# Week 5 Assignment Chapter 8 Problems

Please complete the following 5 exercises below in either Excel or a word document (but must be single document). You must show your work where appropriate (leaving the calculations within Excel cells is acceptable). Save the document, and submit it in the appropriate week using the Assignment Submission button.

Chapter 8 Exercise 1:

1. Basic present value calculations

Calculate the present value of the following cash flows, rounding to the nearest dollar:

A single cash inflow of \$12,000 in five years, discounted at a 12% rate of return. An annual receipt of \$16,000 over the next 12 years, discounted at a 14% rate of return. A single receipt of \$15,000 at the end of Year 1 followed by a single receipt of \$10,000 at the end of Year 3. The company has a 10% rate of return. An annual receipt of \$8,000 for three years followed by a single receipt of \$10,000 at the end of Year 4. The company has a 16% rate of return.

Chapter 8 Exercise 4:

4. Cash flow calculationsand net present value

On January 2, 19X1, Bruce Greene invested \$10,000 in the stock market and purchased 500 shares of Heartland Development, Inc. Heartland paid cash dividends of \$2.60 per share in 19X1 and 19X2; the dividend was raised to \$3.10 per share in 19X3. On December 31, 19X3, Greene sold his holdings and generated proceeds of \$13,000. Greene uses the net-present- value method and desires a 16% return on investments.

Prepare a chronological list of the investment's cash flows. Note: Greene is entitled to the 19X3 dividend. Compute the investment's net present value, rounding calculations to the nearest dollar. Given the results of part (b), should Greene have acquired the Heartland stock? Briefly explain.

Chapter 8 exercise 5:

5. Straightforwardnet present value and internal rate of return

The City of Bedford is studying a 600-acre site on Route 356 for a new landfill. The startup cost has been calculated as follows:

Purchase cost: \$450 per acre

Site preparation: \$175,000

The site can be used for 20 years before it reaches capacity. Bedford, which shares a facility in Bath Township with other municipalities, estimates that the new location will save \$40,000 in annual operating costs.

Should the landfill be acquired if Bedford desires an 8% return on its investment? Use the net-present-value method to determine your answer. Compute the internal rate of return on this project.

Chapter 8 Problem 1:

1. Straightforward net-present-value and payback computations

STL Entertainment is considering the acquisition of a sight-seeing boat for summer tours along the Mississippi River. The following information is available:

Cost of boat

\$500,000

Service life

10 summer seasons

Disposal value at the end of 10 seasons

\$100,000

Capacity per trip

300 passengers

Fixed operating costs per season (including straight-line depreciation)

\$160,000

Variable operating costs per trip

\$1,000

Ticket price

\$5 per passenger

All operating costs, except depreciation, require cash outlays. On the basis of similar operations in other parts of the country, management anticipates that each trip will be sold out and that 120,000 passengers will be carried each season. Ignore income taxes.

Instructions:

By using the net-present-value method, determine whether STL Entertainment should acquire the boat. Assume a 14% desired return on all investments,- round calculations to the nearest dollar.

Chapter 8 Problem 4:

4. Equipment replacement decision

Columbia Enterprises is studying the replacement of some equipment that originally cost \$74,000. The equipment is expected to provide six more years of service if \$8,700 of major repairs are performed in two years. Annual cash operating costs total \$27,200. Columbia can sell the equipment now for \$36,000; the estimated residual value in six years is \$5,000.

New equipment is available that will reduce annual cash operating costs to \$21,000. The equipment costs \$103,000, has a service life of six years, and has an estimated residual value of \$13,000. Company sales will total \$430,000 per year with either the existing or the new equipment. Columbia has a minimum desired return of 12% and depreciates all equipment by the straight-line method.

Instructions:

By using the net-present-value method, determine whether Columbia should keep its present equipment or acquire the new equipment. Round all calculations to the nearest dollar, and ignore income taxes. Columbia's management feels that the time value of money should be considered in all long-term decisions. Briefly discuss the rationale that underlies management's belief.

Week 5 Discussion Questions

Long-term Decision Making

List a few of the issues and considerations businesses should have when it comes to the selection of long-term investments and how those issues impact the various financial statements.

