Accounting Assignment

$30.00

Description

1. Financial statements all have a goal. The cash flow statement does as well.
Requirements
R1. Describe how the Statement of Cash Flows helps investors and creditors
perform each of the following functions:
a. Predict future cash flows
b. Evaluate management decisions
c. Predict the ability to make debt payments to lenders and pay dividends to
stockholders
2. Cash-flow items must be categorized into one of four categories.
Requirements
R1. Answer the following questions about the Statement of Cash Flows:
a. List the categories of cash flows in order of presentation.
b. What is the “key reconciling figure” for the Statement of Cash Flows?
Where do you get this figure?
c. What is the first dollar amount to report for the indirect method?
3. Triumph Corporation is preparing its Statement of Cash Flows by the indirect
method. Triumph has the following items for you to consider in preparing the
statement:

Requirement
Identify each item as an
Operating activity—addition to net income (O+), or subtraction from net
income (O–)
Investing activity—addition to cash flow (I+), or subtraction from cash flow
(I–)
Financing activity—addition to cash flow (F+), or subtraction from cash
flow(F–)
Activity that is not used to prepare the indirect cash-flow statement (N)
Requirement
Identify each item as an

Operating activity—addition to net income (O+), or subtraction from net
income (O–)
Investing activity—addition to cash flow (I+), or subtraction from cash flow
(I–)
Financing activity—addition to cash flow (F+), or subtraction from cash
flow(F–)
Activity that is not used to prepare the indirect cash-flow statement (N)

4. DVR Equipment, Inc., reported the following data for 2011:

Requirement
Compute DVR’s net cash provided by operating activities—indirect method.
5. Street Cellular accountants have assembled the following data for the year
ended June 30, 2012:

Requirement
Prepare the operating activities section using the indirect method for Street
Cellular’s Statement of Cash Flows for the year ended June 30, 2012.
6. Use the data in exercise 5 to complete this exercise.
Requirement
Prepare Street Cellular’s Statement of Cash Flows using the indirect method for the
year ended June 30, 2012. Stop after determining the net increase (or decrease) in
cash.
Requirement
Prepare the operating activities section using the indirect method for Street
Cellular’s Statement of Cash Flows for the year ended June 30, 2012.

7. White Media Corporation had the following Income Statement and Balance Sheet
for 2011:

Requirements
R1. Compute for White Media Corporation during 2011 the
a. Acquisition of equipment. The business sold no equipment during the year.
b. Payment of a long-term note payable. During the year the business issued
a $5,100 note payable.
8. Use the White Media Corporation data in exercise 7 and the results you
calculated from the requirements.
Requirement
Prepare White Media’s Statement of Cash Flows—indirect method—for the year
ended December 31, 2011.
9. Brianna’s Wedding Shops earned net income of $76,000, which included
depreciation of $17,000. Brianna’s paid $122,000 for a building and borrowed
$63,000 on a long-term note payable.
Requirement
How much did Brianna’s cash balance increase or decrease during the year?
10. Roberta McLeary Company expects the following for 2011:

Requirement
How much free cash flow does McLeary expect for 2011?
11. The cash flow statement categorizes like transactions for optimal reporting.
Requirement
Identify each of the following transactions as an (a)
For each cash flow, indicate whether the item increases (+) or decreases (–)
cash.The indirect method is used to report cash flows from operating activities.

12. Consider the following transactions:

Requirement

Indicate whether each transaction would result in an operating activity, an investing
activity, or a financing activity for an indirect method Statement of Cash Flows and
the accompanying schedule of noncash investing and financing activities.
13. The accounting records of CD Sales, Inc., include the following accounts:

Requirement
Compute CD’s net cash provided by (used for) operating activities during March.
Use the indirect method.
14. Cole Gymnastics Equipment, Inc., reported the following financial statements
for 2011:

Requirement
Compute the amount of Cole Gymnastics’ acquisition of plant assets. Cole
Gymnastics sold no plant assets.
15. 1. Accountants for Smithson, Inc., have assembled the following data for the
year ended December 31, 2011:

Requirement
Prepare Smithson’s Statement of Cash Flows using the indirect method. Include an
accompanying schedule of noncash investing and financing activities.

16. The 2012 comparative Balance Sheet and Income Statement of Cobbs Hill, Inc.,
follow:

Cobbs Hill had no noncash investing and financing transactions during 2012. During
the year, there were no sales of land or equipment, no issuances of notes payable,
no retirements of stock, and no treasury stock transactions.
Requirements
R1. Prepare the 2012 Statement of Cash Flows, formatting operating activities by
the indirect method.
R2. How will what you learned in this problem help you evaluate an investment?

Showcase Cinemas and Theater by Design are asking you to recommend their stock
to your clients. Because Showcase and Theater by Design earn about the same net
income and have similar financial positions, your decision depends on their cashflow statements, summarized as follows:

Requirement
Based on their cash flows, which company looks better? Give your reasons.
Financial Statement Case
Refer to the 2009 Amazon.com Financial Statements handout. Use the
Amazon.com Statement of Cash Flows, along with the company’s other financial
statements to answer the following questions.
Requirements
R1. Which method does Amazon use to report net cash flows from operating
activities? How can you tell?
R2. Amazon earned net income during 2009. Did operations provide cash or use
cash during 2009? Give the amount. How did operating cash during 2009 compare
with 2008?
R3. Evaluate 2009 in terms of net income, cash flows, Balance Sheet position, and
overall results. Be specific

