Week 12 Activity Questions (1)
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Page 1 of 15 ACC1AMD Week 12: Activity Questions Week 1 S1-17 Environmental and economic sustainability (LO 8) Southern Waste Australia is considering a new land-fill site. Contracts with the state government and local authorities will provide Southern Waste with revenues of $2 million per annum. Expenses, including depreciation, are estimated to be $1 million per annum. The land-fill site is expected to have a life of 30 years, when it will be closed with de-commissioning costs of $5 million at today’s prices. Concern has been expressed that toxic waste won’t be contained by the design of the land-
fill site and that this will result in environmental pollution to marine and plants that will cost in the region of $50 million to remedy (again, at today’s prices). Requirement What issues of sustainability are suggested by this problem? Considerations of environmental and financial sustainability are suggested. The environmential expenses are difficult to quantify but arguably as significant as the financial ones. However, they are interconnected, as the severity of the environmental impact management directly affects the financial expenses for the restoration. The eventual expenses for rectifying waste contamination could surpass initial estimates, leading to concerns about the fairness between generations (the current generation transferring costs to future ones). Additionally, there is an element of uncertainty. It is possible that no environmental contamination will occur. If the likelihood of contamination is 50%, should the costs be assessed accordingly? Or is it prudent to adopt a cautious approach when evaluating potential outcomes that may result in severe environmental repercussions - for instance, by assuming the most unfavorable financial scenarios? The straightforward financial calculation, disregarding the time value of money, is as follows: The total earnings for the landfill initiative over 30 years amount to 30 x $(2 – 1)m – $5m = $25m. If the containment of the landfill is successful, this represents the net profit. In the case of a 50% chance of contamination, the average net financial gain will be zero ($25m – 50% x $50m). However, unless the contracts mandate Southern Waste to cover any contamination expenses, the company will still achieve a lifetime profit of $25m, while the burden of the same amount will fall on the taxpayer or ratepayer. The financial situation could worsen and potentially become more unfair if the costs of the environmental cleanup exceed projections. Issues 4. Identify the concepts or principles violated Beautiful Wedding Memorabilia Pty Ltd had a number of major business transactions and events during 2020. An extract is provided below. a.
Merchandise inventory with a cost of $68 000 is reported at its net realisable value of $100 000 in the statement of financial position. b.
The owner of Beautiful Wedding Memorabilia Pty Ltd, Ima McBride, used company funds to purchase a computer for personal use for $2500. She recorded it as a decrease in Cash and an increase in Office Equipment. c.
The manager of Beautiful Wedding Memorabilia Pty Ltd wanted to make its 2020 profit look better, so she added in memorabilia sales that occurred on the first two days of 2021. d.
The manager of Beautiful Wedding Memorabilia Pty Ltd wanted to make its 2020 profit look even better, so she did not record an interest payment of $15 000 incurred but not due to be paid until 1 January 2021. e.
Beautiful Wedding Memorabilia Pty Ltd is currently being sued by a bride as she was injured when one of the company’s wedding snow globes shattered. It is expected that the company will have to pay damages; however, the amount is currently uncertain and so the accountant has decided not to include it anywhere in the financial statements.
Page 2 of 15 ACC1AMD Week 12: Activity Questions Required For each situation: a.
Identify if any concept or principle has been violated. b.
Discuss what should have been done and provide evidence for your answer. 5. Identify the violated concept, principle or criterion. Here are some accounting reporting situations: a.
Bonilla Co. Ltd is in its fifth year of operation and has yet to issue financial statements. (Do not use the full disclosure principle.) b.
Hospital Supply Co. Ltd reports only current assets and current liabilities on its statement of financial position. Property, plant and equipment and bills payable are reported as current assets and current liabilities, respectively. Property, plant and equipment is stated at the amount for which it could be sold at short notice. Liquidation of the entity is unlikely. c.
Watts Ltd has inventory on hand that cost $400 000. Watts reports inventory on its statement of financial position at its current market value of $425 000. d.
