A consultant commented that “too often the numbers look good but feel bad.” This comment often stems from estimation error common to capital budgeting proposals that relate to future cash flows. Three reasons for this error often exist. First, reliably predicting cash flows several years into the future is very difficult. Second, the present value of cash flows many years into the future (say, beyond 10 years) is often very small. Third, it is difficult for personal biases and expectations not to unduly influence present value computations. Required 1. Compute the present value of $100 to be received in 10 years assuming a 12% discount rate. 2. Why is understanding the three reasons mentioned for estimation errors important whenevaluatinginvestment projects? Link this response to your answer for part 1.
> Retsa Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $800,000 and will yield the following expected cash flows. Management requires investments to have a payback period of tw
> Aster Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $800,000 and yield the following expected cash flows. Management requires investments to have a payback period of two yea
> Archer Foods has a freezer that is in need of repair and is considering whether to replace the old freezer with a new freezer or have the old freezer extensively repaired. Information about the two alternatives follows. Management requires a 10% rate of
> Grossman Corporation is considering a new project requiring a $30,000 investment in an asset having no salvage value. The project would produce $12,000 of pretax income before depreciation at the end of each of the next six years. The companyâ€
> Aikman Company has an opportunity to invest in one of two projects. Project A requires a $240,000 investment for new machinery with a four-year life and no salvage value. Project B also requires a $240,000 investment for new machinery with a three-year l
> Cortino Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $300,000 cost with an expected four-year life and a $20,000 salvage value. All sales are for cash and all costs are out
> Lenitnes Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $250,000 and will yield the following expected cash flows. Management requires investments to have a payback period of
> Connick Company sells its product for $22 per unit. Its actual and projected sales follow. All sales are on credit. Recent experience shows that 40% of credit sales is collected in the month of the sale, 35% in the month after the sale, 23% in the seco
> Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $250,000 and will yield the following expected cash flows. Management requires investments to have a payback period of
> Hector Company reports the following: Payments for purchases are made in the month after purchase. Selling expenses are 10% of sales, administrative expenses are 8% of sales, and both are paid in the month of sale. Rent expense of $7,400 is paid monthl
> Interstate Manufacturing is considering either replacing one of its old machines with a new machine or having the old machine overhauled. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. Altern
> Manning Corporation is considering a new project requiring a $90,000 investment in test equipment with no salvage value. The project would produce $66,000 of pretax income before depreciation at the end of each of the next six years. The companyâ&#
> Most Company has an opportunity to invest in one of two new projects. Project Y requires a $350,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $350,000 investment for new machinery with a three-year life
> Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $480,000 cost with an expected four-year life and a $20,000 salvage value. All sales are for cash, and all costs are out
> Refer to the information in Exercise 11-8. Create an Excel spreadsheet to compute the internal rate of return for each of the projects. Round the percentage return to two decimals. In Exercise 11-8 Following is information on two alternative investments
> Following is information on two alternative investments being considered by Jolee Company. The company requires a 10% return from its investments. For each alternative project compute the (a) net present value, and (b) profitability index. If the compa
> Phoenix Company can invest in each of three cheese-making projects: C1, C2, and C3. Each project requires an initial investment of $228,000 and would yield the following annual cash flows. (1) Assuming that the company requires a 12% return from its in
> 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 $360,000 with a 6-year life and no salvage value. It will be depreciated on a straight-line basis. The compa
> Compute the payback period for each of these two separate investments (round the payback period to two decimals): a. A new operating system for an existing machine is expected to cost $520,000 and have a useful life of six years. The system yields an inc
> During the last week of March, Sony Stereo’s owner approaches the bank for a $80,000 loan to be made on April 1 and repaid on June 30 with annual interest of 12%, for an interest cost of $2,400. The owner plans to increase the store&aci
> You must prepare a return on investment analysis for the regional manager of Fast & Great Burgers. This growing chain is trying to decide which outlet of two alternatives to open. The first location (A) requires a $1,000,000 investment and is expected to
> Identify three usual time horizons for short-term planning and budgets.
