addition, new cnvironmental regulations, if enacted, could increaseMaxine Peru, the CEO of Peru Resources, hardly noticed tho platoof savory quenclles do brochet and tho glass of Corton Char-lemagno '94 on the table beforo her. She was absorbed by the cngi-noering roport handed to her just as she entered tho CICcutivodining room.Tho roport described a propased new mine on the North Ridgeof ML Zircon. A vain of transcendental zirconium oro had beendiscovered thero on land owned by M Peru's company. Test bor-ings indicated sufficient rescrves to produca 340 tons per ycar oftranscendental zirconium over a 7-ycar period.The vein probably also containcd hydrated zircon gemstoncs.Tho amount and quality of thaso zircons wero hard to predict, sincothey tended to occur in "pockets." The new minc might comeAcross ono, two, or dozens of pockets. The mining cngineer gucssedthat 150 pounds per year might be found. The current price forhigh-quality hydrated zircon gemstones was $3.300 pcr paund.Peru Resources was a family-owned busincss with total assctsof S45 million, including cash rescrves of SA million. The outlayrequired for the now mino would be a major commitment. Fortu-nately, Peru Resources was conservatively financed, and Ms. Perubelioved that the company could borrow up to $9 million at anthe cost of tho mino by S1.5 million.Thero was a chcaper design for the mine, which would reducoits cost by S1.7 million and climinate much of the uncertaintyabout cost overruns. Unfortunately, this design wvould require muchhigher fixed operating costx. Fixed costs would increaso to$850,000 per ycar at planned production levelsThe current prico of trantcendental zirconiumn was S10,000 perton, but thero was no consensus about futuro prices' Soma capertswero projecting rapid price increases to as much as S14,000 perton. On the other hand, there were pesimists saying that pricescould be as low as $7.500 peT ton. Ms Peru did not have strongvicws cither way: Her best guess was that prico would just increasewith inflation at about 3.5% per year. (Mine operting costs wouldalso increase with inflation.)Ms. Peru had wide cxperienco in the mining business, and shekncw that imestors in similar projocts usually wunted a forocastednominal rato of return of at lcast 14%.You have been asked to axtist Ms Peru in evaluating this proj-a Lay out the basc-case NPV analyxix, and undertake sensitivity.Scenario, or break-even analyses as appropriate. Assume that PcruResources pays tax at a 35% ratc. For simplicity, also assumo thatthe imestment in the mine could be depreciated for tax purposesstraight-line over 7 ycanWhat forecasts or scenarios should worry Ms Peru the most?Where would additional information be most belpful7 Is thare aintorest rato of about 8%.The mine's opernting costs wero projected at $900,000 per ycar,including S400.000 of fixed costs and S500,000 of variable costs.M&. Peru thought theso forecaits were accurnte. The big questionmarks seomed to bo the initial cost of the mino and the selling pricoof transcendental zirconium.case for delaying construction of the new minc?Opening the minc, and providing the necessary machincry andorc-crunching facilitics, was suppased to cost SI0 million, but costoverruns of 10% or 15% were common in the mining business. In"Thero wero DO traded forward or futus contracts oa transocndcntal zir-conium. Seo Chapter 24.

Net present value is the net present worth of a project computed by deducting the initial cash…

M Peru's company. Test bor- produce 340 tons per year of car period. d hydrated zircon gemstones. ons were hard to predict, sinco The new mino might comc The current ton, but there w. were projecting ton. On the oth could be as low vicws cither wa

M Peru's company. Test bor- produce 340 tons per year of car period. d hydrated zircon gemstones. ons were hard to predict, sinco The new mino might comc The current ton, but there w. were projecting ton. On the oth could be as low vicws cither wa

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter7: Variable Costing For Management analysis

Section: Chapter Questions

Problem 2PA: The demand for solvent, one of numerous products manufactured by Logan Industries Inc., has dropped...

