 FIN370 University of Phoenix Week 2 Ch 9 Accounting Problem Sets

FIN370

University of Phoenix

### Question Description

Assignment Steps

Resources: Tutorial help on Excel® and Word® functions can be found on the Microsoft®Office website. There are also additional tutorials via the web that offer support for office products.

Complete the following Questions and Problems from each chapter as indicated.

Show all work and analysis.

Prepare in Microsoft® Excel® or Word.

• Ch. 9: Questions 7 & 8 (Questions and Problems section)
• Ch. 10: Questions 3 & 13 (Questions and Problems section)
• Ch. 11: Questions 1 & 7 (Questions and Problems section)

Format your assignment consistent with APA guidelines if submitting in Microsoft® Word.

I have attached a word document with all the questions

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Questions and Problem Sets FIN/370 29 August 2017 Questions and Problems Sets Week 2 Chapter 9 (7)Calculating IRR [LO5] A firm evaluates all of its projects by applying the IRR rule. If the required return is 14 percent, should the firm accept the following project? (8) Calculating NPV [LO1] For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return is 24 percent? Chapter 10 (3) Calculating Projected Net Income [LO1] A proposed new investment has projected sales of \$635,000. Variable costs are 44 percent of sales, and fixed costs are \$193,000; depreciation is \$54,000. Prepare a pro forma income statement assuming a tax rate of 35 percent. What is the projected net income? (13) Project Evaluation [LO1] Dog Up! Franks is looking at a new sausage system with an installed cost of \$540,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for \$80,000. The sausage system will save the firm \$170,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of \$29,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project? Chapter 11 (1) Calculating Costs and Break-Even [LO3] Night Shades, Inc. (NSI), manufactures biotech sunglasses. The variable materials cost is \$9.64 per unit, and the variable labor cost is \$8.63 per unit. a. What is the variable cost per unit? b. Suppose NSI incurs fixed costs of \$915,000 during a year in which total production is 215,000 units. What are the total costs for the year? c. If the selling price is \$39.99 per unit, does NSI break even on a cash basis? If depreciation is\$465,000 per year, what is the accounting break-even point? (7)Calculating Break-Even [LO3] In each of the following cases, calculate the accounting break-even and the cash breakeven points. Ignore any tax effects in calculating the cash break-even. ...
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Chapter 9 - Question 7:
Calculating IRR: A firm evaluates all its projects by applying the IRR rule. If the required
return is 14 percent, should the firm accept the following project?
Year

Cash Flow

0

-\$26,000

1

11, 000

2

14,000

3

10,000

Solution:
The internal rate of return (IRR) is defined as the compound rate of return r that makes the
NPV equal to zero:
𝑁

𝐶𝐹0 + ∑
𝑡=1

−26,000 +

𝐶𝐹𝑡
=0
(1 + 𝑟)𝑡

11,000
14,000
10,000
+
+
=0
(1 + 𝑟) (1 + 𝑟)2 (1 + 𝑟)3

From Excel®, the solution is 𝑟 = 17%
∴ 𝑰𝑹𝑹 𝒊𝒔 𝟏𝟕%
Since the IRR (17%) is greater than the required rate of return (14%), the firm should go ahead
and accept the project.

Chapter 9
Question 8
Calculating NPV: For the cash flows in the previous problems, suppose the firm uses the NPV
decision rule. At a required return of 11 percent, should the firm accept this project? What if the
required return is 24 percent?
Solution:
With reference to the table in question 7,
𝑁

𝑁𝑃𝑉 = 𝐶𝐹0 + ∑
𝑡=1

𝐶𝐹𝑡
(1 + 𝑟)𝑡

𝑨𝒕 𝒓 = 𝟏𝟏% = 𝟎. 𝟏𝟏,
𝑁𝑃𝑉 = −26,000 +

11,000
14,000
10,000
+
+
2
(1 + 0.11) (1 + 0.11)
(1 + 0.11)3

𝑁𝑃𝑉 = −26,000 +

11,000 14,000 10,000
+
+
1.11
1.112
1.113

𝑁𝑃𝑉 = −26,000 + 9,909.91 + 11,362.71 + 7,311.91
𝑁𝑃𝑉 = \$2,584.54
At a required return rate of 11%, NPV is positive (+\$2,584.54), the firm should accept the
project.
𝑨𝒕 𝒓 = 𝟐𝟒% = 𝟎. 𝟐𝟒,
𝑁𝑃𝑉 = −26,000 +