Steph Wolfson, manager of Classic Music Ltd, bought a computer for her personal use. She paid for the computer with company funds and debited the ‘computers’ account. Required For each situation, give the concept, principle, recognition criteria or constraint that has been violated, if any. Give only one answer for each situation.
Page 3 of 15 ACC1AMD Week 12: Activity Questions Week 2 S1-6 Using the accounting equation to analyse transactions (LO 3) Elaine’s Inflatables earns service revenue by providing party planning services and inflatable playscapes. Elaine’s Inflatables is owned and operated by Elaine Gibson. During the past month, Elaine’s Inflatables had the following nine transactions: a.
Gibson contributed $10 000 to the business in exchange for capital. (This is transaction a
.) b.
Purchased equipment for $5 000 on credit. c.
Paid $400 for office supplies. d.
Earned and received $2 500 cash for service revenue. e.
Paid $400 in wages to employees. f.
Gibson withdrew $1 000 cash. g.
Earned $1 000 for services provided. Customer has not yet paid. h.
Paid $1 000 for rent. i.
Received a bill for $250 for the monthly electricity supply. The bill has not yet been paid. Requirement Indicate the effects of the business transactions on the accounting equation for Elaine’s Inflatables. Transaction a
is answered as a guide: Increase asset (Cash); Increase equity (Gibson, capital)
P1-2 Using the accounting equation for transaction analysis (LO 3) Cameron Turnbull started a new business, Turnbull Gymnastics, and completed the following transactions during December: Dec 1 Cameron contributed $21 000 cash as capital. 2 Received $2 400 cash from customers for services performed. 5 Paid $350 cash for office supplies. 9 Performed services for a customer and billed the customer for services rendered, $1 500. 10 Received $100 invoice for gas due in two weeks. 15 Paid for advertising in the local paper, $300. 20 Paid gas invoice received on 10 December. 25 Collected cash in full from customer billed on 9 December. 28 Paid rent for the month, $2 800. 28 Paid $1 100 to assistant for wages. 30 Received $2 800 cash from customers for services performed. 31 Cameron withdrew $4 500. Requirement Analyse the effects of the transactions on the accounting equation of Turnbull Gymnastics.
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Page 4 of 15 ACC1AMD Week 12: Activity Questions Week 3 E2-8 Posting journal entries to T-accounts (LO 4) Open the following T-accounts for London Engineering: Cash; Accounts receivable; Office supplies; Equipment; Accounts payable; Loans payable; London, capital; London, withdrawals; Service revenue; Electricity and gas expense. Post the journal entries to the T-accounts. Also transfer the dates to the T-accounts. Calculate the 31 July balance for each account. Use the following information to answer Exercise E2-9
. The following transactions occurred for Wilson Technology Solutions: May 1 The business received a capital contribution in cash of $85 000 from the owner, Zack Wilson. 2 Purchased office supplies on credit, $550. 4 Paid $57 000 cash for building and land. The building had a fair market value of $48 000. 6 Performed services for customers and received cash, $3 600. 9 Paid $450 on accounts payable. 17 Performed services for customers on credit, $3 400. 19 Paid rent expense for the month, $1 400. 20 Received $1 300 from customers for services to be performed next month. 21 Paid $300 for advertising in next month’s IT Technology
magazine. 23 Received $2 600 cash on account from a customer. 31 Incurred and paid salaries, $1 200.
Page 5 of 15 ACC1AMD Week 12: Activity Questions CE-2 Journalising transactions, posting to T-accounts and preparing a trial balance (LO 2, 3, 4, 5) Exercise CE-2 continues with the garden maintenance business of Lawlor Lawn Service begun in Exercise CE-1 in Chapter 1. Here, you will account for Lawlor Lawn Service’s transactions as it is actually done in practice. Lawlor Lawn Service completed the following transactions during May: May 1 Received $1 700 investment by Lawlor. Opened bank account titled ‘Lawlor Lawn Service’. 3 Purchased on credit a mower, $1 200, and weedkiller, $240. The equipment is expected to remain in service for four years. 5 Purchased $30 of petrol. Wrote cheque no. 1 from the new bank account. 6 Performed lawn services for client on credit, $150. 8 Purchased $150 of fertiliser supplies from the lawn store that will be used on future jobs. Wrote cheque no. 2 from the new bank account. 17 Completed landscaping job for client; received cash $800. 31 Received $100 on account from 6 May sale. Requirements Open T-accounts: Cash; Accounts receivable; Lawn supplies; Equipment; Accounts payable; Lawlor, capital; Lawlor, drawings; Service revenue; Fuel expense. Journalise the transactions. Explanations aren’t required. Post to the T-accounts. Key all items by date and denote an account balance as Bal. Formal posting references are not required. Prepare a trial balance as at 31 May 2021.
