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Concept Introduction:
ARR: Accounting
The formula to calculate ARR is as follows:
Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual
NPV:
IRR:
Requirement-a:
To Calculate:
The net present value of the investment
Answer to Problem 16.38C
The net present value of the investment is -$1,974
Explanation of Solution
The net present value of the investment is calculated as follows:
| Sunset beach Inc. | |||||
| Year 2016 beginning | Year end 2016 | Year end 2017 | Year end 2018 | Year end 2019 | |
| Net cash inflows from operation | $ 40,000 | $ 50,000 | $ 64,000 | $ 46,000 | |
| Initial Investment | $(150,000) | ||||
| Investment in | $ (50,000) | $ 50,000 | |||
| Salvage value of machinery | 25000 | ||||
| Net | $(200,000) | $ 40,000 | $ 50,000 | $ 64,000 | $ 121,000 |
| PV of $1 (@12%) (B) | 1.00000 | 0.89286 | 0.79719 | 0.71178 | 0.63552 |
| PV (C) = (A*B) | $(200,000) | $ 35,714 | $ 39,860 | $ 45,554 | $ 76,898 |
| NPV (Sum of C) | $ (1,974) | ||||
Concept Introduction:
ARR: Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.
The formula to calculate ARR is as follows:
Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.
NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
IRR: Internal Rate of Return (IRR) is the rate at which the NPV of the project is 0 or we can say that IRR is the rate of return at which the project is at breakeven. IRR is calculated using excel or approximation method.
Requirement-b:
To Calculate:
The present value ratio of the investment
Answer to Problem 16.38C
The present value ratio of the investment is 0.99
Explanation of Solution
The present value ratio of the investment is calculated as follows:
| Sunset beach Inc. | |||||
| Year 2016 beginning | Year end 2016 | Year end 2017 | Year end 2018 | Year end 2019 | |
| Net cash inflows from operation | $ 40,000 | $ 50,000 | $ 64,000 | $ 46,000 | |
| Investment in working capital | $ 50,000 | ||||
| Salvage value of machinery | 25000 | ||||
| Cash inflows (A) | $ - | $ 40,000 | $ 50,000 | $ 64,000 | $ 121,000 |
| PV of $1 (@12%) (B) | 1.00000 | 0.89286 | 0.79719 | 0.71178 | 0.63552 |
| PV (C) = (A*B) | $ - | $ 35,714 | $ 39,860 | $ 45,554 | $ 76,898 |
| PV of Cash inflows (Sum of PVs) (D) | $ 198,026 | ||||
| Initial Investment (150000+50000) (E) | $ 200,000 | ||||
| Present value ratio (D/E) | 0.99 | ||||
Concept Introduction:
ARR: Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.
The formula to calculate ARR is as follows:
Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.
NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
IRR: Internal Rate of Return (IRR) is the rate at which the NPV of the project is 0 or we can say that IRR is the rate of return at which the project is at breakeven. IRR is calculated using excel or approximation method.
Requirement-c:
To Calculate:
The Internal rate of
Answer to Problem 16.38C
The Internal rate of return of the investment is 11.61%
Explanation of Solution
The Internal rate of return of the investment is calculated as follows:
| Sunset beach Inc. | |||||
| Year 2016 beginning | Year end 2016 | Year end 2017 | Year end 2018 | Year end 2019 | |
| Net cash inflows from operation | $ 40,000 | $ 50,000 | $ 64,000 | $ 46,000 | |
| Initial Investment | $(150,000) | ||||
| Investment in working capital | $ (50,000) | $ 50,000 | |||
| Salvage value of machinery | 25000 | ||||
| Net Cash Flows (A) | $(200,000) | $ 40,000 | $ 50,000 | $ 64,000 | $ 121,000 |
| IRR = | 11.61% | ||||
Concept Introduction:
ARR: Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.
The formula to calculate ARR is as follows:
Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.
NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
IRR: Internal Rate of Return (IRR) is the rate at which the NPV of the project is 0 or we can say that IRR is the rate of return at which the project is at breakeven. IRR is calculated using excel or approximation method.