> A machine can be purchased for $150,000 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. Compute the machineâ€&
> Beyer Company is considering the purchase of an asset for $180,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Compute the payback period for this investment (round years to two decimals).
> This chapter explained two methods to evaluate investments using recovery time, the payback period and break-even time (BET). Refer to QS 11-8 and (1) compute the recovery time for both the payback period and break-even time, (2) discuss the advantage(
> After evaluating the risk of the investment described in Exercise 11-5, B2B Co. concludes that it must earn at least a 8% return on this investment. Compute the net present value of this investment. (Round the net present value to the nearest dollar.) I
> A machine costs $700,000 and is expected to yield an after-tax net income of $52,000 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 accou
> Polaris managers must select depreciation methods. Why does the use of the accelerated depreciation method (instead of straight line) for income tax reporting increase an investment’s value?
> Why is the present value of $100 that you expect to receive one year from today worth less than $100 received today? What is the present value of $100 that you expect to receive one year from today, discounted at 12%?
> If the present value of the expected net cash flows from a machine, discounted at 10%, exceeds the amount to be invested, what can you say about the investment’s expected rate of return? What can you say about the expected rate of return if the present v
> Why is an investment more attractive to management if it has a shorter payback period?
> Jessica Porter works in both the jewelry department and the hosiery department of a retail store. Porter assists customers in both departments and arranges and stocks merchandise in both departments. The store allocates Porter’s $30,000
> The management of Piaggio is planning to invest in a new companywide computerized inventory tracking system. What makes this potential investment risky?
> H20 Sports Company is a merchandiser of three different products. The company’s March 31 inventories are water skis, 40,000 units; tow ropes, 90,000 units; and life jackets, 150,000 units. Management believes that excessive inventories
> KTM is considering expanding a store. Identify three methods management can use to evaluate whether to expand.
> The management of Arctic Catis planning to acquire new equipment to manufacture snowmobiles. What are some of the costs and benefits that would be included in Arctic Cat’s analysis?
> Why should managers set the required rate of return higher than the rate at which money can be borrowed when making a typical capital budgeting decision?
> What is the average amount invested in a machine during its predicted five-year life if it costs $200,000 and has a $20,000 salvage value? Assume that net income is received evenly throughout each year and straight-line depreciation is used.
> Identify two disadvantages of using the payback period for comparing investments.
> Identify four reasons that capital budgeting decisions by managers are risky.
> What is capital budgeting?
> Capital budgeting decisions require careful analysis because they are generally the ________ ________ and ________ decisions that management faces.
> The following is a partially completed lower section of a departmental expense allocation spreadsheet for Cozy Bookstore. It reports the total amounts of direct and indirect expenses allocated to its five departments. Complete the spreadsheet by allocati
> Visit or call a local auto dealership and inquire about leasing a car. Ask about the down payment and the required monthly payments. You will likely find the salesperson does not discuss the cost to purchase this car but focuses on the affordability of t
> Read the chapter opener about Keith Mullin and his company, Gamer Grub. Keith is considering building a new, larger warehousing center to make his business more efficient and reduce costs. He expects that an efficient warehouse could reduce his costs by
> The management of Zigby Manufacturing prepared the following estimated balance sheet for March, 2013: To prepare a master budget for April, May, and June of 2013, management gathers the followinginformation: a. Sales for March total 20,500 units. Forec
> Break into teams and identify four reasons that an international airline such as Southwest or Delta would invest in a project when its direct analysis using both payback period and net present value indicate it to be a poor investment. (Hint: Think about
> Capital budgeting is an important topic and there are Websites designed to helppeople understand the methods available. Access TeachMeFinance.com’s capital budgeting web page (teachmefinance.com/capitalbudgeting.html). This web page con
> Payback period, accounting rate of return, net present value, and internal rate of return are common methods to evaluate capital investment opportunities. Assume that your manager asks you to identify the type of measurement basis and unit that each meth
> Assume that Arctic Cat invests $2.42 million in capital expenditures, including $1.08 million related to manufacturing capacity. Assume that these projects have a seven-year life and that management requires a 15% internal rate of return on those project
> Piaggio’s annual report includes information about its debt and interest rates. One statement in its annual report reveals that Piaggio recently issued 10-year bonds with a market return of about 6.5%. Required Explain how Piaggio would use that 6.5% ra