Page 6 of 15 ACC1AMD Week 12: Activity Questions Week 5 S3-3 Applying the accrual principle (LO 1) South Shore Magazine
sells subscriptions for $60 for 12 issues. The company collects cash in advance and then mails the magazines to subscribers each month. Apply the revenue recognition principle to determine: •
when South Shore Magazine
should record revenue for this situation. •
the amount of revenue South Shore Magazine
should record for eight issues. P3-3 Journalising and posting adjustments to T-accounts and preparing an adjusted trial balance (LO 3, 4) The unadjusted trial balance of Aurora Air Purification Systems at 30 June 2021 and the data needed for the adjustments follow. AURORA AIR PURIFICATION SYSTEMS Unadjusted trial balance as at 30 June 2021 $ $ Balance
Account
Debit
Credit
Cash 7 800 Accounts receivable 19 800 Prepaid rent 2 600 Office supplies 1 100 Equipment 19 900 Accumulated depreciation—equipment 4 100 Accounts payable 3 000 Salaries payable Unearned revenue 2 800 Aurora, capital 39 600 Aurora, withdrawals 9 300 Service revenue 15 400 Salaries expense 3 100 Rent expense Depreciation expense—equipment Advertising expense 1 300 Supplies expense Total
64 900
64 900
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Page 7 of 15 ACC1AMD Week 12: Activity Questions P3-3 (continued) Adjustment data at 30 June follow: On 15 June, Aurora contracted to perform services for a client, receiving $2 800 in advance. Aurora recorded this receipt of cash as unearned revenue. As of 30 June, Aurora has completed $1 800 worth of the services. Aurora prepaid two months of rent on 1 June. Aurora used $600 of office supplies. Depreciation for the equipment is $700. Aurora received a bill for June’s online advertising, $1 000. Aurora will not pay the bill until July. (Use Accounts payable.) Aurora pays its employees on Monday for the previous week’s wages. Its employees earn $1 500 for a five-day work-week. 30 June falls on Wednesday this year. On 1 April, Aurora agreed to provide a four-month air system check (beginning 1 April) for a customer for $3 000. Aurora has completed the system check every month, but payment has not yet been received and no entries have been made. Requirements Journalise the adjusting entries on 30 June. Using the unadjusted trial balance, open the T-accounts with the unadjusted balances. Post the adjusting entries to the T-accounts. Prepare the adjusted trial balance. How will Aurora Air Purification Systems use the adjusted trial balance?