Requirement-d:
To Calculate:
The Payback period of the investment
Answer to Problem 16.38C
The Payback period of the investment is 3.38 years
Explanation of Solution
The Payback period of the investment is calculated as follows:
| Sunset beach Inc. | |||||
| Year 2016 beginning | Year end 2016 | Year end 2017 | Year end 2018 | Year end 2019 | |
| Net cash inflows from operation | $ 40,000 | $ 50,000 | $ 64,000 | $ 46,000 | |
| Initial Investment | $(150,000) | ||||
| Investment in working capital | $ (50,000) | $ 50,000 | |||
| Salvage value of machinery | 25000 | ||||
| Net Cash Flows | $(200,000) | $ 40,000 | $ 50,000 | $ 64,000 | $ 121,000 |
| Cumulative Net Cash Flows | $(200,000) | $(160,000) | $(110,000) | $(46,000) | $ 75,000 |
| Payback Period = 3 years + (1*46000/121000) =3.38 Years | |||||
Concept Introduction:
ARR: Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.
The formula to calculate ARR is as follows:
Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.
NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
IRR: Internal Rate of Return (IRR) is the rate at which the NPV of the project is 0 or we can say that IRR is the rate of return at which the project is at breakeven. IRR is calculated using excel or approximation method.
Requirement-e:
To Indicate:
The decision for the investment
Answer to Problem 16.38C
The project should not be accepted
Explanation of Solution
The project has the following analytical results:
| Sunset beach Inc. | |
| NPV | $ (1,974) |
| PV Ratio | 0.99 |
| IRR | 11.61% |
| Payback | 3.38 Years |
The project has negative NPV and IRR is less that the required rate 12%, hence the project should not be accepted.
Concept Introduction:
Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager's decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.
Relevant costs are the costs that are relevant for any decision making. Relevant costs are helpful for take managerial decisions like make or buy, accept or reject new offers, sell or further process etc.
Two basic types of the relevant costs are as follows:
- Out-of-pocket costs
- Opportunity costs
Requirement-f:
To Indicate:
The key qualitative factors to be considered for the investment decision
Answer to Problem 16.38C
The key qualitative factors to be considered for the investment decision are as follows:
- Quality of the Products to be sold
- Effect on current Market share after accepting this order
- Effect on current production after committing the additional production
Explanation of Solution
Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager's decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.
The key qualitative factors to be considered for the investment decision are as follows:
- Quality of the Products to be sold
- Effect on current Market share after accepting this order
- Effect on current production after committing the additional production
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Chapter 16 Solutions
Principles of Financial Accounting (Elon University)
- Colleen Company has gathered the following data pertaining to activities it performed for two of its major customers. Jerry, Incorporated Kate Company Number of orders Units per order sales returns: Number of returns Total units returned Number of sales calls. 3 2,000 60 360 1 60 5 140 4 Colleen sells its products at $290 per unit. The firm's gross margin ratio is 20%. Both Jerry and Kate pay their accounts promptly and no accounts receivable is over 30 days. After using business analytics software to carefully analyze the operating data for the past 30 months, the firm has determined the following activity costs: Activity Sales calls Order processing Deliveries Sales returns Sales salary Cost Driver and Rate $ 700 per visit 460 per order 100 per order 210 per return and $5 per unit returned 80,000 per month Complete this question by entering your answers in the tabs below. Required 1 Required 2 Using customers as the cost objects, classify the activity costs into cost categories…arrow_forwardJournal Entries Rocky Mountain Tours Co. is a travel agency. The nine transactions recorded by Rocky Mountain Tours during June 20Y2, its first month of operations, are indicated in the following T accounts: Cash (1) 40,000 (2) 4,000 (7) 13,100 (3) 5,000 (4) 6,175 (6) 6,000 (9) 1,500 Equipment (3) 15,000 Dividends (9) 1,500 Accounts Receivable Accounts Payable Service Revenue (5) 20,500 (7) 13,100 (6) 6,000 (3) 10,000 (5) 20,500 Supplies (2) 4,000 (8) 2,200 Common Stock (1) 40,000 Operating Expenses (4) 6,175 (8) 2,200 Prepare the nine journal entries from which the postings were made. Journal entry explanations may be omitted. If an amount box does not require an entry, leave it blank.arrow_forwardInnovative Consulting Co. has the following accounts in its ledger: Cash, Accounts Receivable, Supplies, Office Equipment, Accounts Payable, Common Stock, Retained Earnings, Dividends, Fees Earned, Rent Expense, Advertising Expense, Utilities Expense, Miscellaneous Expense. Journalize the following selected transactions for October 2012 in a two-column journal. Journal entry explanations may be omitted. If an amount box does not require an entry, leave it blank. Oct. 1. Paid rent for the month, $2,500. 4. Paid advertising expense, $1,000. 5. Paid cash for supplies, $1,800. 6. Purchased office equipment on account, $11,500. 12. Received cash from customers on account, $7,500. 20. Paid creditor on account, $2,700. 27. Paid cash for miscellaneous expenses, $700. 30. Paid telephone bill for the month, $475. 31. Fees earned and billed to customers for the month, $42,400. 31. Paid electricity bill for the month, $900. 31. Paid dividends, $1,500.arrow_forward
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- Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume Manny’s marginal tax rate is 37 percent this year and next year, and that he can earn an after-tax rate of return of 12 percent on his investments. a. What is the after-tax income if Manny sends his client the bill in December? b. What is the after-tax income if Manny sends his client the bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.) Exhibit 3.1 below 4% 5% 6% 7% 8% 9% 10% 11% 12% Year 1 .962 .952 .943 .935 .926 .917 .909 .901 .893 Year 2 .925 .907 .890 .873 .857 .842 .826 .812 .797 Year 3 .889 .864 .840 .816 .794 .772 .751 .731 .712 Year 4 .855 .823 .792 .763 .735 .708 .683 .659 .636 Year 5 .822 .784 .747 .713 .681 .650 .621 .593 .567 Year 6 .790 .746…arrow_forwardRocky Mountain Tours Co. is a travel agency. The nine transactions recorded by Rocky Mountain Tours during June 20Y2, its first month of operations, are indicated in the following T accounts: Cash (1) 40,000 (2) 4,000 (7) 13,100 (3) 5,000 (4) 6,175 (6) 6,000 (9) 1,500 Equipment (3) 15,000 Dividends (9) 1,500 Accounts Receivable Accounts Payable Service Revenue (5) 20,500 (7) 13,100 (6) 6,000 (3) 10,000 (5) 20,500 Supplies (2) 4,000 (8) 2,200 Common Stock (1) 40,000 Operating Expenses (4) 6,175 (8) 2,200 a. Prepare an unadjusted trial balance. List all the accounts in the order of Assets, Liabilities, Stockholders' equity, Revenues, and Expenses. Place the amounts in the proper columns. If an entry is not required in an amount box, leave it blank.arrow_forwardTransactions and T Accounts The following selected transactions were completed during July of the current year: 1. Billed customers for fees earned, $112,700. 2. Purchased supplies on account, $4,500. 3. Received cash from customers on account, $88,220. 4. Paid creditors on account, $3,100. a. Journalize these transactions in a two-column journal, using the appropriate number to identify the transactions. Journal entry explanations may be omitted. If an amount box does not require an entry, leave it blank. (1) Accounts Receivable Fees Earned (2) Supplies Accounts Payable (3) Cash Accounts Receivable (4) Accounts Payable Casharrow_forward
- Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $20,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 12 percent on her investments. a. What is the after-tax cost if Isabel pays the $20,000 bill in December? b. What is the after-tax cost if Isabel pays the $20,000 bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.) c. Based on requirements a and b, should Isabel pay the $20,000 bill in December or January? multiple choice December Januaryarrow_forwardAnswer correctly plz otherwise unhearrow_forwardFinancial accountingarrow_forward
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