Practice Problems

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Business Finance

AMP 415

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Complete Problems E8-12 and P8-23 in the textbook and present your responses in an Excel spreadsheet.

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Name: Date: Class: Professor: ALL YELLOW HIGHLIGHTED CELLS REQUIRE DATA INPUT DO NOT KEY OVER FORMULAS E8-12 Use table in Exhibit 8B-1 in Appendix 8B Amount of the Investment: Less present value of Yr1 and Yr2 cash inflows: Year 1: Year 2: Present Value of Year 3 Cash Inflow: Therefore, the expected cash inflow for Year 3 is: $ $ - $ - $ - $ $ - CELLS REQUIRE DATA INPUT VER FORMULAS ALL YELLOW HIGHLIGHTED CELLS REQUIRE DATA INPUT FORMULAS E8-23 Requirement 1. Product A Sales Revenues: Variable Expenses: Fixed Out-of-pocket operating costs: Annual Net Cash inflows: Product B $ $ $ $ - $ $ $ $ - Product A Investment required (A): Annual Net Cash Inflow (B): Payback Period (A / B): Product B $ $ - $ $ - #DIV/0! #DIV/0! Requirement 2. Net Present Values: Product A Now Purchase of Equipment: Sales: Variable Expenses: Fixed out-of-pocket expenses: Total Cash Flows (A): Discount Factor (B): Present Value (A x B): Net Present Value: Net Present Values: $ $ $ $ 1 $ $ $ $ 1,000 $ - - $ $ $ $ - - $ - Product B Now Purchase of Equipment: Sales: Variable Expenses: Fixed out-of-pocket expenses: Total Cash Flows (A): Discount Factor (B): Present Value (A x B): Net Present Value: 2 $ $ $ $ 1 2 $ $ $ $ 1,000 $ - - $ $ $ $ - - $ - Requirement 3. Product A Investment required (A): $ Product B - $ - Annual Net Cash Inflow (B): Factor of the Internal Rate of Return (A / B): $ - $ - #DIV/0! #DIV/0! Product A Product B Requirement 4. Net Present Value (A): Investment Required (B): Project Profitability Index (A / B): $ $ - $ $ - #DIV/0! #DIV/0! Product A Product B Requirement 5. Annual Net Cash Inflow: Depreciation Expense: Annual Incramental Net Operating Income: $ $ $ - $ $ $ Product A Annual Incramental Net Operating Income (A): Initial Investment (B): Simple Rate of Return (A / B): Requirement 6. Write your answer to Requirement 6 below: $ $ Product B - #DIV/0! - $ $ #DIV/0! S REQUIRE DATA INPUT FORMULAS DO NOT KEY OVER Product B Product B #DIV/0! 3 4 5 $ $ $ $ - $ $ $ $ - $ $ $ $ - $ - $ - $ - 3 4 5 $ $ $ $ - $ $ $ $ - $ $ $ $ - $ - $ - $ - Product B - #DIV/0! Product B #DIV/0! Product B Product B #DIV/0! Student Portal | Main Statement of Cash Flows | Loudcx Grand Canyon University - Digita X managerial_accounting_for_mana X + 0 Х D → e • https://viewer.gcu.edu/vyGhKp Apps Student Portal | Main 04 Mail - Dawn.Amato@ M Inbox - liveoakcheer Online Banking I Nei Jostens Yearbook Ave V Venmo Welcome Da IP PowerTeacher P Pandora Internet Rad + 141 % X 389 of 640 Q C = 3. c. Internal rate of return. Which ranking do you prefer? Why? QB EXERCISE 8-12 Uncertain Cash Flows [LO 8-4] The Cambro Foundation, a nonprofit organization, is planning to invest $104,950 in a project that will last for three years. The project will produce net cash inflows as follows: Year 1 Year 2 Year 3 $30,000 $40,000 ? Required: Assuming that the project will yield exactly a 12% rate of return, what is the expected net cash inflow for Year 3? EXERCISE 8-13 Basic Payback Period and Simple Rate of Return Computations [LO 8-1, LO 8-6] A piece of laborsaving equipment has just come onto the market that Mitsui Electronics, Ltd., could use to reduce costs in one of its plants in Japan. Relevant data relating to the equipment follow: $432,000 Purchase cost of the equipment Annual cost savings that will be provided by the equipment Life of the equipment c $90,000 12 years + Ô e . » 5:24 PM 10/30/2018 Student Portal | Main Log In | Loud Cloud Systems х Grand Canyon University - Digita X managerial_accounting_for_mana X + 0 Х D → e https://viewer.gcu.edu/vyGhKp Apps Student Portal | Main 04 Mail - Dawn.Amato@ M Inbox - liveoakcheer Online Banking Nei Jostens Yearbook Av. V Venmo Welcome Da IP PowerTeacher P Pandora Internet Rad + 141 % 393 of 640 Q C = QB PROBLEM 8-23 Comprehensive Problem [LO 8-1, LO 8-2, LO 8-3, LO 8-5, LO 8-6] Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his divi- sion's return on investment (ROI), which has exceeded 18% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B $170,000 $380,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $250,000 $120,000 $34,000 $70,000 $350,000 $170,000 $76,000 $50,000 The company's discount rate is 16%. Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the internal rate of return for each product. 4. Calculate the project profitability index for each product. 5. Calculate the simple rate of return for each product. 6. Which of the two products should Lou's division pursue? Why? c + e » 5:29 PM 10/30/2018
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Explanation & Answer