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Accounting assignment

$15.00

Description

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Accounting Assignment

$21.00

Description

1. From the below information, calculate the final balance to be carried forward in your check stubs as of the end of October.
Oct. 1 beginning balance $1,200.50
Oct. 8 deposit $300.00
Oct. 12 checks written to bloom company $382.65
Oct. 16 deposit $400.00
Oct. 28 checks written to flex company $185.99
Oct. 31 checks written to Ryan company $88.92
2. Use the information below to determine the values of A, B, C, and D.
Item rug
List $1,400
Chain discount 18/12
Net price EQ rate (A)
Single EQ rate (B)
Amount of trade discount (C)
Net price (D)
3. A truck costing $25,00 with a residual value of $5,00 was purchased by ram corporation. The truck’s estimated life is 10 years. What is the book value at the end of year 2 using the declining-balance method? Assume a depreciation rate of twice the straight-line rate.
4. Last year’s sales at Mel’s Cinema totaled $144,600. This year’s sales should increase by 1/3. How much should sales increase by, and what will sales be in the New Year?
5. A furniture company produced five times as many beds on shift 2 as it did on shift 1. If a total of 240 beds were produced, how many were produced on each shift?
6. US Airways has a net income of $60,000 before taxes. It’s expected that 45% of the net income will go to federal and state taxes. How much will US Airways have left?
7. Sullivan’s Handbags marks up its bags at 45% of the selling price. Pat Sullivan saw a bag at a trade show that she would sell to her customers for $85.00. What is the most she could pay for the bag and still retain the 45% markup of the selling price?
8. Amy Koy met Pat Quin on September 8 at Queen Bank. After talking with Pat, Amy decided she would like to consider a $9,000 loan at 10 and a half percent to be repaid on February 17 of the next year on exact interest. Calculate the amount that Amy would pay at maturity under this assumption. Round all answers to the nearest cent.
9. On May 12, Bob Campbell accepted a $5,000 note in granting a time extension of a bill for goods bought by Rick Ween. Terms of the note were 8%for 120 days. On July 8, Bob needed to raise cash and discounted the note at Rick’s bank at a discount rate of 9%. Calculate Bob’s proceeds using ordinary interest.
10. The asset turnover of Jerry’s Sleepshop is 3.2. Jerry’s total assets are $32,000. What were Jerry’s net sales?
11. Moore Supermarket began the year with 300 boxes of oat flake cereal with a unit cost of $1.89. During the year, the following additional purchases were made:
May 1 200 boxes@ $2.10/each
June 1 400 boxes @ $2.20/each
August 1 250 boxes @ $2.40/each
At the end of the year, Moore had 475 boxes of oat flakes on the shelf and in the back room. Assuming LIFO calculated the (a) cost of ending inventory and (b) cost of goods sold.
12. Total sales for Appliance Center were $205,000 for the week. These sales included a 6% sales tax. What were the actual sales?
13. ***** *****en opened a pizza shop. He insured his shop for $90,000 for fire. What is his insurance premium if the rate per $100 is $0.83?

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Accounting Assignment

$13.00

Description

1. Maeda Company has the following employees on the payroll:

Employee
Name
Marital
Status
Semimonthly
Payroll
Witholding
Allowances

Amal S $4,000 1
Miguel M $5,000 3
Byron S $4,600 2
Hiroko M $6,500 4

Using the information above:

a. Calculate the FUTA tax liability for 2013. Assume that Maeda Company has paid all amounts due during the year.

b. If the payroll is consistent from quarter to quarter, how much would be remitted in FUTA taxes in each of the four quarters in 2013?

2. Quince Company has book income of $120,000 properly determined in accordance with financial accounting principles. The following information is also available:
• The company received a $10,000 dividend from a large publicly-traded domestic corporation of which it owns less than 20%.
• Income tax expense on the financial statements was $30,000.
• Depreciation expense on the financial statements is $25,000 less than depreciation expense determined using tax laws.
• The company received life insurance proceeds of $15,000.
• Charitable contributions of $20,000 were made.

Determine the taxable income of Quince Company.

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Accounting assignment

$42.00

Description

Broadening
your perspective 18-1 “Decision Making Across Your Organization”

BYP 18-1
Martinez Company has decided to introduce a new product. The new product can be
manufactured by either a capital-intensive method or a labor-intensive method.
The manufacturing method will not affect the quality of the product. The
estimated manufacturing costs by the two methods are as follows.

Capital-Intensive Labor Intensive

Direct
Materials $5 per unit $5.50 per unit

Direct Labor $6 per unit $8.00 per unit

Variable
Overhead $3 per unit $4.50 per unit

Fixed
manufacturing costs $2,508,000 $1,538,000

Martinez’s
market research department has recommended an introductory unit sales price of
$30. The incremental selling expenses are estimated to be $502,000 annually
plus $2 for each unit sold, regardless of manufacturing method.

a)
Determine the annual unit
sales volume at which Martinez Company would be indifferent between the two
manufacturing methods.

In not more than 170 words answer the above
question in (a)

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Writea
paper of no more than 350 words after completing Exercise 19-17 in WileyPLUS in
which you respond to the following questions:

  • In this case, would it be better to use the variable or
    absorption costing method, and why?
  • What are the benefits of the two methods?
  • Which method would lead to the best decision when a competitor
    is submitting a lower bid for your product?