Page 8 of 15 ACC1AMD Week 12: Activity Questions Week 6 E4-11 Preparing a worksheet, closing entries, and a post-closing trial balance (LO 2, 3, 4) St Anthony’s Veterinary Hospital completed the following worksheet as at 30 June 2021. Requirements Complete the worksheet for St Anthony’s Veterinary Hospital. Prepare the closing entries. Prepare a post-closing trial balance. ST ANTHONY’S VETERINARY HOSPITAL Worksheet 30 June 2021 (all amounts in dollars) Account Unadjusted trial balance Adjustments Adjusted trial balance Income statement Balance sheet Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash 28,100 28,100 Accounts receivable 9,600 f 600 10,200 Office supplies 900 75 b 825 Prepaid rent 9,000 950 a 8,050 Equipment 23,000 23,000 Acc. depn—Equipment 1,100 c 1,100 Accounts payable 3,600 3,600 Electricity and gas payable 320 320 Salaries payable 875 e 875 Unearned revenue 10,000 d 1,400 8,600 Fitzharris, capital 95,680 95,680 Fitzharris, withdrawals 19,000 19,000 Service revenue 25,000 2,000 d, f 27,000 Rent expense 21,000 a 950 21,950 Salaries expense 14,000 e 875 14,875 Supplies expense b 75 75 Electricity and gas expense 10,000 10,000 Depn expense—Equipment c 1,100 1,100 Total 134,600 134,600 5,000 5,000 137,175 137,175 Net loss Total
Page 9 of 15 ACC1AMD Week 12: Activity Questions Week 8 S16-3 Preparing the direct method cash flow statement (LO 3) Green Bean Ltd began 2021 with cash of $57 000. During the year, Green Bean earned revenue of $596 000 and collected $618 000 from customers. Expenses for the year totalled $433 000, of which Green Bean paid $214 000 in cash to suppliers and $209 000 in cash to employees. Green Bean also paid $146 000 to purchase equipment and a cash dividend of $56 000 to its shareholders during 2021. Requirement Prepare the company’s cash flow statement for the year ended 31 December 2021. Format operating activities by the direct method. 3.42 Preparing a statement of financial position and calculating profit Samuel and Vinnie decide to form a partnership on 1 January 2020. They secure the services of a solicitor to draw up their partnership agreement as follows. Samuel is to contribute: his vehicle valued at $72 000 plant and equipment valued at $168 000 accounts receivable totalling $28 800. Vinnie is to contribute: cash totalling $48 000 a building valued at $336 000 a mortgage of $192 000; this was secured over the building and the partnership agreed to assume this liability. It is also agreed that Samuel will act as manager with an annual salary of $120 000, to be allocated at the end of each year. Profits or losses will be divided between Samuel and Vinnie in the proportion 3/5 and 2/5 respectively. Gross profit for the year ended 31 December 2020 is $520 000, with operating expenses of $240 000. Samuel withdrew $24 000 and Vinnie withdrew $32 000 during the year. Required Prepare the statement of financial position of the partnership on its formation (1 January 2020). Calculate each partner’s share of profit for the year ended 31 December 2020
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Page 10 of 15 ACC1AMD Week 12: Activity Questions Week 9 PSA4.2 Journalise purchase and sale transactions under a perpetual inventory system. LO2, 3
The Novelty Bookstore distributes hardback books to retail stores and extends credit terms of 2/7, n/30 to all of its customers. During the month of June the following inventory transactions occurred. June 2 Purchased 130 books on account for $6 each from Reader’s World Publishers, terms 1/7, n/30. Also made a cash payment to Classic Couriers of $60 for the freight on this date. 3 Sold 140 books on account to the Book Nook for $12 each. 6 10 books returned to Reader’s World Publishers. Received $60 credit. 9 Paid Reader’s World Publishers the amount owing. 15 Received payment from the Book Nook. 17 Sold 120 books on account to Read-A-Lot Bookstore for $12 each. 20 Purchased 120 books on account for $6 each from Read More Publishers, terms 2/7, n/30. 24 Received payment of account from Read-A-Lot Bookstore. 26 Paid Read More Publishers the amount owing. 28 Sold 110 books on account to Readers Bookstore for $12 each. 30 Granted Readers Bookstore $180 credit for 15 books returned costing $90. The books were returned into inventory. Required a.
Journalise the transactions for the month of June for The Novelty Bookstore, using a perpetual inventory system. Assume the cost of each book sold was $6. What are the advantages and disadvantages for The Novelty Bookstore of using a perpetual inventory system as opposed to a periodic system?
E6-8 Applying the lower-of-cost-and-net-realisable-value rule to retail inventories (LO 4) Rapid Resources, which uses the FIFO inventory costing method, has the following account balances at 31 May 2022, prior to releasing the financial statements for the year: Inventory, ending $ 14 500 Cost of sales 70 000 Sales revenue 118 000 Rapid has determined that the net realisable value of the 31 May 2022 ending inventory is $13 500. Requirements Prepare any adjusting journal entry required from the information given. What value would Rapid report on the balance sheet at 31 May 2022 for Inventory?