> Adria Lopez has found that her line of computer desks and chairs has become very popular and she is finding it hard to keep up with demand. She knows that she cannot fill all of her orders for both items, so she decides she must determine the optimal sal
> Marathon Running Shop has two service departments (advertising and administration) and two operating departments (shoes and clothing). During 2013, the departments had the following direct expenses and occupied the following amount of floor space. The
> Holmes Company produces a product that can either be sold as is or processed further. Holmes has already spent $50,000 to produce 1,250 units that can be sold now for $67,500 to another manufacturer. Alternatively, Holmes can process the units further at
> Excel Memory Company can sell all units of computer memory X and Y that it can produce, but it has limited production capacity. It can produce two units of X per hour or three units of Y per hour, and it has 4,000 production hours available. Contribution
> Kando Company incurs a $9 per unit cost for Product A, which it currently manufactures and sells for $13.50 per unit. Instead of manufacturing and selling this product, the company can purchase Product B for $5 per unit and sell it for $12 per unit. If i
> Black Diamond Company produces snow skis. Each ski requires 2 pounds of carbon fiber. The company’s management predicts that 5,000 skis and 6,000 pounds of carbon fiber will be in inventory on June 30 of the current year and that 150,000 skis will be sol
> Refer to QS 10-1 and QS 10-2. What nonfinancial factors should Helix consider before accepting this order? Explain. In QS 10-1 Helix Company has been approached by a new customer to provide 2,000 units of its regular product at a special price of $6 per
> Refer to the data in QS 10-1. Based on financial considerations alone, should Helix accept this order at the special price? Explain. In QS 10-1 Helix Company has been approached by a new customer to provide 2,000 units of its regular product at a specia
> Helix Company has been approached by a new customer to provide 2,000 units of its regular product at a special price of $6 per unit. The regular selling price of the product is $8 per unit. Helix is operating at 75% of its capacity of 10,000 units. Ident
> Signal mistakenly produced 10,000 defective cell phones. The phones cost $60 each to produce. A salvage company will buy the defective phones as they are for $30 each. It would cost Signal $80 per phone to rework the phones. If the phones are reworked, S
> Rory Company has a machine with a book value of $75,000 and a remaining five-year useful life. A new machine is available at a cost of $112,500, and Rory can also receive $60,000 for trading in its old machine. The new machine will reduce variable manufa
> A guitar manufacturer is considering eliminating its electric guitar division because its $76,000 expenses are higher than its $72,000 sales. The company reports the following expenses for this division. Should the division be eliminated? Avoidable
> Below are departmental income statements for a guitar manufacturer. The manufacturer is considering dropping its electric guitar department since it has a net loss. The company classifies advertising, rent, and utilities expenses as indirect. (1) Prepar
> Radar Company sells bikes for $300 each. The company currently sells 3,750 bikes per year and could make as many as 5,000 bikes per year. The bikes cost $225 each to make; $150 in variable costs per bike and $75 of fixed costs per bike. Radar received an
> Label each of the following statements as either true (“T”) or false (“F”). 1. Relevant costs are also known as unavoidable costs. 2. Incremental costs are also known as differential costs. 3. An out-of-pocket cost requires a current and/or future outlay
> Garcia Company has 10,000 units of its product that were produced last year at a total cost of $150,000. The units were damaged in a rain storm because the warehouse where they were stored developed a leak in the roof. Garcia can sell the units as is for
> Esme Company’s management is trying to decide whether to eliminate Department Z, which has produced low profits or losses for several years. The company’s 2013 departmental income statement shows the following. In an
> Near the end of 2013, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2013. To prepare a master budget for January, February, and March of 2014, management gathers the foll
> Sung Company is able to produce two products, R and T, with the same machine in its factory. The following information is available. The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is
> Micron Manufacturing produces electronic equipment. This year, it produced 7,500 oscilloscopes at a manufacturing cost of $300 each. These oscilloscopes were damaged in the warehouse during storage and, while usable, cannot be sold at their regular selli
> Alto Company currently produces component TH1 for its sole product. The current cost per unit to manufacture its required 400,000 units of TH1 follows. Direct materials . . . . . . . . . . . $1.20 Direct labor . . . . . . . . . . . . . . . . 1.50 Overhe
> Mervin Company produces circuit boards that sell for $8 per unit. It currently has capacity to produce 600,000 circuit boards per year, but is selling 550,000 boards per year. Annual costs for the 550,000 circuit boards follow. Direct materials . . . .