Make sure your response and references
are consistent with APA Format

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accounting assignment

$41.00

Description

Problem 1 (50 marks)

Balance Sheets
December 31, 20X6

Peony
Ltd. Aster
Ltd.
Assets:
Cash $ 62,500 $ 25,000
Accounts receivable 187,500 200,000
Inventories 225,000 125,000
Equipment 6,250,000 3,375,000
Accumulated amortization (2,212,500) (1,550,000)
Investment in Aster Ltd. 1,000,000 –
Other investments 125,000 ____-____
Total assets $5,637,500 $2,175,000
Liabilities and Shareholders’ Equity
Accounts payable $ 562,500 $ 250,000
Bonds payable 375,000 625,000
Total liabilities 937,500 875,000
Common shares 1,500,000 375,000
Retained earnings 3,200,000 925,000
Total shareholders’ equity 4,700,000 1,300,000
Total liabilities and shareholders’ equity $5,637,500 $2,175,000

?
Income Statements
Year Ended December 31, 20X6

Peony
Ltd. Aster
Ltd.
Sales revenue $2,500,000 $1,875,000
Royalty revenue 187,500 –
Dividend income 93,750 ____-____
Total revenue 2,781,250 1,875,000
Cost of sales 1,500,000 1,125,000
Other expenses 700,000 513,750
Total expenses 2,200,000 1,638,750
Net income $ 581,250 $ 236,250

Statements of Retained Earnings
December 31, 20X6

Peony
Ltd. Aster
Ltd.
Retained earnings, beginning of year $2,993,750 $ 801,250
Net income 581,250 236,250
Dividends declared (375,000) (112,500)
Retained earnings, end of year $3,200,000 $ 925,000

• At January 1, 20X1, Peony Ltd. acquired 80% of the common shares of Aster Ltd. by issuing 500,000 Peony common shares valued at $2 per share. This resulted in Peony having 1,500,000 issued and outstanding shares.

• Peony has provided the following information about Aster at the acquisition date:

Aster’s shareholders’ equity consisted of the following:

Common shares $375,000
Retained earnings 693,750

Fair value of Aster’s net identifiable assets equalled their carrying value, with the exception of the following items:

Excess of fair value
over carrying value:
Inventories $ 12,500
Equipment 93,750
Investments 12,500

The accumulated amortization on the equipment was $718,750. The equipment is amortized on a straight-line basis. At the acquisition date, the equipment is estimated to have a remaining life of 10 years with no residual value.

• In 20X3, Aster sold its investments to parties outside the consolidated entity for $56,250 over carrying value.

• From the acquisition date to December 31, 20X5, Aster paid royalties of $625,000 to Peony. During 20X6, Aster paid $112,500 in royalties to Peony.

• At the beginning of 20X4, Peony purchased some equipment from Aster for $113,750. Aster had originally acquired the equipment for $125,000 and was amortizing it at a rate of $12,500 per year. When Aster sold the equipment to Peony, it had a carrying value of $87,500. At that time, Peony estimated that the equipment had a remaining life of 7 years and started amortizing the equipment in 20X4, using the straight-line method with no residual value.

• At December 31, 20X5, Aster’s inventory included $25,000 of goods purchased from Peony. Peony’s gross margin on the sale was 40%. The goods were sold to third parties in 20X6.

• At December 31, 20X5, Peony’s inventory included $125,000 of goods purchased from Aster. Aster’s gross margin on the sale was 40%. The goods were sold to third parties in 20X6.

• During 20X6, Peony sold goods to Aster for $125,000. Peony’s gross margin on the sale was 40%. At December 31, 20X6, $50,000 of the goods are still in Aster’s inventory.

?
• During 20X6, Aster sold goods to Peony for $875,000. Aster’s gross margin on the sale was 40%. At December 31, 20X6, $87,500 of the goods are still in Peony’s inventory.

• Peony uses the entity method to report business combinations.

Required:

Prepare the consolidated financial statements for Peony at December 31, 20X6 using the direct method. Show all your work.

Problem 2 (35 marks)

On January 1, 20X4, Chee Co. purchased 80% of the outstanding shares of Tyme Ltd. for $2,000,000 in cash. On the acquisition date, Tyme’s shareholders’ equity consisted of the following:

Common shares $1,600,000
Retained earnings 800,000

At the time of acquisition, the carrying values of Tyme’s identifiable net assets equalled their fair market values with the following exceptions:

• The fair value of a building with an estimated remaining life of 10 years was $480,000 less than its carrying value.

• A long-term liability that matures in 8 years has a fair value that is $400,000 less than its carrying value.

The condensed income statements for Chee and Tyme are presented below:
Income Statements
Year ended December 31, 20X8

Chee Co. Tyme Ltd.
Sales $1,600,000 $ 720,000
Investment income 800,000 80,000
Gain on sale of land ___-___ 54,400
Total revenue 2,400,000 854,400
Cost of goods sold 1,040,000 400,000
Other expenses 768,000 256,000
Total expenses 1,808,000 656,000
Net income $ 592,000 $ 198,400

Additional information:

• At the beginning of 20X5, Chee acquired a piece of equipment from Tyme for $168,000. Tyme had purchased the equipment 5 years ago for $320,000. When Tyme purchased the equipment, it had expected that it would have a useful life of 20 years, with no residual value. Chee concurred with this estimate (i.e., at the time of purchase, Chee expected that the equipment would have a remaining useful life of 15 years). Both Tyme and Chee use the straight-line method of amortization.

• Sale of goods from Chee to Tyme:

Gross Unsold Goods in Tyme’s
Year Sales Margin Inventory at Year-End
20X7 $400,000 30% $80,000
20X8 320,000 30% 72,000

• Sale of goods from Tyme to Chee:

Gross Unsold Goods in Chee’s
Year Sales Margin Inventory at Year-End
20X7 $240,000 40% $56,000
20X8 200,000 40% 48,000

• All goods in inventory at year-end were sold to third parties in the subsequent year.

• On August 31, 20X8, Chee purchased a tract of land from Tyme for $106,400 in cash. Tyme had acquired the land 12 years previously for $52,000.

• During 20X8, Chee declared and paid dividends of $200,000 and Tyme declared and paid dividends of $32,000.

• There was no impairment of goodwill at the end of 20X8.

• Chee accounts for its investments using the cost method and uses the entity theory method to report its business combinations.