Attached.

Name:
Date:
Class:
Professor:

ALL YELLOW HIGHLIGHTED CELLS REQUIRE DATA INPUT
DO NOT KEY OVER FORMULAS

E8-12
Use table in Exhibit 8B-1 in Appendix 8B
Amount of the Investment:
Less present value of Yr1 and Yr2 cash inflows:
Year 1:
Year 2:
Present Value of Year 3 Cash Inflow:
Therefore, the expected cash inflow for Year 3 is:

$
$

30,000.00
40,000.00

$

61,078.27

$

104,950.00

$
$

70,000.00
34,950.00

CELLS REQUIRE DATA INPUT
VER FORMULAS

ALL YELLOW HIGHLIGHTED CELLS REQUIRE DATA INPUT
FORMULAS

E8-23
Requirement 1.
Sales Revenues:
Variable Expenses:
Fixed Out-of-pocket operating costs:
Annual Net Cash inflows:

Investment required (A):
Annual Net Cash Inflow (B):
Payback Period (A / B):

$
$
$
$

Product A
250,000.00
(120,000.00)
(50,000.00)
420,000.00

$
$
$

Product A
170,000.00
60,000.00
2.83

$
$
$
$

Product B
350,000.00
(170,000.00)
(50,000.00)
570,000.00

$
$
$

Product B
380,000.00
130,000.00
2.92

Requirement 2.
Net Present Values:

Product A
Now
$ (170,000.00)

Purchase of Equipment:
Sales:
Variable Expenses:
Fixed out-of-pocket expenses:
Total Cash Flows (A):
Discount Factor (B):
Present Value (A x B):
Net Present Value:
Net Present Values:
Purchase of Equipment:
Sales:
Variable Expenses:
Fixed out-of-pocket expenses:
Total Cash Flows (A):
Discount Factor (B):
Present Value (A x B):
Net Present Value:

1

2

$ 250,000.00 $ 250,000.00
$ (120,000.00) $ (120,000.00)
$ (70,000.00) $ (70,000.00)
$ (170,000.00) $ 440,000.00 $ 440,000.00
1.000
0.862
0.743
$ (170,000.00) $ 379,280.00 $ 326,920.00
$ 26,440.00
Product B
Now
$ 380,000.00

1

2

$ 350,000.00 $ 350,000.00
$ (170,000.00) $ (170,000.00)
$ (50,000.00) $ (50,...


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