Description
ACT 5733 – Advanced
Managerial Accounting
Spring 2 2015
HW #2
Directions: Answer all threequestions. Please submit your work in Word or PDF
formats only.You can submit an Excel file to support calculations, but please
“cut and paste†your solutions into the Word or PDF file. Be sure to show how
you did your calculations. Also, please be sure to include your name at the top
of the first page of your file. You can use any sources you wish, except for
other people. Please be sure to document any source you use. The assignment
is due by 9:00 AM on Wednesday, July 15th. Please run spell check and proofread your answers. If you have any
questions, please e-mail me at.edu”>af878@nova.edu
or.felo@gmail.com”>andrew.felo@gmail.com.
Good luck!
Question #1
Consider the following potential investment, which
has the same risk as the firm’s other projects:
|
Time
|
Cash
|
|
0
|
-$185,000
|
|
1
|
$32,000
|
|
2
|
$38,000
|
|
3
|
$38,000
|
|
4
|
$40,000
|
|
5
|
$40,000
|
|
6
|
$45,000
|
|
7
|
$46,000
|
a)
What
are the investment’s payback period, IRR, and NPV, assuming the firm’s WACC is
8%?
b)
If
the firm requires a payback period of less than 4 years, should this project be
accepted? Be sure to justify your choice.
c)
Based
on the IRR and NPV rules, should this project be accepted? Be sure to justify your choice.
d)
Which
of the decision rules (payback, NPV, or IRR) do you think is the best rule for
a firm to use when evaluating projects? Be
sure to justify your choice.
Question #2
A
firm believes it can generate an additional$500,000 per year in revenues for
the next 5 years if it replaces existing equipment that is no longer usable
with new equipment that costs $480,000. The existing equipment is fully
depreciated and has a market value of $2,000. The firm expects to be able to
sell the new equipment when it is finished using it (after 5 years) for
$30,000. Variable costs are expected to total 60% of revenue. The additional
sales will require an initial investment in net working capital of $60,000,
which is expected to be recovered at the end of the project (after 5 years). Assume
the firm uses straight line depreciation, its marginal tax rate is 35%, and the
discount rate for the project is 14%.
a)
How much value will this new equipment create for the firm?
b)
At what discount rate will this project break even?
c)
Should the firm purchase the new equipment? Be sure to justify your recommendation.
Question #3
Your
company is interested in having a new facility constructed. The contractor
expects that it will take approximately 3 years to complete the building. The
contractor has offered you three payment plans for the building. They are as
follows:
|
Time
|
Plan
|
Plan
|
Plan
|
|
Today
|
$400,000
|
$0
|
$600,000
|
|
1
|
$1,300,000
|
$2,175,000
|
$0
|
|
2
|
$1,300,000
|
$0
|
$1,900,000
|
|
3
|
$1,300,000
|
$2,175,000
|
$1,900,000
|
The
CFO of your company has asked you to provide recommendation concerning which
payment plan to accept. What is your recommendation? Assume your
weighted-average cost of capital is 12%.
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