Required:

a) Prepare a consolidated income statement for Chee Co. for the year ended December 31, 20X8. Be sure to show your supporting calculations. (25 marks)

b) Prove that your calculation of net income attributable to the shareholders of Chee Co. in (a) is correct by calculating Chee’s net income using the equity method. (10 marks)

Problem 3 (15 marks)

At the beginning of 20X3, Jong Ltd. acquired 80% of the outstanding shares of Nye Co. for $1,400,000. At the acquisition date, Nye’s shareholders’ equity consisted of the following:

Common shares $350,000
Retained earnings 875,000

At the time of acquisition, all of Nye’s net identifiable assets had carrying values that equalled their fair values with the exception of its patents. The fair value of the patents exceeded their carrying values by $525,000 and had a remaining life of 8 years.

The trial balances for Jong and Nye for December 31, 20X6 are as follows:

Jong Ltd. Nye Co.
DR CR DR CR
Cash 700,000 350,000
Accounts receivable 1,400,000 249,200
Inventory 2,100,000 1,575,000
Plant and equipment 9,800,000 1,750,000
Accumulated amortization 2,800,000 700,000
Patents 280,000
Investment in Nye 1,400,000
Investment in Jong bonds 170,800
Accounts payable 1,744,400 1,734,950
Bonds payable 350,000
Premium on bonds payable 5,600
Common shares 3,150,000 350,000
Retained earnings 7,000,000 1,400,000
Dividends 420,000 175,000
Sales 3,430,000 1,400,000
Dividend revenue 140,000
Interest revenue 15,050
Cost of goods sold 1,680,000 595,000
Operating expenses 673,400 210,000
Interest expense 26,600
Income tax expense 420,000 _________ 245,000 ________
18,620,000 18,620,000 5,600,000 5,600,000

?
Additional information:

• 20X6 net income for Jong is $770,000 and for Nye, $365,050.

• At the beginning of 20X6, Jong purchased a piece of equipment from Nye for $350,000. At the time of purchase, the equipment had a net book value of $280,000 to Nye and an estimated useful life of 5 years.

• At the end of 20X5, Jong’s inventory included $350,000 of goods purchased from Nye. Nye’s had recorded a gross profit of $140,000 on this sale.

• During 20X6, Nye sold goods to Jong for $700,000. Nye earned a gross profit of $280,000 on this sale.

• At the end of 20X6, Jong had sold all the goods in its opening inventory to third parties but still had $210,000 of the goods purchased from Nye during 20X6 in its ending inventory. All of those goods will be sold to third parties in 20X7.

• Amortization expense for the plant, equipment, and patent are included in operating expenses.

• At the beginning of 20X4, Jong issued bonds for $359,800. These bonds have an interest rate of 8%, mature in 7 years, and have a face value of $350,000. Interest will be paid annually at the end of the year. Nye purchased half of these bonds at the beginning of 20X6 for $169,750. Any intercompany gains or losses on these bonds are to be allocated between the two companies.

• Both companies have an average income tax rate of 40%.

Required:

Assume that Jong used the equity method of accounting for its investment in Nye instead of the cost method. Calculate the balance of its “Investment in Nye” account.

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accounting assignment

$7.00

Description

Total Assets 80

Floating
rate mortgages $ 40
(Currently 9% annuall7)

30-year fixed rate loans
(Currently 6% annuall7) 40

Liabilities and Equity

1-year time deposits
(currently 5% annually)

$ 50
3-year time deposits
(Currently 7% annually)

20
Equity 10

Total liabilities and equity 80

a. What Is X’s expected net interest income at year end ?
b. What will net interest income be if interest rates rise by 1 percent ?
c. Using the cumulative repricing gap model, what is the expected net interest
income for a 1 percent increase in interest rates ?
d. What will net interest income be at year end if interest rates on rate
sensitive assets increase by 1% but interest rates on rate sensitive
liabilities increase by 0.5% ?

Additional Requirements

Level of Detail: Show all work

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accounting assignment

$13.00

Description

1 Calculating ratios: solve the unknown
The current asset section of the Excalibur Tire Company’s balance sheet consists of cash, marketable securities, accounts receivable, and inventories. The December 31, 2011 balance sheet revealed the following:
Inventories 840,000
Total Assets 2,800,000
Current ratio 2.25
Acid –test ratio 1.2
Debt to equity 1.8

Required:
Determine the following 2011 balance sheet items:
1. Current assets
2. Shareholder’s equity
3. Noncurrent assets
4. Long-term liabilities

2 Effect of management decisions on ratios
Most decisions made by management impact the ratios analysts use to evaluate performance. Indicate (by letter) whether each of the actions listed below will immediately increase (I), decrease (D), or have no effect (N) on the ratios shown. Assume each ratio is less than 1.0 before the action is taken.

3 Balance Sheet Errors
You recently joined the internal auditing department of Marcus Clothing Corporation. As one of your firs assignments you are examining a balance sheet prepared by a staff account.

In the course of your examination you uncover the following information pertaining to the balance sheet:
1. The company rents it facilities. The land that appears in the statement is being held for future sale.
2. The note receivable is due in 2013. The balance of 53,000 includes 3,000 of accrued interest. The next interest payment is due in July 2012.
3. The note payable is due in installments of 20,000 per year. Interest on both the notes and bonds is payable annually.
4. The company’s investments consist of marketable equity securities of other corporations. Management does not intend to liquidate any investments in the coming year.
Required:
Identify and explain the deficiencies in the statement prepared by the company’s accountant. Include in your answer items that require additional disclosure, either on the face of the statement or in a note.

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accounting assignment

$14.00

Description

The Diamond Glitter Company is in the process of preparing its financial statements for 2012. Assume that no entries for depreciation have been recorded in 2012. The following information related to depreciation of fixed assets is provided to you.

1. The company purchased equipment on January 2, 2009, for $165,000. At that time, the equipment had an estimated useful life of 7 years with a $25,000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2012, as a result of additional information, the company determined that the equipment has a remaining useful life of 3 years with a $15,000 salvage value.

