ACC – Managerial Accounting Problems

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Description

Palo Alto Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s current truck (not the least of which is that it runs). The new truck would cost $55,950. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,560. At the end of 8 years the company will sell the truck for an estimated $27,610. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset’s estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company’s cost of capital is 8%.
(Refer the below table).

Compute the cash payback period and net present value of the proposed investment.(If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125. Round answer for Payback period to 1 decimal place, e.g. 10.5. Round Discount Factor to 5 decimal places, e.g. 0.17986.)

Cash payback period

years

Net present value

$

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $23,320. Each project will last for 3 years and produce the following net annual cash flows.

Year

AA

BB

CC

1

$7,420

$10,600

$13,780

2

9,540

10,600

12,720

3

12,720

10,600

11,660

Total

$29,680

$31,800

$38,160

The equipment’s salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug’s required rate of return is 12%. (Refer the below table)

Compute each project’s payback period.(Round answers to 2 decimal places, e.g. 15.25.)

AA

years

BB

years

CC

years

Which is the most desirable project?

The most desirable project based on payback period is

Which is the least desirable project?

The least desirable project based on payback period is

Henkel Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.

Project Kilo

Project Lima

Project Oscar

Capital investment

$167,400

$178,200

$200,850

Annual net income:

Year

1

14,040

18,900

29,700

2

14,040

17,820

24,300

3

14,040

16,740

23,220

4

14,040

12,420

14,580

5

14,040

9,180

13,500

Total

$70,200

$75,060

$105,300

Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.) (Refer the below table)

Compute the cash payback period for each project.(Round answers to 2 decimal places, e.g. 10.50.)

Project Kilo

years

Project Lima

years

Project Oscar

years

Goltra Clinic is considering investing in new heart-monitoring equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company’s cost of capital is 6%.

Option A

Option B

Initial cost

$191,000

$263,000

Annual cash inflows

$72,000

$81,800

Annual cash outflows

$28,100

$26,700

Cost to rebuild (end of year 4)

$51,100

$0

Salvage value

$0

$7,900

Estimated useful life

7 years

7 years

Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal rate of return, experiment with alternative discount rates to arrive at a net present value of zero.)(If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value to 0 decimal places, e.g. 125. Round profitability index to 2 decimal places, e.g. 10.50. Round answers for IRR to 0 decimal places, e.g. 12. Round Discount Factor to 5 decimal places.)

Net Present Value

Profitability Index

Internal Rate of Return

Option A

$

%

Option B

$

%

 

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