Managerial Accounting 1B
Financial and Managerial Accounting
Chapter 24
1.Exercise 24-1 Payback period computation; even cash flows L.O. P1
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Compute the payback period for each of these two separate investments: |
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a. |
A new operating system for an existing machine is expected to cost $260,000 and have a useful life of five years. The system yields an incremental after-tax income of $75,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. (Round your answer to 2 decimal places.) |
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Payback period |
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b. |
A machine costs $190,000, has a $10,000 salvage value, is expected to last nine years, and will generate an after-tax income of $30,000 per year after straight-line depreciation. (Round your answer to 1 decimal place.) |
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Payback period |
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2.
Exercise 24-2 Payback period computation; uneven cash flows L.O. P1
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Wenro Company is considering the purchase of an asset for $90,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. |
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Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Total |
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Net cash flows |
$ |
30,000 |
$ |
20,000 |
$ |
30,000 |
$ |
60,000 |
$ |
19,000 |
$ |
159,000 |
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Compute the payback period for this investment. (Round your intermediate calculations to 3 decimal places and final answer to 1 decimal place.) |
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Payback period |
3.
Exercise 24-3 Payback period computation; declining-balance depreciation L.O. P1
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A machine can be purchased for $300,000 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 $50,000 salvage value. |
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Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
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Net incomes |
$ |
20,000 |
$ |
50,000 |
$ |
100,000 |
$ |
75,000 |
$ |
200,000 |
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Compute the machine s payback period (ignore taxes). (Round your intermediate calculations to 3 decimal places and final answer to 2 decimal places.) |
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Payback period |
4.
Exercise 24-4 Accounting rate of return L.O. P2
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A machine costs $500,000 and is expected to yield an after-tax net income of $15,000 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 accounting rate of return. (Omit the “%” sign in your response.) |
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Accounting rate of return |
5.
Exercise 24-6 Computing net present value L.O. P3
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K2B 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 $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. K2B Co. concludes that it must earn at least a 8% return on this investment. The company expects to sell 96,000 units of the equipment s product each year. The expected annual income related to this equipment follows. (UseTable B.3) |
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Sales |
$ |
150,000 |
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Costs |
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Materials, labor, and overhead (except depreciation) |
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80,000 |
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Depreciation on new equipment |
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20,000 |
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Selling and administrative expenses |
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15,000 |
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Total costs and expenses |
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115,000 |
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Pretax income |
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35,000 |
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Income taxes (30%) |
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10,500 |
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Net income |
$ |
24,500 |
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Compute the net present value of this investment. (Round “PV Factor” to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount. Omit the “$” sign in your response.) |