2. During 2012, the company changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $625,000. It had a useful life of 10 years and a salvage value of $50,000. The following computations present depreciation on both bases for 2010 and 2011.
2011 2010
Straight-line $ 57,500 $ 57,500
Declining-balance $ 92,000 $ 115,000

3. The company purchased a machine on July 1, 2010, at a cost of $450,000. The machine has a salvage value of $25,000 and a useful life of 10 years. The company’s bookkeeper recorded straight-line depreciation in 2010 and 2011 but failed to consider the salvage value. Ignore Tax effect.

4. The company has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows.
December 31, 2011 $ 5,400
December 31, 2012 $ 4,600

5. In reviewing the December 31, 2011, inventory, the company discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. The company has already made an entry that established the incorrect December 31, 2012, inventory amount.
December 31, 2010 Understated $ 32,000
December 31, 2011 Understated $ 51,000
December 31, 2012 Overstated $ 9,500

6. At December 31, 2012, the company decided to change to the straight -line method depreciation method on its retail display equipment from double-declining-balance. The equipment had an original cost of $250000 when purchased on January 1, 2011. It has a salvage value of 0 and a 8-year useful life. Depreciation expense recorded prior to 2012 under the double-declining-balance method was $62500. The company has already recorded 2012 depreciation expense of $46875 using the double-declining-balance method.

7. Before the current year, the company accounted for its income from long-term construction contracts on the completed-contract basis. Early this year, the company changed to the percentage-of-completion basis for accounting purposes but continues to use the completed-contract method for tax purposes. Income for the current year has been recorded using the new method. Prior year tax effects must be considered. The following information is available.
Pretax Income
Percentage-of-Completion Completed-Contract
Prior to 2012 $320,000 $180,000
2012 $140,000 $120,000

Required:
Prepare the journal entries necessary at December 31, 2012, to record the corrections and changes made to date related to the information provided. The books are still open for 2012. The income tax rate is 35%. The company has not yet recorded its 2012 income tax expense and payable amounts so current-year tax effects may be ignored.

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accounting assignment

$42.00

Description

Chapter 7:
1. A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company’s expected and required rate of return is 15%, which of the following statements is CORRECT?

a. The company’s current stock price is $20.
b. The company’s dividend yield 5 years from now is expected to be 10%.
c. The constant growth model cannot be used because the growth rate is negative.
d. The company’s expected capital gains yield is 5%.
e. The company’s stock price next year is expected to be $9.50.

2. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 2.0%, and if investors’ required rate of return is 10.5%, what is the stock’s intrinsic value?

3. E. M. Roussakis Inc.’s stock currently sells for $50 per share. The stock’s dividend is projected to increase at a constant rate of 4% per year. The required rate of return on the stock, rs, is 15.50%. What is Roussakis’ expected price 5 years from now?

4. Carter’s preferred stock pays a dividend of $2.00 per quarter. If the price of the stock is $60.00, what is its nominal (not effective) annual expected rate of return?

5. Schnusenberg Corporation just paid a dividend of $1.25 per share, and that dividend is expected to grow at a constant rate of 7.00% per year in the future. The company’s beta is 1.35, the required return on the market is 10.50%, and the risk-free rate is 4.00%. What is the intrinsic value for Schnusenberg’s stock?

6. Rentz RVs Inc. (RRV) is presently enjoying relatively high growth because of a surge in the demand for recreational vehicles. Management expects earnings and dividends to grow at a rate of 30% for the next 4 years, after which high gas prices will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s last dividend, D0, was $1.25. RRV’s beta is 1.20, the market risk premium is 5.25%, and the risk-free rate is 3.00%. What is the intrinsic value of RRV’s common stock?

7. Using the information on Rentz RVs Inc. from problem 6, what is the dividend yield expected for the next year?

8. The Wei Company’s last paid dividend was $2.75. The dividend growth rate is expected to be constant at 2.50% for 2 years, after which dividends are expected to grow at a rate of 8.00% forever. Wei’s required return (rs) is 12.00%. What is the intrinsic value of Wei’s stock?
9. Using the information on Wei Company from problem 8, what should be the price of Wei’s stock at the end of Year 5?

10. You are an analyst studying Beranek Technologies, which was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.50 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years with 50% dividend growth in year 4 and 25% dividend growth in year 5, and then to increase its dividend at a constant growth rate of 6.00% per year thereafter. Assuming a required return of 15.00%, what is your estimate of the intrinsic value of Beranek’s stock?

Chapter 9:
11. Schalheim Sisters Inc. has always paid out all of its earnings as dividends, and hence has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity. Its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would reduce its WACC?

a. The market risk premium declines.
b. The flotation costs associated with issuing new common stock increase.
c. The company’s beta increases.
d. Expected inflation increases.
e. The flotation costs associated with issuing preferred stock increase.

12. Hettenhouse Company’s (HC) perpetual preferred stock sells for $105.50 per share, and it pays a $9.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.50% of the price paid by investors. HC’s marginal tax rate is 30%. What is the company’s cost of preferred stock for use in calculating the WACC?

13. Scanlon Inc.’s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: the risk–free rate of return is 4.00%; the market risk premium is 6.00%; and Scanlon’s beta is 0.85. Based on the CAPM approach, what is the cost of equity from retained earnings?

14. Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = $1.90; P0 = $45.50; and g = 7.00% (constant). What is the cost of equity from retained earnings based on the DCF approach?

15. P. Lange Inc. hired your consulting firm to help them estimate the cost of equity. The yield on Lange’s bonds is 7.25%, and your firm’s economists believe that the cost of equity can

15. P. Lange Inc. hired your consulting firm to help them estimate the cost of equity. The yield on Lange’s bonds is 7.25%, and your firm’s economists believe that the cost of equity can be estimated using a risk premium of 5.50% over a firm’s own cost of debt. What is an estimate of Lange’s cost of equity from retained earnings?

