Using Capital BudgetingTen years ago Kramer Company, of which you are controller, bought machinery at a cost of $250,000. The purchase was made at the insistence of the production manager. The machinery is now worthless, and the production manager believes that it should be replaced. He gives you the following analysis, which he says verifies the correctness of the decision to buy the machinery ten years ago. He bases his statement on the 21% return he calculated, which is higher than the 16% cutoff rate of return.Required: Do you agree that the investment was wise? Why or why not? ndall giving andyour recommendation regarding the proposal.CASES7-39 Ten years ago Kramer Company, of which you are controller, bought machinery at aReevaluating cost of $250,000. The purchase was made at the insistence of the production man-an investment ager. The machinery is now worthless, and the production manager believes that it ter 7 Capital Budgeting Decisions-Part I313should be replaced. He gives you the following analysis, which he says verifies thecorrectness of the decision to buy the machinery ten years ago. He bases his state-ment on the 21% return he calculated, which is higher than the 16% cutoff rate of re-turn.edecoo choiRes.theAnnual cost savings:LaborOverhead$ 41,00028,000TotaiLess straight-line depreciation ($250,000/10)Increase in pretax incomeIncome taxes at 40%$ 69,00025,000$ 44,00017,600ntenirocessS10B00.000p00.00mIncrease in net income$ 26,400Average investment ($250,000/2)Return on investment$125,00021%four yeuhe taxRequired:Do you agree that the investment was wise? Why or why not?7-40PureRalston Comnanu

Introduction : The above question relates to the capital budgeting decisions of a company. Capital…

s that it should be replaced. He gives you the following analysis, which he says verifies the correctness of the decision to buy the machinery ten years ago. He bases his statement on the 21% return he calculated, which is higher tha

s that it should be replaced. He gives you the following analysis, which he says verifies the correctness of the decision to buy the machinery ten years ago. He bases his statement on the 21% return he calculated, which is higher tha

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter12: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 12.2.2P: Differential analysis report for machine replacement proposal Catalina Tooling Company is...

