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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
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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The now machinery would cost Sl million. This investmant could bo deprecinted on the 5-ycar MACRS schedule. The refurbished plant and now machinery would Inst for many yoars. Howover, the romnining market for duffel canvas was small, and it was not cloar that additional ordars could be obtnined oncc the navy contract wus finished. Tho machinary Was Custom-built and could bo used only for duffel canvas. Its sccondhand vuluo at the and of 5 yoars was probably zaro. Thble 9.4 shows the sales staff's forecnsts of incomo from the Jack Tur, CFO of Shectbend & Halyard, Inc., opened the company confidentinl envelope. It contained a draft of a competitive bid for o contract to supply duffel canvas to the U.S. Navy. The cover momo from Sheetband's CEO asked Mr. Thr to rovicw the bid baforo it was submitted. The bid and its supporting documents had becen prepared by Sheetbend's sales staff. It called for Sheetband to supply 100,000 yards of duffel canvas per year for 5 yoars. The proposed salling price wns fixed at $30 per yard. Mr. Thr was not usually involved in sales, but this bid was unusual in at least two respects. First, if accepted by the would commit Sheetbend to a fixed-price, long-torm contract. Sec- ond, producing the duffel canvas would require an investment of S1.5 million to purchase mnchincry and to refurbish Sheetbend's plant in Pleasantboro, Mainc. Mr. Thr set to work and by tho and of the week hnd collected the following facts and assumptions: Navy contrnct. Mr. Tar roviowed this forecast and decided that its assumptions wero roasonable, cxcept that the forecast used book, not tax, dopreciation. But the forecast incomo statoment containcd no montion of navy, it working capital. Mr. Tur thought that working capital would average about 10% of sales. Armed with this information, Mr. Tar constructed a spreadshect to calculate the NPV of the duffel canvas project, assuming that Sheetbend's bid would be acccpted by the navy. He had just finished debugging the spreadsheet when another confidentinl 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 million in cash. Should Mr. Tar recommand submitting the bid to the navy at the proposed price of $30 per yard? The discount rate for this project is 12%. The plant in Plcasantboro had bean built in the carly 1900s and is now idle. The plant was fully depreciated on Sheetbend's books, for the purchase cost of the lnnd (in 1947) ofr S10,000. cxccpt Now that the land was valuable shorefront property, Mr. Thr thought the land and the idle plant could be sold, immediately or in the near future, for $600,000. Refurbishing the plant would cost $500,000. This investment would be depreciated for tax purposes on the 10-ycar MACRS schedule.
Transcribed Image Text:The now machinery would cost Sl million. This investmant could bo deprecinted on the 5-ycar MACRS schedule. The refurbished plant and now machinery would Inst for many yoars. Howover, the romnining market for duffel canvas was small, and it was not cloar that additional ordars could be obtnined oncc the navy contract wus finished. Tho machinary Was Custom-built and could bo used only for duffel canvas. Its sccondhand vuluo at the and of 5 yoars was probably zaro. Thble 9.4 shows the sales staff's forecnsts of incomo from the Jack Tur, CFO of Shectbend & Halyard, Inc., opened the company confidentinl envelope. It contained a draft of a competitive bid for o contract to supply duffel canvas to the U.S. Navy. The cover momo from Sheetband's CEO asked Mr. Thr to rovicw the bid baforo it was submitted. The bid and its supporting documents had becen prepared by Sheetbend's sales staff. It called for Sheetband to supply 100,000 yards of duffel canvas per year for 5 yoars. The proposed salling price wns fixed at $30 per yard. Mr. Thr was not usually involved in sales, but this bid was unusual in at least two respects. First, if accepted by the would commit Sheetbend to a fixed-price, long-torm contract. Sec- ond, producing the duffel canvas would require an investment of S1.5 million to purchase mnchincry and to refurbish Sheetbend's plant in Pleasantboro, Mainc. Mr. Thr set to work and by tho and of the week hnd collected the following facts and assumptions: Navy contrnct. Mr. Tar roviowed this forecast and decided that its assumptions wero roasonable, cxcept that the forecast used book, not tax, dopreciation. But the forecast incomo statoment containcd no montion of navy, it working capital. Mr. Tur thought that working capital would average about 10% of sales. Armed with this information, Mr. Tar constructed a spreadshect to calculate the NPV of the duffel canvas project, assuming that Sheetbend's bid would be acccpted by the navy. He had just finished debugging the spreadsheet when another confidentinl 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 million in cash. Should Mr. Tar recommand submitting the bid to the navy at the proposed price of $30 per yard? The discount rate for this project is 12%. The plant in Plcasantboro had bean built in the carly 1900s and is now idle. The plant was fully depreciated on Sheetbend's books, for the purchase cost of the lnnd (in 1947) ofr S10,000. cxccpt Now that the land was valuable shorefront property, Mr. Thr thought the land and the idle plant could be sold, immediately or in the near future, for $600,000. Refurbishing the plant would cost $500,000. This investment would be depreciated for tax purposes on the 10-ycar MACRS schedule.
TABLE 9.4 Forooast Incomo statomont for tho U.S. Navy duffol oanvao projoct (dollar figuros In thoubands, oxcopt prlco por yard) Yoar: 3 4. 1. Yards sold 2. Prico por yard 3. Rovonuo (1 X 2) 4. Cost of goods sold 5. Oporating cash flow (3 - 4) 6. Daproclation 100.00 100.00 100.00 100.00 100.00 30.00 30.00 30.00 30.00 30.00 3,000.00 3,000.00 3,000.00 3,000.00 3,000.00 2,100.00 2,184.00 2,271.36 2,362.21 2,456.70 900.00 816.00 728.64 637.79 543.30 250.00 250.00 260.00 250.00 250.00 7. Income (5 - 6) 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 incomo (7 - 8) $422.50 $367.90 S311.12 $252.07 S190.65 Notoo: 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 to Inaroaso 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). Tho 8500,000 cost of rofurbishing tho Plonoantboro plant io doproclatod atralght-lino ovor 10 yoarm ($50.000 por yoar).
Transcribed Image Text:TABLE 9.4 Forooast Incomo statomont for tho U.S. Navy duffol oanvao projoct (dollar figuros In thoubands, oxcopt prlco por yard) Yoar: 3 4. 1. Yards sold 2. Prico por yard 3. Rovonuo (1 X 2) 4. Cost of goods sold 5. Oporating cash flow (3 - 4) 6. Daproclation 100.00 100.00 100.00 100.00 100.00 30.00 30.00 30.00 30.00 30.00 3,000.00 3,000.00 3,000.00 3,000.00 3,000.00 2,100.00 2,184.00 2,271.36 2,362.21 2,456.70 900.00 816.00 728.64 637.79 543.30 250.00 250.00 260.00 250.00 250.00 7. Income (5 - 6) 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 incomo (7 - 8) $422.50 $367.90 S311.12 $252.07 S190.65 Notoo: 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 to Inaroaso 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). Tho 8500,000 cost of rofurbishing tho Plonoantboro plant io doproclatod atralght-lino ovor 10 yoarm ($50.000 por yoar).
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