Page 11 of 15 ACC1AMD Week 12: Activity Questions E6-9 Applying the lower-of-cost-and-net-realisable-value rule to inventories (LO 4) Nutritional Foods reports inventory at the lower of cost and net realisable value. Prior to releasing its financial statements for the year ended 31 March 2022, Nutritional’s preliminary
income statement, before the year-end adjustments, appears as follows: NUTRITIONAL FOODS Income statement (partial) for the year ended 31 March 2022 $ Sales revenue 117 000 Cost of sales 45 000 Gross profit 72 000 Nutritional has determined that the net realisable value of ending inventory is $17 000. Cost is $20 000. Requirements Journalise the adjusting entry for inventory, if any is required. Prepare a revised partial income statement to show how Nutritional Foods should report sales, cost of sales and gross profit.
Page 12 of 15 ACC1AMD Week 12: Activity Questions Week 10 E18-6 Calculating six key ratios (LO 4) The financial statements of Victor’s Natural Foods include the following items: Current year Preceding year Balance sheet:
Cash $ 20 000 $ 24 000 Short-term investments 18 000 26 000 Net receivables 50 000 78 000 Inventory 70 000 66 000 Prepaid expenses 12 000 10 000 Total current assets $170 000 $204 000 Total current liabilities 129 000 92 000 Income statement:
Net credit sales $478 000 Cost of sales 318 000 Calculate the following ratios for the current year: a.
current ratio b.
acid-test ratio c.
inventory turnover d.
days in inventory e.
days’ sales in receivables f.
gross profit percentage
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Page 13 of 15 ACC1AMD Week 12: Activity Questions P18-5 Using ratios to evaluate a share investment (LO 4) Comparative financial statement data of Dangerfield Ltd follow, with selected 2019 amounts also given where appropriate. DANGERFIELD LTD Comparative income statement for the years ended 31 December 2021 and 2020 $ $ 2021
2020
Net sales 465 000 428 000 Cost of sales 237 000 214 000 Gross profit
228 000 214 000 Selling and general expenses 138 000 136 000 Interest expense 10 000 16 000 Profit before income tax
80 000 62 000 Income tax expense 23 000 25 000 Profit
57 000 37 000 DANGERFIELD LTD Comparative balance sheet as at 31 December 2021 and 2020 $ $ $ 2021
2020
2019*
Current assets: Cash 94 000 93 000 Current receivables, net 107 000 116 000 102 000 Inventories 145 000 160 000 210 000 Prepaid expenses 19 000 8 000 Total current assets 365 000 377 000 Property, plant and equipment, net 217 000 178 000 Total assets
582 000
555 000
596 000 Total current liabilities 228 000 242 000 Total non-current liabilities 114 000 98 000 Total liabilities
342 000 340 000 Preference capital, 3% 96 000 96 000 Ordinary shareholders’ equity 144 000 119 000 91 000 Total liabilities and shareholders’ equity
582 000
555 000
* Selected 2019 amounts
Page 14 of 15 ACC1AMD Week 12: Activity Questions P18-5 Using ratios to evaluate a share investment (continued) Additional information: §
Market price of Dangerfield’s ordinary share: $76.67 at 31 December 2021 and $37.20 at 31 December 2020. §
Ordinary shares outstanding: 13 000 during 2021, and 11 000 during 2020 and 2019. §
All sales on credit. Requirements §
Calculate the following ratios for 2021 and 2020: a.
current ratio b.
times-interest-earned ratio c.
inventory turnover d.
gross profit percentage e.
debt to equity ratio f.
rate of return on ordinary shareholders’ equity g.
earnings per ordinary share h.
price/earnings ratio §
Decide: (a) whether Dangerfield’s ability to pay debts and to sell inventory improved or deteriorated during 2021; and (b) whether the investment attractiveness of its ordinary shares appears to have increased or decreased.