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Differential analysis report for machine replacement proposal Catalina Tooling Company is considering replacing a machine that has been used in its factory for two years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows: Annual nonmanufacturing operating expenses and revenue are not expected to be affected by the purchase of the new machine. Instructions List other factors that should be considered before a final decision is reached.
The sales manager of Lugi Company is at a loss on what to do with 10,000 units of defective parts on stock with a cost of P 25,000. Two proposals submitted for his consideration are as follows: a) sell the parts as scrap for P 1.75 per unit. b) Re-work the parts at a cost of P 12,500 and sell them for P 5 per unit. What is the net advantage or disadvantage of the proposal to re-work? P 20,000 advantage P 37,500 advantage P 7,500 disadvantage P 12,500 advantage
14.ABC Company is committed to a plan to sell a building and has started looking for a buyer for that building. The company will continue to use the building until another building is completed to house the office staff located in the building. There is no intention to relocate the office staff until the new building is completed. As of Dec 31, 2021, the building has a carrying amount of P250,000 and fair value less costs to sell amounted to P235,000. How much will be presented as Assets-Held-for-Sale in the statement of financial position at Dec 31, 2021? 15.During 2021, Entity F incurred P4,000,000 in exploration costs for each of 15 oil wells drilled in 2021. Of the 15 wells drilled, 10 were dry holes. The entity uses the successful efforts method of accounting. Assuming that the entity depletes 30% of the oil discovered in 2021, what amount of these exploration costs would remain in its Dec 31, 2021 statement of financial position?
The accountant at industrial system Incorporated (ISI) decided to depriciate some new production equipment by using a declining balance method aproved by the goverment. ISI purchased three flexible manufacturing cells at a price of $400,000 each. The freight charges paid at the time of delivery was $20,000 and a special handling fee of $15,000 was paid. ISI paid $50,000 to prepare the site for the cells. In adddition, 6 employees, each earning $20.00 per hour worked five weeks at 40 hours per week to set up a prepare the new system. other materials applicable to the new cells cost $1000. a) determine the cost basis of the new cell. b) the useful life of the equiment is 5 years and ISI will use double declining balance as it method of depreciation until it has to swicht to SL. Determine which year that ISI will swith to SL.
Assume a (hypothetical) company, Troff erini S. A., incurred the following expendituresto purchase a towel and tissue roll machine: €10,900 purchase price including taxes,€200 for delivery of the machine, €300 for installation and testing of the machine,and €100 to train staff on maintaining the machine. In addition, the company paid aconstruction team €350 to reinforce the factory floor and ceiling joists to accommodatethe machine’s weight. Th e company also paid €1,500 to repair the factory roof (a repairexpected to extend the useful life of the factory by five years) and €1,000 to have theexterior of the factory and adjoining offices repainted for maintenance reasons. Th erepainting neither extends the life of factory and offices nor improves their usability.1. Which of these expenditures will be capitalized and which will be expensed?2. How will the treatment of these expenditures aff ect the company’s financialstatements?
The management found suitable office to buy with a purchase cost of GHC1,000,000.00; however, 2 years ago, the company lost GHC150,000.00 on similar project which failed. The company wants to use needs refurbishment before occupation at a cost of GHC250, 000.00 and there will be annual rates and utility costs payable from year 1 of GHC70,000.00. The company will have static annual employee costs of GHC135,000.00 together with other identified fixed annual overheads of GHC100,000.00 per annum. Ann Marketing Ltd expects to generate sales from 2 new customers each week in year 1 at an average invoice value of GHC5,000.00. The company’s business plan suggests that, the annual total revenue of year 1 will increase at 10% per annum from year 2 to 5 without any additional expenditure requirement. The company has a cost of capital of 8% and a Return of Capital Employed (ROCE) of 15%. Assuming that, all cash movement will align with profitability calculate the profitability index
Murl Plastics Inc. purchased a new machine one year ago at a cost of $69,000. Although the machine operates well, the president of Murl Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below: PresentMachine ProposedNew Machine Purchase cost new $ 69,000 $ 103,500 Estimated useful life new 6 years 5 years Annual operating costs $ 48,300 $ 16,100 Annual straight-line depreciation 11,500 20,700 Remaining book value 57,500 — Salvage value now 11,500 — Salvage value in five years 0 0 In trying to decide whether to purchase the new machine, the president has prepared the following analysis: Book value of the old machine $ 57,500 Less: Salvage value 11,500 Net loss from disposal $ 46,000…
The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $25,000 machine that wouldreduce operating costs in its warehouse by $4,000 per year. At the end of the machine’s 10-year useful life, it will have no scrap value. The company’srequired rate of return is 12%.Required:(Ignore income taxes.)1. Determine the net present value of the investment in the machine.2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?
Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $502,000 or a new model 220 machine costing $443,000 to replace a machine that was purchased 11 years ago for $470,000. The old machine was used to make product I43L until it broke down last week. Unfortunately, the old machine cannot be repaired.Management has decided to buy the new model 220 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product I43L.Management also considered, but rejected, the alternative of simply dropping product I43L. If that were done, instead of investing $443,000 in the new machine, the money could be invested in a project that would return a total of $487,000.In making the decision to buy the model 220 machine rather than the model 370 machine, the differential cost was: A: 59,000 B: 27,000 C: 32,000 D: 17,000
Crane Company phrchased equipment on March 31,2021, at a cost of $ 284,000.Management is considering the merits of using the diminishing- balance or units- of- production method of depriciation instead of straight-line method,which it currently uses for other equipment.The new equipment has an residual value of $ 4000 and an estimated useful life of either four years or 80,000 units.Demand for the products produced by the equipment is sporadic so the equipment will be used more in some years than in others.Assume the equipment produces the following number of units each year: 14200 units in 2021; 20,600 units in 2022; 20,200 units in 2023; 20,000 units in 2024; and 5,000 units in 2025. Crane has a december 31 year end. Prepare seperate depriciation schedules for life of the equipment using (a) Straight-line-method (b) Double- diminishing-balance method for the year 2021 to 2025?
Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $511,000 or a new model 220 machine costing $471,000 to replace a machine that was purchased 7 years ago for $503,000. The old machine was used to make product I43L until it broke down last week. Unfortunately, the old machine cannot be repaired. Management has decided to buy the new model 220 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product I43L. Management also considered, but rejected, the alternative of simply dropping product I43L. If that were done, instead of investing $471,000 in the new machine, the money could be invested in a project that would return a total of $479,000. In making the decision to invest in the model 220 machine, the opportunity cost was: Multiple Choice $503,000 $471,000 $511,000 $479,000
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The company already spent $15,000 (i.e., sunk cost) in last year to improve the production line site. The truck's basic price is $90,000, and it will cost another $10,000 to modify it for special use by your firm. Use of the truck will require an increase in net operating working capital (spare parts of inventory) of $25,000. The truck falls into the MACRS 3 year class, and it will be sold after three years for $20,000 (salvage value). The truck will increase the sale by $200,000, and the cost of all expenses will be 40% of sales. The firm's marginal tax rate is 40 percent. What is the operating cash flow in Year 1? $120,800 $45,000 $52,200 $98,000 $85,200