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Beyer Company is considering the purchase of an asset for $370,000. 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		$	86,000			$	49,000			$	70,000			$	300,000			$	12,000			$	517,000

 

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.)
	Year Cash inflow (outflow) Cumulative Net Cash Inflow (outflow) 0 $(370,000) $(370,000) 1 86,000 (284,000) 2 49,000 (235,000) 3 70,000 (165,000) 4 300,000 135,000 5 12,000 147,000 $147,000 Payback period = 3.55 years

   

A machine can be purchased for $350,000 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		$	27,000			$	42,000			$	67,000			$	54,500			$	117,000

 

Compute the machine’s payback period (ignore taxes).  (Round your intermediate calculations to 3 decimal places and payback period answer to 3 decimal places.)
	Cost $350,000 Salvage Value 0 Double Declining Balance Depreciation Year Beginning Book Value Depreciation Rate Depreciation Expense Accumulated Depreciation Ending Book Value 1 $350,000 40% $140,000 $140,000 $210,000 2 210,000 40% 84,000 84,000 126,000 3 126,000 40% 50,400 134,400 75,600 4 75,600 40% 30,240 164,640 45,360 5 45,360 Remainder 45,360 210,000 0 $350,000 Year Net income DDB Depreciation Cash inflow (outflow) Cumulative Net Cash Inflow (outflow) 0 $(350,000) $(350,000) 1 $27,000 $140,000 167,000 (183,000) 2 42,000 84,000 126,000 (57,000) 3 67,000 50,400 117,400 60,400 4 54,500 30,240 84,740 145,140 5 117,000 45,360 162,360 307,500 $307,500 Payback period = 2.486 years

 

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 five 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.

 

b.		A machine costs $170,000, has a $16,000 salvage value, is expected to last ten years, and will generate an after-tax income of $47,000 per year after straight-line depreciation.
	Payback period Choose Numerator: / Choose Denominator: = Payback period Cost of investment / Annual net cash flow = Payback period a. $300,000 / $144,138 = 2.08 years b. $170,000 / $62,400 = 2.72 years

 

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.)

 

	Accounting rate of return Choose Numerator: / Choose Denominator: = Accounting rate of return Annual after-tax net income / Annual average investment = Accounting rate of return $9,000 / $180,000 = 5.00 %

 

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

 

1.		Compute the payback period.
	Payback period Choose Numerator: / Choose Denominator: = Payback period Cost of investment / Annual net cash flow = Payback period $480,000 / $89,000 = 5.39 years
2.		Compute the accounting rate of return for this equipment
	Accounting rate of return Choose Numerator: / Choose Denominator: = Accounting rate of return Annual after-tax net income / Annual average investment = Accounting rate of return $49,000 / $240,000 = 20.42 %

   

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 $371,200 with a 6-year life and no salvage value. It will be depreciated on a straight-line basis. B2B Co. concludes that it must earn at least a 10% return on this investment. The company expects to sell 148,480 units of the equipment’s product each year. The expected annual income related to this equipment follows. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

    
 

Sales	$	232,000
Costs
Materials, labor, and overhead (except depreciation)		81,000
Depreciation on new equipment		61,867
Selling and administrative expenses		23,200
Total costs and expenses		166,067
Pretax income		65,933
Income taxes (30%)		19,780
Net income	$	46,153

  
 

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.)

 

	Chart values are based on: n = 6 i = 10% Select chart Amount x PV factor = Present Value $108,020 x 4.3553 = $470,460 Present value of cash inflows $470,460 Present value of cash outflows 371,200 Net present value $99,260

   

Following is information on two alternative investments being considered by Jolee Company. The company requires a 12% return from its investments. (FV of $1, PV of $1, FVA of $1 and PVA of $1). (Use appropriate factor(s) from the tables provided.)