> Windmire Company manufactures and sells to local wholesalers approximately 300,000 units per month at a sales price of $4 per unit. Monthly costs for the production and sale of this quantity follow. Direct materials . . . . . . . . . . . . . . . . $3
> Maryanne Dinardo manages an auto dealership’s service department. The recent month’s income statement for his department follows. (1) Analyze the items on the income statement and identify those that definitely should
> What are controllable costs?
> Define and describe cycle efficiency.
> Each retail store of Applehas several departments. Why is it useful for its management to (a) collect accounting information about each department and (b) treat each department as a profit center?
> Can management of a company such as Arctic Catuse cycle time and cycle efficiency as useful measures of performance? Explain.
> Explain the difference between value-added time and nonvalue-added time.
> Define and describe cycle time and identify the components of cycle time.
> Electro Company manufactures an innovative automobile transmission for electric cars. Management predicts that ending inventory for the first quarter will be 75,000 units. The following unit sales of the transmissions are expected during the rest of the
> Polaris delivers its products to locations around the world. List three controllable and three uncontrollable costs for its delivery department.
> Give two examples of products with joint costs.
> KTMaims to give its managers timely cost reports. In responsibility accounting, who receives timely cost reports and specific cost information? Explain.
> Piaggio has many departments. How is a department’s contribution to overhead measured?
> Is it possible to evaluate a cost center’s profitability? Explain.
> What are two main goals in managerial accounting for reporting on and analyzing departments?
> Why should managers be closely involved in preparingtheir responsibility accounting budgets?
> Controllable and uncontrollable costs must be identified with a particular _____ and a definite _____ period.
> What is the difference between operating departments and service departments?
> Selected product data from Piaggio (www.piaggio.com) follow. Required1. Compute the percentage growth in net sales for each product line from fiscal year 2010 to 2011. Round percents to one decimal.2. Which product line’s net sales gr
> Big Sound, a merchandising company specializing in home computer speakers, budgets its monthly cost of goods sold to equal 70% of sales. Its inventory policy calls for ending inventory in each month to equal 20% of the next month’s budgeted cost of goods
> Visit a local movie theater and check out both its concession area and its showing areas. The manager of a theater must confront questions such as: ● How much return do we earn on concessions? ● What types of movies generate the greatest sales? ● What ty
> Brian Linton’s company, United By Blue, sells jewelry and apparel. His company’s plans call for continued expansion into other types of products. Required 1. How can United By Blue use departmental income statements to assist in understanding and contro
> Polaris, and Arctic Cat compete across the world in several markets. Required1. Design a three-tier responsibility accounting organizational chart assuming that you have available internal information for both companies. Use Exhibit 9.1 as an example. T
> This chapter described and used spreadsheets to prepare various managerial reports (see Exhibit 9-6). You can download from Websites various tutorials showing how spreadsheets are used in managerial accounting and other business applications. Exhibit 9-
> Improvement Station is a national home improvement chain with more than 100 stores throughout the country. The manager of each store receives a salary plus a bonus equal to a percent of the store’s net income for the reporting period. The following net i
> Senior Security Co. offers a range of security services for senior citizens. Each type of service is considered within a separate department. Mary Pincus, the overall manager, is compensated partly on the basis of departmental performance by staying with
> Polaris and Arctic Cat compete in several on-road and off-road motorized vehicle categories.Sales, income, and asset information is provided for each company below. Required1. Compute profit margin for each company.2. Compute investment turnover for ea
