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Chapter 8: Exercises 1, 2, 3, 8, 11
Chapter 9: Exercises 2, 3, 4, 5, 7, 8, 9
EXERCISE 8–1 Payback Method [LO 8–1]
The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:
Year
Investment
Cash Inflow
1. . . . . . .
$15,000
$1,000
2. . . . . . .
$8,000
$2,000
3. . . . . . .
$2,500
4. . . . . . .
$4,000
5. . . . . . .
$5,000
6. . . . . . .
$6,000
7. . . . . . .
$5,000
8. . . . . . .
$4,000
9. . . . . . .
$3,000
10 . . . . . .
$2,000
Required:
Determine the payback period of the investment.
Would the payback period be affected if the cash inflow in the last year were several times as large?
EXERCISE 8–2 Net Present Value Method [LO 8–2]
The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine’s five-year useful life, it will have zero scrap value. The company’s required rate of return is 12%.
Required:
Determine the net present value of the investment in the machine.
What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?
EXERCISE 8–3 Internal Rate of Return [LO 8–3]
Wendell’s Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of $1.20 per dozen donuts sold. The new machine would have a six-year useful life.
Required:
What would be the total annual cash inflows associated with the new machine for capital budgeting purposes?
Find the internal rate of return promised by the new machine to the nearest whole percent.
In addition to the data given previously, assume that the machine will have a $9,125 salvage value at the end of six years. Under these conditions, compute the internal rate of return to the nearest whole percent. (Hint: You may find it helpful to use the net present value approach; find the discount rate that will cause the net present value to be closest to zero.)
EXERCISE 8–8 Payback Period and Simple Rate of Return [LO 8–1, LO 8–6]
Nick’s Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $300,000, have an eight-year useful life, and have a total salvage value of $20,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
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Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$200,000
Less operating expenses:
Commissions to amusement houses. . . . . . . . . . . . .
$100,000
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,000
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,000
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,000
160,000
Net operating income. . . . . . . . . . . . . . . . . . . . . . .
$ 40,000
Required:
Assume that Nick’s Novelties, Inc., will not purchase new games unless they provide a payback period of five years or less. Would the company purchase the new games?
Compute the simple rate of return promised by the games. If the company requires a simple rate of return of at least 12%, will the games be purchased?
EXERCISE 8–11 Preference Ranking of Investment Projects [LO 8–5]
Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:
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The net present values above have been computed using a 10% discount rate.
The company wants your assistance in determining which project to accept first, second, and so forth.
Required:
Compute the project profitability index for each project.
In order of preference, rank the four projects in terms of:
· a. Net present value.
· b. Project profitability index.
· c. Internal rate of return.
Which ranking do you prefer? Why?
Chapter 9: Exercises 2, 3, 4, 5, 7, 8, 9
EXERCISE 9–2 Production Budget [LO9–3]
Down Under Products, Ltd., of Australia has budgeted sales of its popular boomerang for the next four months as follows:
Sales in Units
April...........................
50,000
May............................
75,000
June...........................
90,000
July............................
80,000
The company is now in the process of preparing a production budget for the second quarter. Past experience has shown that end-of-month inventory levels must equal 10% of the following month’s sales. The inventory at the end of March was 5,000 units.
Required:
Prepare a production budget for the second quarter; in your budget, show the number of units to be produced each month and for the quarter in total.
EXERCISE 9–3 Direct Materials Budget [LO9–4]
Three grams of musk oil are required for each bottle of Mink Caress, a very popular perfume made by a small company in western Siberia. The cost of the musk oil is $1.50 per gram. Budgeted production of Mink Caress is given below by quarters for Year 2 and for the first quarter of Year 3:
Musk oil has become so popular as a perfume ingredient that it has become necessary to carry large inventories as a precaution against stock-outs. For this reason, the inventory of musk oil at the end of a quarter must be equal to 20% of the following quarter’s production needs. Some 36,000 grams of musk oil will be on hand to start the first quarter of Year 2.
Required:
Prepare a direct materials budget for musk oil, by quarter and in total, for Year 2. At the bottom of your budget, show the amount of purchases for each quarter and for the year in total.
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EXERCISE 9–4 Direct Labor Budget [LO9–5]
The production manager of Rordan Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year:
Each unit requires 0.35 direct labor-hours, and direct laborers are paid $12.00 per hour.
Required:
Construct the company’s direct labor budget for the upcoming fiscal year, assuming that the direct labor workforce is adjusted each quarter to match the number of hours required to produce the forecasted number of units produced.
Construct the company’s direct labor budget for the upcoming fiscal year, assuming that the direct labor workforce is not adjusted each quarter. Instead, assume that the company’s direct labor workforce consists of permanent employees who are guaranteed to be paid for at least 2,600 hours of work each quarter. If the number of required direct labor-hours is less than this number, the workers are paid for 2,600 hours anyway. Any hours worked in excess of 2,600 hours in a quarter are paid at the rate of 1.5 times the normal hourly rate for direct labor.
EXERCISE 9–5 Manufacturing Overhead Budget [LO9–6]
The direct labor budget of Yuvwell Corporation for the upcoming fiscal year contains the following details concerning budgeted direct labor-hours:
The company’s variable manufacturing overhead rate is $3.25 per direct labor-hour and the company’s fixed manufacturing overhead is $48,000 per quarter. The only noncash item included in fixed manufacturing overhead is depreciation, which is $16,000 per quarter.
Required:
Construct the company’s manufacturing overhead budget for the upcoming fiscal year.
Compute the company’s manufacturing overhead rate (including both variable and fixed manufacturing overhead) for the upcoming fiscal year. Round off to the nearest whole cent.
EXERCISE 9–7 Cash Budget [LO9–8]
Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management has prepared the following summary of its budgeted cash flows:
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The company’s beginning cash balance for the upcoming fiscal year will be $20,000. The company requires a minimum cash balance of $10,000 and may borrow any amount needed from a local bank at a quarterly interest rate of 3%. The company may borrow any amount at the beginning of any quarter and may repay its loans, or any part of its loans, at the end of any quarter. Interest payments are due on any principal at the time it is repaid. For simplicity, assume that interest is not compounded.
Required:
Prepare the company’s cash budget for the upcoming fiscal year.
EXERCISE 9–8 Budgeted Income Statement [LO9–9]
Gig Harbor Boating is the wholesale distributor of a small recreational catamaran sailboat. Management has prepared the following summary data to use in its annual budgeting process:
Budgeted unit sales........................................................
460
Selling price per unit.......................................................
$1,950
Cost per unit..................................................................
$1,575
Variable selling and administrative expenses (per unit)........
$75
Fixed selling and administrative expenses (per year)...........
$105,000
Interest expense for the year............................................
$14,000
Required:
Prepare the company’s budgeted income statement. Use the absorption costing income statement format shown in Schedule 9.
EXERCISE 9–9 Budgeted Balance Sheet [LO9–10]
The management of Mecca Copy, a photocopying center located on University Avenue, has compiled the following data to use in preparing its budgeted balance sheet for next year:
Ending Balances
Cash...........................................
?
Accounts receivable.......................
$8,100
Supplies inventory.........................
$3,200
Equipment...................................
$34,000
Accumulated depreciation..............
$16,000
Accounts payable..........................
$1,800
Common stock.............................
$5,000
Retained earnings........................
?
The beginning balance of retained earnings was $28,000, net income is budgeted to be $11,500, and dividends are budgeted to be $4,800.
Required:
Prepare the company’s budgeted balance sheet.
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