  

	Project A					Project B
Initial investment		$	(176,325	)			$	(140,960	)
Expected net cash flows in year:
1			36,000					27,000
2			60,000					49,000
3			80,295					58,000
4			77,400					79,000
5			61,000					25,000

  
 

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.)
	Project A Initial Investment $176,325 Chart values are based on: i = 12% Year Cash inflow x PV factor = Present Value 1 36,000 x 0.8929 = 32,144 2 60,000 x 0.7972 = 47,832 3 80,295 x 0.7118 = 57,154 4 77,400 x 0.6355 = 49,188 5 61,000 x 0.5674 = 34,611 $220,929 Present value of cash inflows $220,929 Present value of cash outflows 176,325 Net present value $44,604 Project B Initial Investment $140,960 Year Cash inflow x PV factor = Present Value 1 27,000 x 0.8929 = 24,108 2 49,000 x 0.7972 = 39,063 3 58,000 x 0.7118 = 41,284 4 79,000 x 0.6355 = 50,205 5 25,000 x 0.5674 = 14,185 $168,845 Present value of cash inflows $168,845 Present value of cash outflows 140,960 Net present value $27,885
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.)
	Choose Numerator: / Choose Denominator: = Profitability index Net present value of cash flows / Initial investment = Profitability index Project A $44,604 / $176,325 = 0.2530 Project B $27,885 / $140,960 = 0.1978
2.		Assume If the company can only select one project, which should it choose?
		Project A Project B

   

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $40,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $50,000. Variable manufacturing costs are $33,800 per year for this machine. Information on two alternative replacement machines follows.

  

	Alternative A			Alternative B
Cost	$	117,000		$	118,000
Variable manufacturing costs per year		22,700			10,700

    

Calculate the total change in net income if Alternative A is adopted. (Cash outflows should be indicated by a minus sign.)
	ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine $(117,000) Cash received to trade in old machine 50,000 Reduction in variable manufacturing costs 44,400 Total change in net income $(22,600)

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

	ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine $(118,000) Cash received to trade in old machine 50,000 Reduction in variable manufacturing costs 92,400 Total change in net income $24,400
Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase?
Alternative B Keep the manufacturing machine Alternative A

   
Division A manufactures picture tubes for TVs. The tubes can be sold either to Division 8 of the same
company or to outside customers. Last year, the following activity was recorded in Division A.
 

 
Sales to Division 8 were at the same price as sales to outside customers. The tubes purchased by
Division 8 were used in a TV set manufactured by that division. Division 8 incurred $260 in additional
variable cost per TV and then sold the TVs for $630 each.
 
Prepare income statements for last year for Division A, Division 8, and the company as a whole.
(Input all amounts as positive values. Leave no cells blank - be certain to enter "0" wherever
required. Omit the "$" sign in your response.)
 

 
Assume that Division A's manufacturing capacity is 20 ,700 tubes per year. Next year, Division 8
wants to purchase 6,200 tubes from Division A, rather than only 5,200. tubes as in last year. (Tubes
of this type are not available from outside sources.) From the standpoint of the company as a whole?
 
Continue to sell the tubes to outside customers.
Sell the 1,000 additional tubes to Division B.
   
Damico Company's Board Division manufactures an electronic control board that is widely used in high-
end DVD players. The cost per control board is as follows
 

 
Part of the Board Division's output is sold to outside manufacturers of DVD players. and part is sold to
Damico Company's Consumer Products Division, which produces a DVD player under the Damico name.
The Board Division charges a selling price of $187 per control board for all sales, both internally and externally.
The costs, revenues, and net operating income associated with the Consumer Products Division's
DVD player are given below:
 

 
The Consumer Products Division has an order from an overseas distributor for 5,000 DVD players.
The distributor wants to pay only $405 per DVD player.
 
1. Assume that the Consumer Products Division has enough idle capacity to fill the 5,000-unit order. Is
the division likely to accept the $405 price, or to reject it?
Accept
Reject
 
Assume that both the Board Division and the Consumer Products Division have idle capacity. Under these conditions,
would rejecting the $405 price be advantageous for the company as a whole, or would it result in the loss of potential profits?
(Input the amount as a positive value. Omit the "$" sign in your response.)
 