16. In their most recent fiscal year, XYZ, Inc. had net income of $20 million and total common equity of $200 million. Also, XYZ, Inc. pays out 40% of its earnings as dividends. Using the Retention Growth Model, what is your best estimate of XYZ’s expected growth rate?

17. Several years ago the Pettijohn Company sold a $1,000 par value, noncallable bond that now has 15 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $950, and the company’s tax rate is 34%. To issue new bonds, Pettijohn would incur 3% flotation costs. What is the component cost of debt for use in the WACC calculation?

18. LePage Co. expects to earn $2.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $22.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 7% would be incurred. What would be the cost of equity from new common stock?

19. You were hired as a consultant to Quigley Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 13.25%, and the tax rate is 34%. The firm will not be issuing any new stock. What is Quigley’s WACC?

20. Roxie Epoxy’s balance sheet shows a total of $50 million long-term debt with a coupon rate of 8.00% and a yield to maturity of 7.00%. This debt currently has a market value of $55 million. The balance sheet also shows that that the company has 20 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $8.50 per share; stockholders’ required return, rs, is 15.00%; and the firm’s tax rate is 35%. Based on market value weights, and assuming the firm is currently at its target capital structure, what WACC should Roxie use to evaluate capital budgeting projects?

Chapter 10:

21. Projects C and D are mutually exclusive and have normal cash flows with an initial outflow followed by a series of positive cash inflows. Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is CORRECT?

a. Project D has a higher IRR.

b. Project D is probably larger in scale than Project C.

c. Project C probably has a faster payback.

d. Project C has a higher IRR.

e. The crossover rate between the two projects is below 12%.

22. Frye Foods is considering a project that has the following cash flow data. What is the

project’s IRR?

Year:

0

1

2

3

4

5

Cash flows:

-$1,300

$325

$325

$325

$325

$325

23. Van Auken Inc. is considering a project that has the following cash flows:

Year

Cash Flow

0

-$1,000

1

400

2

300

3

600

4

400

The company’s WACC is 10%. What is the project’s ordinary payback?

24. Babcock Inc. is considering a project that has the following cash flow and WACC data.

What is the project’s NPV?

WACC:

14.00%

Year:

0

1

2

3

Cash flows:

-$950

$500

$300

$400

25. Garvin Enterprises is considering a project that has the following cash flow and WACC

data. What is the project’s discounted payback?

WACC:

8.00%

Year:

0

1

2

3

Cash flows:

-$1,000

$500

$500

$500

26. Hindelang Inc. is considering a project that has the following cash flow and WACC data.

What is the project’s MIRR?

WACC:

14.00%

Year:

0

1

2

3

4

Cash flows:

-$900

$300

$320

$340

$360

27. Hogwarts Inc. is considering a project with the following cash flows:

Initial cash outlay = $2,500,000

After–tax net operating cash flows for years 1 to 4 = $750,000 per year

Additional after–tax terminal cash flow at the end of year 4 = $450,000

Compute the profitability index of this project if Hogwarts’ WACC is 12%.

28. Anderson Associates is considering two mutually exclusive projects that have the following cash

flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$10,000 -$8,000

1 2,000 7,000

2 2,000 3,000

3 6,000 1,000

4 8,000 1,000

At what cost of capital do the two projects have the same net present value? (That is, what is the crossover rate?)

29. Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B.

System A requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $60,000 at the end of each of the next 2 years. The system could be replaced every 2 years, and the cash inflows and outflows would remain the same.

System B also requires an up-front cost of $100,000, after which it would generate positive after-tax cash flows of $48,000 at the end of each of the next 3 years. System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 10%.

The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm. The company’s cost of capital is 14%. What is the NPV (on a 6-year extended basis) of the system that adds the most value?

30. Using the information from problem 29 on Walker & Campsey, what is the equivalent annual annuity (EAA) for System A?

Chapter 11:

31. When evaluating a new project, firms should include in the projected cash flows all of the

following EXCEPT:

a.

Changes in net operating working capital attributable to the project.

b.

Previous expenditures associated with a market test to determine the feasibility of the project provided those costs have been expensed for tax purposes.

c.

The value of a building owned by the firm that will be used for this project.

d.

A decline in the sales of an existing product provided that decline is directly attributable to this project.

e.

The salvage value of assets used for the project at the end of the project’s life.

32. Taussig Technologies is considering two potential projects, X and Y. In assessing the projects’ risks, the company estimated the beta of each project versus both the company’s other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following numbers:

Project X

Project Y

Expected NPV

$350,000

$350,000

Standard deviation (sNPV)

$100,000

$150,000

Project beta (vs. market)

1.4

0.8

Correlation of the project cash flows with cash flows from currently existing projects.

Cash flows are notcorrelated with the cash flows from existing projects.

Cash flows are highlycorrelated with the cash flows from existing projects.

Which of the following statements is CORRECT?

a.

Project X has more stand-alone risk than Project Y.

b.

Project X has more corporate (or within-firm) risk than Project Y.

c.

Project X has more market risk than Project Y.

d.

Project X has the same level of corporate risk as Project Y.

e.

Project X has less market risk than Project Y.

33. Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Langston evaluates low-risk projects with a WACC of 8%, average projects at 10%, and high-risk projects at 12%. The company is considering the following projects:

Project

Risk

Expected Return

A

High

15%

B

Average

12

C

High

11

D

Low

9

E

Low

6

Which set of projects would maximize shareholder wealth?

a.

A and B.

b.

A, B, and C.

c.

A, B, and D.

d.

A, B, C, and D.

e.

A, B, C, D, and E.

34. Which of the following statements is CORRECT?

a.

Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset.

b.

Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.

c.

Corporations must use MACRS depreciation for both stockholder reporting and tax purposes.

d.