Responsibilities in Management Accounting

Review the rights and responsibilities of Certified Management Accountants:

http://www.imanet.org/PDFs/Public/CMA/RIghts_Responsibility_CMA.pdf

What are some of the ethical responsibilities and obligations that management accountants have within an organization? Provide some examples. Are these responsibilities different than the obligations for financial accountants?

Week 5 Final Paper

Focus of the Final Paper

You’ve just been hired onto ABC Company as the corporate controller. ABC Company is a manufacturing firm that specializes in making cedar roofing and siding shingles. The company currently has annual sales of around \$1.2 million, a 25% increase from the previous year. The company has an aggressive growth target of reaching \$3 million annual sales within the next 3 years. The CEO has been trying to find additional products that can leverage the current ABC employee skillset as well as the manufacturing facilities.

As the controller of ABC Company, the CEO has come to you with a new opportunity that he’s been working on. The CEO would like to use the some of the shingle scrap materials to build cedar dollhouses. While this new product line would add additional raw materials and be more time-intensive to manufacture than the cedar shingles, this new product line will be able to leverage ABC’s existing manufacturing facilities as well as the current staff. Although this product line will require added expenses, it will provide additional revenue and gross profit to help reach the growth targets. The CEO is relying on you to help decide how this project can be afforded  Provide details about the estimated product costs, what is needed to break even on the project, and what level of return this product is expected to provide.

In order to help out the CEO, you need to prepare a six- to eight-page report that will contain the following information (including exhibits, but excluding your references and title page). Refer to the accompanying Excel spreadsheet (available through your online course) for some specific cost and profit information to complete the calculations.

I. An overall risk profile of the company based on current economic and industry issues that it may be facing.

II. Current company cash flow

a. You need to complete a cash flow statement for the company using the direct method.
b. Once you’ve completed the cash flow statement, answer the following questions:
i. What does this statement of cash flow tell you about the sources and uses of the company?
ii. Is there anything ABC Company can do to improve the cash flow?
iii. Can this project be financed with current cash flow from the company? Why or why not?
iv. If the company needs additional financing beyond what ABC Company can provide internally (either now or sometime throughout the life of the project), how would you suggest the company obtain the additional financing, equity or corporate debt, and why?

III. Product cost: ABC Company believes that it has an additional 5,000 machine hours available in the current facility before it would need to expand. ABC Company uses machine hours to allocate the fixed factory overhead, and units sold to allocate the fixed sales expenses. ABC Company expects that it will take twice as long to produce the expansion product as it currently takes to produce its existing product.
a. What is the product cost for the expansion product?
b. By adding this new expansion product, it helps to absorb the fixed factory and sales expenses. How much cheaper does this expansion make the existing product?
c. Assuming ABC Company wants a 40% gross margin for the new product, what selling price should it set for the expansion product?
d. Assuming the same sales mix of these two products, what are the contribution margins and break-even points by product?
IV. Potential investments to accelerate profit: ABC company has the option to purchase additional equipment that will cost about \$42,000, and this new equipment will produce the following savings in factory overhead costs over the next five years:

Year 1, \$15,000
Year 2, \$13,000
Year 3, \$10,000
Year 4, \$10,000
Year 5, \$6,000

ABC Company uses the net-present-value method to analyze investments and desires a minimum rate of return of 12% on the equipment.
a. What is the net present value of the proposed investment ignore income taxes and depreciation?
b. Assuming a 5-year straight-line depreciation, how will this impact the factory’s fixed costs for each of the 5 years (and the implied product costs)? What about cash flow?
c. Considering the cash flow impact of the equipment as well as the time-value of money, would you recommend that ABC Company purchases the equipment? Why or why not?
V. Conclusion:
a. What are the major risk factors that you see in this project?
b. As the controller and a management accountant, what is your responsibility to this project?
c. What do you recommend the CEO do?

Writing the Final Paper

1.   Must be six to eight double-spaced pages in length, and formatted according to APA style as outlined in the Ashford Writing Center.
2.   Must include a title page with the following:
a.   Title of paper
b.   Student’s name
c.   Course name and number
d.   Instructor’s name
e.   Date submitted
3.   Must begin with an introductory paragraph that has a succinct thesis statement.
4.   Must address the topic of the paper with critical thought.
5.   Must end with a conclusion that reaffirms your thesis.
6.   Must document all sources in APA style, as outlined in the Ashford Writing Center.
7.   Must include a separate reference page, formatted according to APA style as outlined in the Ashford Writing Center.

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