Cost Management
Cost Management
8th Edition
ISBN: 9781259917028
Author: BLOCHER, Edward
Publisher: Mcgraw-hill Education,
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Chapter 12, Problem 56P

1.

To determine

Calculate the maximum amount of annual variable operating expenses (pre-tax) that would make the attractive investment from a present-value standpoint.

1.

Expert Solution
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Explanation of Solution

Calculate the maximum amount of annual variable operating expenses (pre-tax) that would make the attractive investment from a present-value standpoint as follows:

Maximum annual variable operating expense (pre-tax)}=(Annual operating expense Annuity amount (3))=$200,000$93,970=$106,030

Working note (1):

Calculate the present value of salvage value.

Present value of salvage value} =(Salvage value×PV factor @12% for 6th year)=$90,000×0.564=$50,760

Working note (2):

Calculate the net investment outlay.

Net investment outlay = (Investment outlayPV of salvage value (1))=$460,000$50,760=$409,240

Working note (3):

Calculate the annuity amount.

Annuity amount = Net investment outlay (2)(Present value of annuity for 6 years @12%)=$409,2404.355=$93,970

2.

To determine

Calculate the maximum amount of annual variable operating expenses (both pre-tax and after tax).

2.

Expert Solution
Check Mark

Explanation of Solution

Calculate the maximum amount of annual variable operating expenses (both pre-tax and after tax) as follows:

Maximum annual after-tax variable expense} = [(Annual post-tax operatingexpense for exiting asset (9))Present value of annuity (11)]=$130,000$64,350=$65,650

Maximum pre-tax variable operatingexpenses} =[ (Maximum annual after taxvariable operating expense)135% ]=$65,650(135%)=$101,001

Working note (4):

Calculate the gain or loss on sales.

Gain or (loss) on sales = (Sellig price Net book value)=$40,000$60,00=$(20,000)

Working note (5):

Calculate the tax saving due to deductibility of loss.

Tax saving due to deductibility of loss }=(Loss on sales (4)×Tax rate)=$20,000×35%=$7,000

Working note (6):

Calculate the net-of-tax initial investment outlay.

Net-of-tax initial investment outlay}=(Initial investmentTax saving due to deductibility of loss (5))=$460,000$7,000=$453,000

Working note (7):

Calculate the net –of tax difference salvage value at the end of year 6.

Net –of tax difference salvage value at the end of year 6}=(Different in salvage value at the end of 6 year(Different in salvage value at the end of 6 year×35%))=$90,000($90,000×35%)=$90,00031,500=$58,500

Working note (8):

Calculate the present value of differential depreciation tax shield at 8%.

Present value of differential depreciation tax shield at 8%}=[(Annual tax shield for replacement assetAnnual tax shield existing asset)×Present value annuity @8% for 6 years]=($29,167$3,500)×4.623=$118,657

Working note (9):

Calculate the annual post-tax operating expense for exiting asset.

Annual post-tax operating expense for exiting asset}=(Annual pre-tax operating expense×(135%))=$200,000(135%)=$130,000

Working note (10):

Calculate the present value of after-tax variable operating costs for replacement assets.

Present value of after-tax variable operating costs for replacement assets}=(After tax net investment outlayPV of after tax additional salvage valuePV of differential tax savngs due to depreciation (8))=$453,000$36,855$118,657=$297,488

Working note (11):

Calculate the present value of annuity.

Present value of annuity }(Present value of after-tax variable operating costs for replacement assets (10))Annuity factor for 6 years @8%=$297,4884.623=$64,350

3.

To determine

State the strategic considerations that might affect the decision.

3.

Expert Solution
Check Mark

Explanation of Solution

State the strategic considerations that might affect the decision as follows:

  • Competitors of the company,
  • Environmental-management benefits with the new equipment and,
  • Delivery time, response time and process efficiency.

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Chapter 12 Solutions

Cost Management

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