Using MACRS depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project’s forecasted NPV.

e.

Using MACRS depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project’s forecasted NPV.

35. Which of the following does NOT have incremental cash flow effects and thus should NOT be considered in capital budgeting decisions?

a.

A firm has a parcel of land that can be used for a new plant site, be sold, or be used for agricultural purposes.

b.

A new product will generate new sales, but some of those new sales will be from customers who switch from one of the firm’s current products.

c.

A firm must obtain new equipment for the project, and $1 million of costs for shipping and installing the new machinery will be required.

d.

A firm has spent $2 million on R&D associated with a new product. These costs have been expensed for tax purposes, and they cannot be recovered if the new project is rejected.

e.

A firm can produce a new product, and the existence of that product will stimulate sales of some of the firm’s other products.

36. You work for Athens Inc., and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 after-tax net operating cash flow?

Sales revenues

$15,000

Depreciation

$4,000

Cash operating costs

$6,000

Tax rate

39.0%

37. Fool Proof Software is considering a new project whose data are shown below. The equipment that will be used has a 3-year class life, and will be depreciated by the MACRS depreciation system. Revenues and Cash operating costs are expected to be constant over the project’s 10-year life. What is the Year 1 after-tax net operating cash flow?

Equipment cost (depreciable basis)

$75,000

Sales revenues, each year

$70,000

Cash operating costs

$25,000

Tax rate

35.0%

38. Bing Services is now in the final year of a project. The equipment originally cost $20,000, of which 75% has been depreciated. Bing can sell the used equipment today for $7,000, and its tax rate is 35%. What is the equipment’s net after-tax salvage value for use in a capital budgeting analysis?

39. Thomson Media is considering investing in some new equipment whose data are shown below. The equipment has a 3-year class life and will be depreciated by the MACRS depreciation system, and it will have a positive pre-tax salvage value at the end of Year 3, when the project will be closed down. Also, some new working capital will be required, but it will be recovered at the end of the project’s life. Revenues and cash operating costs are expected to be constant over the project’s 3-year life. What is the project’s NPV?

WACC

12.0%

Net investment in fixed assets (depreciable basis)

$60,000

Required new working capital

$10,000

Sales revenues, each year

$75,000

Operating costs excl. depr’n, each year

$30,000

Expected pretax salvage value

$7,000

Tax rate

35.0%

40. A project’s base case or most likely NPV is $50,000, and assume its probability of occurrence is

60%. Assume the best case scenario NPV is 50% higher than the base case and assume the worst

scenario NPV is 30% lower than the base case. Both the best case scenario and the worst case scenario

have a 20% probability of occurrence. Find the projects coefficient of variation.

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accounting assignment

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Description

E11-1 If Halley Industries

reimburses employees who earn master’s degrees and who agree to remain with the

firm for an additional 3 years, should the expense of the tuition reimbursement

be categorized as a capital expenditure or an operating expenditure?

E11-2 Iridium Corp. has spent

$3.5 billion over the past decade developing a satellite-based

telecommunication system. It is currently trying to decide whether to spend an

additional $350 million on the project. The firm expects that this outlay will

finish the project and will generate cash flow of $15 million per year over the

next 5 years. A competitor has offered $450 million for the satellites already

in orbit. Classify the firm’s outlays as sunk costs or opportunity costs, and

specify the relevant cash flows,

E11-3 Canvas Reproductions, Inc.,

has spent $4,500 dollars researching a new project. The project requires

$20,000 worth of new machinery, which would cost $3,000 to install. The company

would realize $4,500 in after-tax proceeds from the sale of old machinery. If

Canvas’s working capital is unaffected by this project, what is the initial

investment amount for this project?

E11-4 A few years ago, Largo

Industries implemented an inventory auditing system at an installed cost of

$175,000. Since then, it has taken depreciation deductions totaling $124,250.

What is the system’s current book value? If Largo sold the system for $110,000,

how much recaptured depreciation would result?

E11-5 Bryson Sciences is planning

to purchase a high-powered microscopy machine for $55,000 and incur an additional

$7,500 in installation expenses. It is replacing similar microscopy equipment

that can be sold to net $35,000, resulting in taxes from a gain on the sale of

$11,250. Because of this transaction, current assets will increase by $6,000

and current liabilities will increase by $4,000. Calculate the initial

investment in the high-powered microscopy machine.

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accounting assignment

$89.00

Description

As a financial consultant, you have contracted with Wheel Industries to evaluate their procedures involving the evaluation of long term investment opportunities. You have agreed to provide a detailed report illustrating the use of several techniques for evaluating capital projects including the weighted average cost of capital to the firm, the anticipated cash flows for the projects, and the methods used for project selection. In addition, you have been asked to evaluate two projects, incorporating risk into the calculations.

You have also agreed to provide an 8-10 page report, in good form, with detailed explanation of your methodology, findings, and recommendations.

Company Information

Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%.

Required:

Wheel has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for $50 per share with a 10% flotation cost, what is the cost of new equity for the firm? What are the advantages and disadvantages of using this type of financing for the firm?

The firm is considering using debt in its capital structure. If the market rate of 5% is appropriate for debt of this kind, what is the after tax cost of debt for the company? What are the advantages and disadvantages of using this type of financing for the firm?

The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.

Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.

If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?

Now calculate the IRR for the project. Is this an acceptable project? Why or why not? Is there a conflict between your answer to part C? Explain why or why not?

Wheel has two other possible investment opportunities, which are mutually exclusive, and independent of Investment A above. Both investments will cost $120,000 and have a life of 6 years. The after tax cash flows are expected to be the same over the six year life for both projects, and the probabilities for each year’s after tax cash flow is given in the table below.