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Maxine Peru, the CEO of Peru Resources, hardly noticed the plate of savory quenelles de brochet and the glass of Corton Charlemagne '94 on the table before her. She was absorbed by the engineering report handed to her just as she entered the executive dining room. The report described a proposed new mine on the North Ridge of Mt. Zircon. A vein of transcendental zirconium ore had been discovered there on land owned by Ms. Peru's company. Test borings indicated sufficient reserves to produce 340 tons per year of transcendental zirconium over a 7-year period. The vein probably also contained hydrated zircon gemstones. The amount and quality of these zircons were hard to predict because they tended to occur in "pockets." The new mine might come across one, two, or dozens of pockets. The mining engineer guessed that 150 pounds per year might be found. The current price for high-quality hydrated zircon gemstones was $3,300 per pound. Peru Resources was a family-owned business with total…
Maxine Peru, the CEO of Peru Resources, hardly noticed the plate of savory quenelles de brochet and the glass of Corton Charlemagne 94 on the table before her. She was absorbed by the engineering report handed to her just as she entered the executive dining room. The report described a proposed new mine on the North Ridge of Mt. Zircon. A vein of transcendental zirconium ore had been discovered there on land owned by Ms. Peru's company. Test borings indicated sufficient reserves to produce 340 tons per year of transcendental zirconium over a 7-year period. The vein probably also contained hydrated zircon gemstones. The amount and quality of these zircons were hard to predict because they tended to occur in *"pockets." The new mine might come across one, two, or dozens of pockets. The mining engineer guessed that 150 pounds per year might be found. The current price for high-quality hydrated zircon gemstones was $3,300 per pound. Peru Resources was a family-owned business with total…
Refer to the XYZ Company example in the chapter and the results in Panels A and B of Exhibit 12.7. On the basis of this information, management of the company has decided to delay the implementation of the project for 1 year. Those managers are now interested in knowing how sensitive this decision is with respect to the assumptions they’ve made regarding the basic analysis. Therefore, they have asked you to prepare some supplementary analyses regarding Panel B of Exhibit 12.7. Required: 1. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (20%), medium (47%), and low (33%)? 2. Holding everything else constant, what is the expected NPV of the decision if the probabilities for the three scenarios are as follows: high (24%), medium (43%), and low (33%)? 3. Prepare a 5 × 3 table containing the estimated NPV of the decision to delay for each combination of the following: risk-free rate of interest…
An officer for a large construction company is feeling nervous. The anxietyis caused by a new excavator just released onto the market. The newexcavator makes the one purchased by the company a year ago obsolete.As a result, the market value for the company’s excavator has droppedsignificantly, from $600,000 a year ago to $50,000 now. In ten years, itwould be worth only $3,000. The new excavator costs only $950,000 andwould increase operating revenues by $90,000 annually. The newequipment has a ten-year life and expected salvage value of $175,000. Thetax rate is 35%, the CCA rate, 25% for both excavators, and the requiredrate of return for the company is 14%. What is the NPV of the newexcavator? (Negative answer should be indicated by a minus sign. Do notround your intermediate calculations. Round the final answer to 2decimal places. Omit $ sign in your response.)NPV $
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The production manager on the Ofon Phase 2 offshore platform operated by Total S.A. must purchase specialized environmental equipment or an equivalent service. The first cost is $250,000 with an AOC of $66,000. The manager has let it be known that he does not care about the salvage value because he thinks it will make no difference in the decision-making process. His supervisor estimates the salvage might be as high as $100,000 or as low as $10,000 in 3 years, at which time the equipment will be unnecessary. Alternatively, a subcontractor can provide the service for $165,000 per year. The total offshore project MARR is 13% per year. Determine if the decision to buy the equipment is sensitive to the salvage value. The annual worth of high salvage value is $______________ 142,525 incorrect.. The annual worth of low salvage value is $_______________ 168,940 incorrect.. Decision is sensitive…
Because of the ongoing community quarantine brought about by COVID-19, there was a drastic reduction in the revenue from vegetable sales. The management decided to wait until the pandemic is over and present financial statements for the waiting period rather than prepare now the traditional twelve-month financial statements. Which of the following statements is true? * This is a violation of the periodicity assumption. This supports the going concern assumption. This is a violation of the monetary unit assumption. This supports the accrual basis of accounting.
Johnson Limited is contemplating the installation of a new system that would allow for automated handling of customer inquiries about their order status, account balances, etc. Currently all such inquiries are handled manually by customer service representatives. The software for the new system would cost $214,000. An additional $169,000 would be required for one-time installation costs. Management estimates that the new system would result in costs of $10,300 per year related to addressing software issues and other technological problems that may arise. However, the new system is expected to reduce labour costs by $65,000 per year. Management estimates that the system would be used for five years. Severance costs related to the employees that would be laid off after implementing the new system would be $22,600. Johnson Limited requires a return of at least 15% on investments of this type. Required: Ignore income taxes. 1. Compute the net annual cost savings promised by the new system.…
Robert Hamilton was hired six months ago as thecontroller of a small oil and gas exploration anddevelopment company, Gusher, Inc., headquarteredin Beaumont, Texas. Before working at Gusher,Hamilton was the controller of a larger petroleumcompany, Eureka Oil Company, based in Dallas. The joint interest billing and fixed asset accountingsystems of Gusher are outdated, and many processingproblems and errors have been occurring quitefrequently. Hamilton immediately recognized theseproblems and informed the president, Mr. Barton,that it was crucial to install a new system. Bartonconcurred and met with Hamilton and Sally Jeffries,the information systems (IS) senior manager. Bartoninstructed Jeffries to make the new system thatHamilton wished to have on top priority in herdepartment. Basically, he told Jeffries to deliver thesystem to meet Hamilton’s needs as soon as possible.Jeffries left the meeting…
Dupont Corp. recently discontinued operations on one of its four branches, the branch is nowconducting a clearance sale. The fixed assets in the discontinued branch are now being offered forsale and a buyer has been identified. The sale can take place within a year.Despite all this, the management is insisting on presenting all the fixed assets, including those thatbelong to the disposal group as PPE as it would give an impression of large manufacturingcapacity. They are not in favour of presenting any amount of revenues from discontinuedoperations as well. Explain to them why these assets are no longer PPE and should be separated as assets-held-for-sale and why income on discontinued operation should be separated from continuing operation.
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Robert Hamilton was hired 6 months ago as the controller of a small oil and gas exploration and development company, Gusher, Inc., headquartered in Beaumont, Texas. Before working at Gusher, Hamilton was the controller of a larger petroleum company, Eureka Oil Company, based in Dallas.The joint interest billing and fixed asset accounting systems of Gusher are outdated, and frequent processing problems and errors have been occurring. Hamilton immediately recognized these problems and informed the president, Mr. Barton, that it was crucial to install a new system. Barton concurred and met with Hamilton and Sally Jeffries, the information systems senior manager. Barton instructed Jeffries to make the new system a top priority. Basically, he told Jeffries to deliver the system to meet Hamilton’s needs as soon as possible.Jeffries left the meeting feeling overwhelmed because the IT department is currently working on two other very big projects, one for the production department and the…