11,000
14,000
10,000
+
+
2
(1 + 0.24) (1 + 0.24)
(1 + 0.24)3

𝑁𝑃𝑉 = −26,000 +

11,000 14,000 10,000
+
+
1.24
1.242
1.243

𝑁𝑃𝑉 = −26,000 + 8,870.97 + 9,105.10 + 5,244.87
𝑁𝑃𝑉 = −\$2,799.06
At 24% required return rate, the NPV is a negative value (-\$2,799.06). Therefore the firm
should not accept this project

Chapter 10 - Question 3
Calculating Project Net Income: A proposed new investment has projected sales of \$635,000.
Variable costs are 44 percent of sales, and fixed costs are \$193,000; depreciation is \$54,000.
Prepare a pro forma income statement assuming a tax rate of 35 percent. What is the project net
income?
Solution:
Given:
Projected sales = \$635,000
Variable costs = 44% of sales = 0.44 × \$635,000 = \$279,400
Fixed costs = \$193,000
Depreciation = \$54,000
Tax rate = 35%
Total Expenses: 279,400 + 193,000 + 54,000 = \$526,400
Earning Before Interest and Tax (EBIT) = Projected Sales − Total Expenses
Earning Before Interest and Tax (EBIT) = 635,000 − 526,400 = \$108,600
Taxes = 35% × EBIT = 0.35 × \$108,600 = \$38,010
∴ 𝐏𝐫𝐨𝐣𝐞𝐜𝐭 𝐍𝐞𝐭 𝐈𝐧𝐜𝐨𝐦𝐞 = 𝐄𝐁𝐈𝐓 − 𝐓𝐚𝐱 = \$𝟕𝟎, 𝟓𝟗𝟎

Pro Forma Income Statement
Projected Sales

\$635,000

Variable cost

\$279,000

Fixed cost

\$193,000

Depreciation

\$54,000

Total Expenses

\$526,400

Earnings Before Interest and Taxes (EBIT)

\$108,600

Taxes

\$38,010

Net Income

\$70,590

The project Net Income is \$70,590.

Chapter 10 – Question 13.
Project Evaluation: Dog up! Frank is looking at a new sausage system with an installed cost of
\$540,000. This cost will be depreciated straight-line zero over the project’s five-year life, at the
end of which the sausage system can be scrapped for \$80,000. The sausage system will save the
firm \$170,000 per year in pretax operating costs, and the system requires an initial investment in
net working capital of \$29,000. If the tax rate is 34 percent and the discount rate is 10 percent,
what is the NPV of the project?
Solution:
For the new sausage system
Annual depreciation =

\$540,000
= \$108,000
5

Aftertax salvage value = Market Value + (Book Value − Market Value) × Tax
Market Value = \$80,000,

Book Value = \$0

Tax = 34%

∴ Aftertax salvage value = MV + (0 − MV) × T = MV − MV ∙ T = 𝐌𝐕(𝟏 − 𝐓)
∴ Aftertax salvage value = \$80,000(1 − 0.34) = \$52,800
Applying the tax shield approach, the Operating Cash Flow (OCF) for the project is:
𝑂𝐶𝐹 = (𝑆 − 𝐶) × (1 − 𝑇) + 𝐷 × 𝑇
where: 𝑠 = 𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠,

𝑐 = 𝑐𝑎𝑠ℎ 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠, 𝐷 = 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, and 𝑇 = 𝑡𝑎𝑥

∴ 𝑂𝐶𝐹 = \$170,000(1 − 0.34) + (0.34 × 108,000) = 112,200 + 36720 = \$148,920
The NPV f... uoscar (3983)
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