Barry Cabs is a sole proprietorship that owns and operates one taxi cab. The company purchased its cab 5 years ago for $40,000. When it purchased the cab it expected it to be useful for 8 years with a residual value of $5,000. Barry thinks he could sell the cab today for $14,000. Barry is considering replacing the old cab with a new, all-electric taxi. The all electric car would cost $60,000 and would have an expected useful life of 8 years. Over its 8 year life, the cab would reduce annual operating costs (mostly gas and maintenance) by $8,000 per year for the first 6 years, and $10,000 per year thereafter. After 8 years, it is expected the taxi would have a $2,000 residual value. Barry's cost of borrowing is 15% and assume no tax implications.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Barry Cabs is a sole proprietorship that owns and operates one taxi cab. The company purchased its cab 5 years ago for $40,000. When it
purchased the cab it expected it to be useful for 8 years with a residual value of $5,000. Barry thinks he could sell the cab today for $14,000.
Barry is considering replacing the old cab with a new, all-electric taxi. The all electric car would cost $60,000 and would have an expected useful
life of 8 years. Over its 8 year life, the cab would reduce annual operating costs (mostly gas and maintenance) by $8,000 per year for the first 6
years, and $10,000 per year thereafter. After 8 years, it is expected the taxi would have a $2,000 residual value. Barry's cost of borrowing is 15%
and assume no tax implications.
Required:
1 What is the payback period for replacing the exiting cab with the new electric taxi? (2 marks)
2 What is the net present value of replacing the existing cab with the new electric one? (4 marks)
3 What is the internal rate of return for replacing the existing cab with the new electric one? (2 marks)
4 What is the profitability index for replacing the existing cab with the new electric one? (2 marks)
Transcribed Image Text:Barry Cabs is a sole proprietorship that owns and operates one taxi cab. The company purchased its cab 5 years ago for $40,000. When it purchased the cab it expected it to be useful for 8 years with a residual value of $5,000. Barry thinks he could sell the cab today for $14,000. Barry is considering replacing the old cab with a new, all-electric taxi. The all electric car would cost $60,000 and would have an expected useful life of 8 years. Over its 8 year life, the cab would reduce annual operating costs (mostly gas and maintenance) by $8,000 per year for the first 6 years, and $10,000 per year thereafter. After 8 years, it is expected the taxi would have a $2,000 residual value. Barry's cost of borrowing is 15% and assume no tax implications. Required: 1 What is the payback period for replacing the exiting cab with the new electric taxi? (2 marks) 2 What is the net present value of replacing the existing cab with the new electric one? (4 marks) 3 What is the internal rate of return for replacing the existing cab with the new electric one? (2 marks) 4 What is the profitability index for replacing the existing cab with the new electric one? (2 marks)
Bloom Corp. produces one product that sells at $20 per unit and sells best on Valentine's Day and Mother's
Day. As a result peak sales occur in February and May of each year. Budgeted sales in units for the first six
months of the coming year are:
Month
January
Units
12,000
February
March
|Аpril
May
32,000
18,000
34,000
30,000
June
15,000
25% of all sales are cash sales and the rest are on account. Past experience shows that the company collects
25% of a month's credit sales in the month of sale. Another 65% of credit sales is collected in the month
following sale, and the remaining 10% of credit sales is collected in the second month following sale. Bad
debts are negligible and can be ignored.
To ensure that sales volumes can be met, the company requires that ending inventory for a particular month
reflect 15% of next month's sales. Assume June 30 closing inventory will be 1,500 units.
Required:
a)
Prepare a sales budget in dollars and a schedule of cash collections from sales, by month and in total, for the second
quarter (10 marks).
b)
If the company prepares a budgeted balance sheet as of June 30, compute the accounts receivable as of that date (5
marks).
c)
Prepare a production budget by month and in total for the first quarter (5 marks).
Transcribed Image Text:Bloom Corp. produces one product that sells at $20 per unit and sells best on Valentine's Day and Mother's Day. As a result peak sales occur in February and May of each year. Budgeted sales in units for the first six months of the coming year are: Month January Units 12,000 February March |Аpril May 32,000 18,000 34,000 30,000 June 15,000 25% of all sales are cash sales and the rest are on account. Past experience shows that the company collects 25% of a month's credit sales in the month of sale. Another 65% of credit sales is collected in the month following sale, and the remaining 10% of credit sales is collected in the second month following sale. Bad debts are negligible and can be ignored. To ensure that sales volumes can be met, the company requires that ending inventory for a particular month reflect 15% of next month's sales. Assume June 30 closing inventory will be 1,500 units. Required: a) Prepare a sales budget in dollars and a schedule of cash collections from sales, by month and in total, for the second quarter (10 marks). b) If the company prepares a budgeted balance sheet as of June 30, compute the accounts receivable as of that date (5 marks). c) Prepare a production budget by month and in total for the first quarter (5 marks).
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