 
Assume that the Board Division is operating at capacity and could sell all of its control boards to outside manufacturers of DVD players.
Assume, however, that the Consumer Products Division has enough idle capacity to fill the 5,000-unit order. Under these conditions,
compute the profit impact to the Consumer Products Division of accepting the order at the $405 price.
(Input the amount as a positive value. Omit the"$" sign in your response.)
 

   
Nelcro Company's Electrical Division produces a high-quality transformer. Sales and cost data on the transformer follow:
 

 
Nelcro Company has a Motor Division that would like to begin purchasing this transformer from the
Electrical Division. The Motor Division is currently purchasing 10,000 transformers each year from
another company at a cost of $31 per transformer. Nelcro Company evaluates its division managers on
the basis of divisional profits.
 
1. Assume that the Electrical Division is now selling only 48,000 transformers each year to outside
customers.
 
a. From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for
transformers sold to the Motor Division? (Omit the "$" sign in your response .)
 

 
b. From the standpoint of the Motor Division, what is the highest acceptable transfer price for
transformers acquired from the Electrical Division? (Omit the "$" sign in your response.)
 

 
c. If left free to negotiate without interference, would you expect the division managers to voluntarily
agree to the transfer of 10,000 transformers from the Electrical Division to the Motor Division?
 
Yes
No
 
d. From the standpoint of the entire company, should a transfer take place?
 
Transfer should take place.
Transfer should not take place.
 
2. Assume that the Electrical Division is now selling all of the transformers it can produce to outside
customers.
 
a. From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for
transformers sold to the Motor Division? (Omit the "$"sign in your response .)
 

 
b. From the standpoint of the Motor Division, what is the highest acceptable transfer price for
transformers acquired from the Electrical Division? (Omit the "$" sign in your response.)
 

 
c. If left free to negotiate without interference, would you expect the division managers to voluntarily
agree to the transfer of 10,000 transformers from the Electrical Division to the Motor Division?
 
No
Yes
 
d. From the standpoint of the entire company, should a transfer take place?
 
Transfer should not take place.
Transfer should take place.
   
"I know headquarters wants us to add that new product line," said Fred Halloway, manager of Kirsi Product s' East Divis ion.
"But I want to see the numbers before I make a move. Our division's return on investment (ROI) has led the company for three years,
and I don 't want any letdown." Kirsi Products is a decentralized wholesaler with four autonomous divisions.
The divisions are evaluated on the basis of ROI, with year- end bonuses given to divisional managers who have the highest
ROI. Operating results for the company's East Division for last year are given below
 

 
The company had an overall ROI of 18% last year (considering all divisions). T he company's East
Division has an opportunity to add a new product line that would require an investment of $3 ,000,000.
The cost and revenue characteristics of the new product line per year wou ld be as follows:
 

 
1. Compute the East Division's RO I for last year; also compute the ROI as it wou ld appear if the new
product line is added. (Do not round intermediate percentage values. Round your intermed iate
calculations and final answers to 2 decimal places. Omit the"%" sign in your response.)
 

 
2. If you were in Fred Halloway's position, would you accept or reject the new product line?
 
Accept
Reject
 
3. Why do you suppose headquarters is anxious for the East Division to add the new product line?
 
Adding the new line would decrease the company's overall ROI.
Adding the new line would increase the company's overall ROI.
 
4. Suppose that the company's minimum required rate of return on operating assets is 15% and that
performance is evaluated using residual income.
 
a. Compute the East Division's residual income for last year; also compute the residual income as it
would appear if the new product line is added. (Omit the "$" sign in your response .)
 

 
b. Under these circumstances, if you were in Fred Halloway's position would you accept or reject the
new product line?
 