Page 15 of 15 ACC1AMD Week 12: Activity Questions Week 11 P9-3 Accounting for bad debts by the direct write-off and allowance methods (LO 2, 3) On 31 May, Hilltop Floral Supply had a $145 000 debit balance in Accounts receivable and a $5 800 credit balance in Allowance for doubtful debts. During June, Hilltop made: Sales on credit, $540 000 (ignore cost of sales) Collections on account, $581 000 Write-offs of bad debts, $5 000. Requirements Record sales and collections on account. Then record bad debts expense (1% of credit sales) and write-offs of customer accounts for June using the allowance
method. Show all June activity in Accounts receivable, Allowance for doubtful debts and Bad debts expense (post to these T-accounts). Suppose that Hilltop used a different method to account for bad debts. Record sales and collections on account. Then record bad debts expense for June using the direct write-off
method. Post to Accounts receivable and Bad debts expense and show their balances at 30 June. What amount of bad debts expense would Hilltop report on its June income statement under each of the two methods? Which amount better matches expense with revenue? Give your reason. What amount of net
accounts receivable would Hilltop report on its 30 June balance sheet under each of the two methods? Which amount is more realistic? Give your reason. S10-7 Calculating depreciation—second year (LO 2) At the beginning of 2022, JetQuick Airlines purchased a used Boeing jet at a cost of $46 million. JetQuick expects the plane to remain useful for eight years (5 million kilometres) and to have a residual value of $6 million. JetQuick expects the plane to be flown for 1.3 million kilometres the first year and 1 million kilometres the second year. Requirements Calculate second-year (2023) depreciation on the plane using the following methods: straight line Calculate the balance in Accumulated depreciation at the end of the second year using the straight-line method of depreciation.
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- QUESTION 1 A new production system for a factory is to be purchased and installed for $115,042. This systom will save approximately 300,000 kWh of electric power each year for a6- year period. Assume the cost of electricity is $0.10 per kWh, and factory MARR is 15% per year, and the salvage value of the system wil be $9,196 at year 6. Using the PW method to analyzes if this investment is economically justified A- calculate the PW of the above investment and insert the result belowarrow_forwardRequired information Use the following information for the Quick Study below. [The following information applies to the questions displayed below.] Project A requires a $380,000 initial investment for new machinery with a five-year life and a salvage value of $39,000. The company uses straight-line depreciation. Project A is expected to yield annual net income of $23,000 per year for the next five years. QS 25-6 Accounting rate of return LO P2 Compute Project A's accounting rate of return. Accounting Rate of Return Choose Numerator: Choose Denominator: = Accounting Rate of Return Accounting rate of returnarrow_forwardProblem 9-19 Project Evaluation (LO2, LO3) United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $185,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an Investment in plant and equipment of $1.71 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $570,000. Finally, the project requires an immediate Investment in working capital of $435,000. Thereafter, working capital is forecasted to be 10% of sales In each of years 1 through 7. Working capital will be run down to zero in year 8 when the project shuts down. Year 1 sales of hog feed are expected to be $5.90…arrow_forward
- Problem 9-19 Project Evaluation (LO2, LO3) United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $185,000, and thereafter, the rent is expected to grow in line with Inflation at 4% a year. In addition to using the warehouse, the proposal envisages an Investment in plant and equipment of $1.71 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $570,000. Finally, the project requires an immediate Investment in working capital of $435,000. Thereafter, working capital is forecasted to be 10% of sales In each of years 1 through 7. Working capital will be run down to zero in year 8 when the project shuts down. Year 1 sales of hog feed are expected to be $5.90…arrow_forwardProblem 9-19 Project Evaluation (LO2, LO3) United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $130,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.38 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $460,000. Finally, the project requires an immediate investment in working capital of $380,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $4.80 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster…arrow_forwardProblem 9-19 Project Evaluation (LO2, LO3) United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $180,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.68 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $560,000. Finally, the project requires an immediate investment in working capital of $430,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $5.80 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster…arrow_forward
- Problem 6-8 Project Evaluation Dog Up! Franks is looking at a new sausage system with an installed cost of $445,000. 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 $53,000. The sausage system will save the firm $139,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $25,000. If the tax rate is 23 percent and the discount rate is 11 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPVarrow_forwardF2 please help.....arrow_forward
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