Answered: EXO Company is projecting its financial…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter10: Property, Plant And Equipment: Acquisition And Subsequent Investments

Section: Chapter Questions

Problem 11P

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Net present value method for a service company Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for 70,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of 15,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be 65,000 per year for each of the next five years. A driver will cost 40,000 in 20Y1, with an expected annual salary increase of 2,000 for each year thereafter. The annual operating costs for the truck are estimated to be 6,000 per year. a. Determine the expected annual net cash flows from the delivery truck investment for 20Y120Y5. b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the present value table appearing in Exhibit 2 of this chapter. c. Is the additional truck a good investment based on your analysis? Explain.
Return on Investment and Economic Value Added Calculations with Varying Assumptions Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to earn income of 310,000 based on sales of 3.45 million. Without any new investments, the division will have average operating assets of 3 million. The division is considering a capital investment projectadding knitting machines to produce gaitersthat requires an additional investment of 600,000 and increases net income by 57,500 (sales would increase by 575,000). If made, the investment would increase beginning operating assets by 600,000 and ending operating assets by 400,000. Assume that the actual cost of capital for the company is 7%. (Note: Round all answers to four decimal places.) Required: 1. Compute the ROI for the division without the investment. 2. Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1. 3. CONCEPTUAL CONNECTION Compute the ROI for the division with the new investment. Do you think the divisional manager will approve the investment? 4. CONCEPTUAL CONNECTION Compute the margin and turnover ratios for the division with the new investment. How do these compare with the old ratios? 5. CONCEPTUAL CONNECTION Compute the EVA of the division with and without the investment. Should the manager decide to make the knitting machine investment?
EXCESS CAPACITY Krogh Lumbers 2019 financial statements are shown here. Krogh Lumber: Balance Sheet as of December 31, 2019 (thousands of dollars) Krogh Lumber: Income Statement for December 31, 2019 (thousands of dollars) a. Assume that the company was operating at full capacity in 2019 with regard to all items except fixed assets; fixed assets in 2019 were being utilized to only 75% of capacity. By what percentage could 2020 sales increase over 2019 sales without the need for an increase in fixed assets? b. Now suppose 2020 sales increase by 25% over 2019 sales. Assume that Krogh cannot sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 82% and increase its total liabilities-to-assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2020 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 11%. Any stock issuances or repurchases will be made at the firms current stock price of 40. Develop Kroghs projected financial statements like those shown in Table 16.2. What are the balances of notes payable, bonds, common stock, and retained earnings?

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