The now machinery would cost Sl million. This investmantcould bo deprecinted on the 5-ycar MACRS schedule.The refurbished plant and now machinery would Inst for manyyoars. Howover, the romnining market for duffel canvas wassmall, and it was not cloar that additional ordars could beobtnined oncc the navy contract wus finished. Tho machinaryWas Custom-built and could bo used only for duffel canvas. Itssccondhand vuluo at the and of 5 yoars was probably zaro.Thble 9.4 shows the sales staff's forecnsts of incomo from theJack Tur, CFO of Shectbend & Halyard, Inc., opened the companyconfidentinl envelope. It contained a draft of a competitive bid for ocontract to supply duffel canvas to the U.S. Navy. The cover momofrom Sheetband's CEO asked Mr. Thr to rovicw the bid baforo itwas submitted.The bid and its supporting documents had becen prepared bySheetbend's sales staff. It called for Sheetband to supply 100,000yards of duffel canvas per year for 5 yoars. The proposed sallingprice wns fixed at $30 per yard.Mr. Thr was not usually involved in sales, but this bid wasunusual in at least two respects. First, if accepted by thewould commit Sheetbend to a fixed-price, long-torm contract. Sec-ond, producing the duffel canvas would require an investment ofS1.5 million to purchase mnchincry and to refurbish Sheetbend'splant in Pleasantboro, Mainc.Mr. Thr set to work and by tho and of the week hnd collected thefollowing facts and assumptions:Navy contrnct. Mr. Tar roviowed this forecast and decided thatits assumptions wero roasonable, cxcept that the forecast usedbook, not tax, dopreciation.But the forecast incomo statoment containcd no montion ofnavy,itworking capital. Mr. Tur thought that working capital wouldaverage about 10% of sales.Armed with this information, Mr. Tar constructed a spreadshect tocalculate the NPV of the duffel canvas project, assuming thatSheetbend's bid would be acccpted by the navy.He had just finished debugging the spreadsheet when anotherconfidentinl anvelope arrived from Sheetbond's CEO. It con-tained a firm offer from a Maine real estate developer to pur-chase Sheetbend's Pleasantboro land and plant for S1.5 millionin cash.Should Mr. Tar recommand submitting the bid to the navy atthe proposed price of $30 per yard? The discount rate for thisproject is 12%.The plant in Plcasantboro had bean built in the carly 1900s and isnow idle. The plant was fully depreciated on Sheetbend's books,for the purchase cost of the lnnd (in 1947) ofr S10,000.cxccptNow that the land was valuable shorefront property, Mr. Thrthought the land and the idle plant could be sold, immediatelyor in the near future, for $600,000.Refurbishing the plant would cost $500,000. This investmentwould be depreciated for tax purposes on the 10-ycar MACRSschedule. TABLE 9.4 Forooast Incomostatomont for tho U.S. Navyduffol oanvao projoct (dollarfiguros In thoubands, oxcoptprlco por yard)Yoar:34.1. Yards sold2. Prico por yard3. Rovonuo (1 X 2)4. Cost of goods sold5. Oporating cash flow (3 - 4)6. Daproclation100.00100.00100.00100.00100.0030.0030.0030.0030.0030.003,000.003,000.003,000.003,000.003,000.002,100.002,184.002,271.362,362.212,456.70900.00816.00728.64637.79543.30250.00250.00260.00250.00250.007. Income (5 - 6)650.00566.00478.64387.79293.308. Tax at 35%227.50198.10167.52135.72102.659. Not incomo (7 - 8)$422.50$367.90S311.12$252.07S190.65Notoo:1. Yordo nold and prico por yard would bo foxod by contract.2. Coot of goodo Includoo bxod cost of S300.000 por yoar plus variablo cooto of $18 por yard. Conto aro oxpoctod toInaroaso at Uho Inflation rato of 4% por yoar.3. Doprociation: AS1 million Invontmant in machinory lo doproaintod otraight-lino ovor 6 yoaro ($200,000 por yoar). Tho8500,000 cost of rofurbishing tho Plonoantboro plant io doproclatod atralght-lino ovor 10 yoarm ($50.000 por yoar).

Net Present Value=(Present Value of Cash Inflows-Present Value of Cash Outflows)

TABLE 9.4 Forecast Incomo Yoar: 1 4. statomont for tho U.S. Navy duffol canvas projoct (dollar figuros in thousands, oxcopt prico por yard) 1. Yards sold 100.00 100.00 100.00 100.00 100.00 2. Prico por yard 30.00 30.00 30.00 30.00 30.00 3,000.00 3,000.00 3. Rovonuo (1 X 2) 4. Cost of goods sold 5. Operating cash flow (3 - 4) 6. Doprociation 7. Incomo (5-6) 3,000.00 3,000.00 3,000.00 2,100.00 2,184.00 2,271.36 2,362.21 2,456.70 900.00 816.00 728.64 637.79 543.30 250.00 250.00 250.00 250.00 250.00 650.00 566.00 478.64 387.79 293.30 8. Tax at 35% 227.50 198.10 167.52 135.72 102.65 9. Not income (7 - 8) $422.50 $367.90 S311.12 $252.07 $190.65 Noton: 1. Yardo oold and prico por yard would be fixod by contract. 2. Cost of goodo Includoo fixod cost of $300.000 por yoar plus varinblo coato of $18 por yard. Conto aro oxpocted to Inaroaso at tho inflation rato of 4% por yoar. 3. Doprociation: A S1 million invootmant in maahinory io doprocintod atraight-lino ovor 5 yoarm ($200.000 por yoar). Tho S500.000 cost of rofurbishing tho Ploasantboro plant is doprociatod atraight-lino ovor 10 yoarm (S50.000 por yaar).

TABLE 9.4 Forecast Incomo Yoar: 1 4. statomont for tho U.S. Navy duffol canvas projoct (dollar figuros in thousands, oxcopt prico por yard) 1. Yards sold 100.00 100.00 100.00 100.00 100.00 2. Prico por yard 30.00 30.00 30.00 30.00 30.00 3,000.00 3,000.00 3. Rovonuo (1 X 2) 4. Cost of goods sold 5. Operating cash flow (3 - 4) 6. Doprociation 7. Incomo (5-6) 3,000.00 3,000.00 3,000.00 2,100.00 2,184.00 2,271.36 2,362.21 2,456.70 900.00 816.00 728.64 637.79 543.30 250.00 250.00 250.00 250.00 250.00 650.00 566.00 478.64 387.79 293.30 8. Tax at 35% 227.50 198.10 167.52 135.72 102.65 9. Not income (7 - 8) $422.50 $367.90 S311.12 $252.07 $190.65 Noton: 1. Yardo oold and prico por yard would be fixod by contract. 2. Cost of goodo Includoo fixod cost of $300.000 por yoar plus varinblo coato of $18 por yard. Conto aro oxpocted to Inaroaso at tho inflation rato of 4% por yoar. 3. Doprociation: A S1 million invootmant in maahinory io doprocintod atraight-lino ovor 5 yoarm ($200.000 por yoar). Tho S500.000 cost of rofurbishing tho Ploasantboro plant is doprociatod atraight-lino ovor 10 yoarm (S50.000 por yaar).

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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