Accept
Reject
   
Ra ins Nickless Ltd. of Australia has two divis ions that operate in Perth and Darwin. Selected da ta on the
two divisions follow:
 

 
1. Compute the return on investment (ROI) for each divis ion . (Omit the"%" sign in your response.)
 

 
2. Assume that the company evaluates performance using residual income and that the minimum
required rate of return for any division is 16%. Compute the residual income for each division. (Omit the "$" sign in your response.)
 

 
3. Is the Darwin Division 's greater residual income an ind ication that it is better managed?
 
Yes
No
   
The Abs Shoppe is a regional chain of health clubs. The managers of the clubs, who have authority to make investments as needed,
are evaluated based largely on return on investment (ROI). The Abs Shoppe reported the following results for the past year:
 

 
1. Compute the club's return on investment (ROI). (Omit the"%" sign in your response.)
 

 
2. Assume that the manager of the club is able to increase sales by $80,000 and that as a result net operating income increases
by $6,000. Further assume that this is possible without any increase in value: operating assets. What would be the club's return
on investment (ROI)? (Do not round intermediate calculations. Omit the "%" sign in your response.)
 

 
3. Assume that the manager of the club is able to reduce expenses by $3,200 without any change in sales or operating assets.
What would be the club's return on investment (ROI)? (Do not round value: intermediate calculations.
Round your answer to 2 decimal places. Omit the "%" sign in your response.)
 

 
4. Assume that the manager of the club is able to reduce operating assets by $20,000
without any change in sales or net operating income.
What would be the club's return on investment (ROI)? (Omit the "%" sign in your response.)
 

   
BusServ.com Corporation provides business-to-business services on the Internet. Data concerning the most recent year appear below:
 

 
1. Compute the company's return on investment (ROI).
(Do not round intermediate calculations. Omit the"%" sign in your response.)
 

 
2. The entrepreneur who founded the company is convinced that sales will increase next year by 150% and that net operating income
will increase by 400%, with no increase in average operating assets.
What would be the company's RO I? (Do not round intermediate calculations. Omit the "%" sign in your response.)
 

 
3. The Chief Financial Officer of the company believes a more realistic scenario would be a $2 million increase in sales, requiring an
$800,000 increase in average operating assets, with a resulting $250,000 increase in net operating income. What would be the company's
ROI in this scenario? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the " %" sign in your response.)
 

   
lmages.com is a small Internet retailer of high-quality posters. The company has $800,000 in operating assets and fixed expenses of
$160,000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to $5 million per year.
The company's contribution margin ratio is 10%, which means that an additional dollar of sales results in additional contribution margin ,
and net operating income, of 10 cents.
 
1. Complete the following table showing the relationship between sales and return on investment (ROI).
(Round your percentage answers to 2 decimal places. Omit the "$" and "%" signs in your response.)
 

 
2. What happens to the company's return on investment (ROI) as sales increase?
(Round your answer to 2 decimal places. Omit the "%" sign in your response.)
 

   
Midlands Design Ltd. of Manchester, England, is a company specializing in providing design services to residential developers.
Last year the company had net operating income of £400,000 on sales of £2,000,000. The company's average operating assets
for the year were £2,200,000 and its minimum required rate of return was 16%.
(The currency in the United Kingdom is the pound, denoted by £.)
Compute the company's residual income for the year. (Omit the "£" sign in your response.)
 

   
Comparative data on three companies in the same service industry are given below.
 
2. Fill in the missing information. (Round the "Turnover" answers to 1 decimal place, and all other answers to the nearest whole number.
Omit the"$" & "%"signs in your response.)
 

   
Lipex, Ltd., of Birmingham, England, is interested in cutting the amount of time between when a customer places an order and when
the order is completed. For the first quarter of the year, the following data were reported:
 

 

Homework  1.1 1.2  2.1 2.2  3.1 3.2  4.1 4.2 5.1 5.2  6.1 6.2  7.1  7.2  8.1  8.2  9.1   9.2  10.1  10.2  11.1  11.2  12.1 12.2  13.1  13.2  14.1  14.2  15.1   15.2
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