original cost.
• An investment of an additional $9,500 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere.
• Both a wash and a vacuum service would be offered. Each customer would pay $1.53 for a wash and $.85 for access to a vacuum cleaner.
• The only variable costs associated with the operation would be 7.5 cents per wash for water and 10 cents per use of the vacuum for electricity.
• In addition to rent, monthly costs of operation would be: cleaning, $1,100; insurance, $75; and maintenance, $1,645.
• Gross receipts from the wash would be about $1,836 per week. According to the experience of other car washes, 60% of the customers using the wash would also use the vacuum.

Mr. Duncan will not open the car wash unless it provides at least a 12% return.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation.

2-a. Determine the net present value using the net present value method of investment analysis.

2-b. Would you advise Mr. Duncan to open the car wash?

Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation.

	Auto wash cash receipts Vacuum cash receipts Total cash receipts Less cash disbursements: Water Electricity Rent Cleaning Insurance Maintenance Total cash disbursements Annual net cash flow from operations

Determine the net present value using the net present value method of investment analysis. (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

	Net present value

Would you advise Mr. Duncan to open the car wash?

	Yes No

Question 4

Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information:

	Present Truck			New Truck
Purchase cost new	$	25,000		$	30,000
Remaining book value	$	11,000			–
Overhaul needed now	$	11,000			–
Annual cash operating costs	$	12,500		$	10,000
Salvage value-now	$	5,000			–
Salvage value-five years from now	$	4,000		$	5,000

If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above.

The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 11% discount rate.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. What is the net present value of the “keep the old truck” alternative?

2. What is the net present value of the “purchase the new truck” alternative?

3. Should Bilboa Freightlines keep the old truck or purchase the new one?

What is the net present value of the “keep the old truck” alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

	Net present value

What is the net present value of the “purchase the new truck” alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

	Net present value

Should Bilboa Freightlines keep the old truck or purchase the new one?

	Purchase the new truck Keep the old truck