Investment B Investment C

Probability

After Tax

Cash Flow

Probability

After Tax

Cash Flow

0.25

$20,000

0.30

$22,000

0.50

32,000

0.50

40,000

0.25

40,000

0.20

50,000

What is the expected value of each project’s annual after tax cash flow? Justify your answers and identify any conflicts between the IRR and the NPV and explain why these conflicts may occur.

Assuming that the appropriate discount rate for projects of this risk level is 8%, what is the risk-adjusted NPV for each project? Which project, if either, should be selected? Justify your conclusions

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accounting assignment

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Description

Questions 6

E12-1 Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $25,000, has a 5-year life, and has no residual value at the end of the 5 years. The company’s cost of capital is 12%. Known with less certainty are the actual after-tax cash inflows for each of the 5 years. The company has estimated expected cash inflows for three scenarios: pessimistic, most likely, and optimistic. These expected cash inflows are listed in the following table. Calculate the range for the NPV given each scenario.

Expected cash inflows

Year

Pessimistic

Most likely

Optimistic

1

$5,500

$ 8,000

$10,500

2

6,000

9,000

12,000

3

7,500

10,500

14,500

4

6,500

9,500

11,500

5

4,500

6,500

7,500

E12-2 You wish to evaluate a project requiring an initial investment of $45,000 and having a useful life of 5 years. What minimum amount of annual cash inflow do you need if your firm has an 8% cost of capital? If the project is forecast to earn $12,500 per year over the 5 years, what is its IRR? Is the project acceptable?

E12-3 Like most firms in its industry, Yeastime Bakeries uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale of 0-10. The scale is recreated in the following table.

Risk index

Required return

0

4.0% (current risk-free rate)

1

4.5

2

5.0

3

5.5

4

6.0

5

6.5 (current IRR)

6

7.0

7

7.5

8

8.0

9

8.5

10

9.0

The firm is analyzing two projects based on their RADRs. Project Sourdough requires an initial investment of $12,500 and is assigned a risk index of 6. Project Greek Salad requires an initial investment of $7,500 and is assigned a risk index of 8. The two projects have 7-year lives. Sourdough is projected to generate cash inflows of $5,500 per year. Greek Salad is projected to generate cash inflows of $4,000 per year. Use each project’s RADR to select the better project.

E12-4 Outcast, Inc., has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, M and N. The cash flows for each project are presented in the following table. Calculate the NPV and the annualized net present value (ANPV) for each project using the firm’s cost of capital of 8%. Which project would you recommend?

Project M

Project N

Initial investment

$35,000

$55,000

Year

Cash inflows

1

$12,000

$18,000

2

25,000

15,000

3

30,000

25,000

4

—

10,000

5

—

8,000

6

—

5,000

7

—

5,000

E12-5 Longchamps Electric is faced with a capital budget of $150,000 for the coming year. It is considering six investment projects and has a cost of capital of 7%. The six projects are listed in the following table, along with their initial investments and their IRRs. Using the data given, prepare an investment opportunities schedule (IOS). Which projects does the IOS suggest should be funded? Does this group of projects maximize NPV? Explain.

Project

Initial investment

IRR

1

$75,000

8%

2

40,000

10

3

35,000

7

4

50,000

11

5

45,000

9

6

20,000

6

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accounting assignment

$53.00

Description

Questions 6

E12-1 Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $25,000, has a 5-year life, and has no residual value at the end of the 5 years. The company’s cost of capital is 12%. Known with less certainty are the actual after-tax cash inflows for each of the 5 years. The company has estimated expected cash inflows for three scenarios: pessimistic, most likely, and optimistic. These expected cash inflows are listed in the following table. Calculate the range for the NPV given each scenario.

Expected cash inflows

Year

Pessimistic

Most likely

Optimistic

1

$5,500

$ 8,000

$10,500

2

6,000

9,000

12,000

3

7,500

10,500

14,500

4

6,500

9,500

11,500

5

4,500

6,500

7,500

E12-2 You wish to evaluate a project requiring an initial investment of $45,000 and having a useful life of 5 years. What minimum amount of annual cash inflow do you need if your firm has an 8% cost of capital? If the project is forecast to earn $12,500 per year over the 5 years, what is its IRR? Is the project acceptable?

E12-3 Like most firms in its industry, Yeastime Bakeries uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale of 0-10. The scale is recreated in the following table.

Risk index

Required return

0

4.0% (current risk-free rate)

1

4.5

2

5.0

3

5.5

4

6.0

5

6.5 (current IRR)

6

7.0

7

7.5

8

8.0

9

8.5

10

9.0

The firm is analyzing two projects based on their RADRs. Project Sourdough requires an initial investment of $12,500 and is assigned a risk index of 6. Project Greek Salad requires an initial investment of $7,500 and is assigned a risk index of 8. The two projects have 7-year lives. Sourdough is projected to generate cash inflows of $5,500 per year. Greek Salad is projected to generate cash inflows of $4,000 per year. Use each project’s RADR to select the better project.

E12-4 Outcast, Inc., has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, M and N. The cash flows for each project are presented in the following table. Calculate the NPV and the annualized net present value (ANPV) for each project using the firm’s cost of capital of 8%. Which project would you recommend?

Project M

Project N

Initial investment

$35,000

$55,000

Year

Cash inflows

1

$12,000

$18,000

2

25,000

15,000

3

30,000

25,000

4

—

10,000

5

—

8,000

6

—

5,000

7

—

5,000

E12-5 Longchamps Electric is faced with a capital budget of $150,000 for the coming year. It is considering six investment projects and has a cost of capital of 7%. The six projects are listed in the following table, along with their initial investments and their IRRs. Using the data given, prepare an investment opportunities schedule (IOS). Which projects does the IOS suggest should be funded? Does this group of projects maximize NPV? Explain.

Project

Initial investment

IRR

1

$75,000

8%

2

40,000

10

3

35,000

7

4

50,000

11

5

45,000

9

6

20,000

6

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