1.
Prepare a schedule for expected
1.
Explanation of Solution
Net cash flow: Net cash flow is the difference between cash receipts and cash payments.
Year |
Operating costs after tax (A)(1) | Savings (4) (B) |
Net | |
0 | $(630,000) | |||
1 | ($31,500) | $218,700 | $18,000 | $205,200 |
2 | ($31,500) | $218,700 | $36,000 | $223,200 |
3 | ($31,500) | $218,700 | $36,000 | $223,200 |
4 | ($31,500) | $218,700 | $36,000 | $223,200 |
5 | ($31,500) | $218,700 | $36,000 | $223,200 |
6 | ($31,500) | $218,700 | $36,000 | $223,200 |
7 | ($31,500) | $218,700 | $36,000 | $223,200 |
8 | ($31,500) | $218,700 | $18,000 | $205,200 |
9 | ($31,500) | $218,700 | - | $187,200 |
10 | ($31,500) | $218,700 | - | $187,200 |
Table (1)
Working note (1):
Calculate the annual operating cost after tax:
Working note (2):
Calculate the annual depreciation expense.
Working note (3):
Calculate the annual depreciation expense after tax:
Year | Annual deprecation (A) (2) | Deprecation after tax |
1 | 45,000 | $18,000 |
2 | 90,000 | $36,000 |
3 | 90,000 | $36,000 |
4 | 90,000 | $36,000 |
5 | 90,000 | $36,000 |
6 | 90,000 | $36,000 |
7 | 90,000 | $36,000 |
8 | 45,000 | $18,000 |
Table (2)
Note: The annual depreciation expense is $90,000; however the depreciation expense is calculated on the basis of straight line deprecation with half year convention method. Hence, the depreciation expense under half year convention method is $45,000
Working note (4):
Calculate the annual savings after tax:
2.
Calculate the payback period of company H.
2.
Explanation of Solution
Payback period: Payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the proposal of long-term investment (fixed assets) of the business. But payback method has high risk than other method, because it does not follow the time value of money concept in valuing the cash inflows.
Calculate the payback period of company H as follows:
Initial investment = $630,000.
Year | Cash inflow | Accumulated cash flow |
1 | $205,200 | $205,200 |
2 | $223,200 | $428,400 |
3 | $223,200 | $651,600 |
4 | $223,200 | $874,800 |
5 | $223,200 | $1,098,000 |
6 | $223,200 | $1,321,200 |
7 | $223,200 | $1,544,400 |
8 | $205,200 | $1,749,600 |
9 | $187,200 | $1,936,800 |
10 | $187,200 | $2,124,000 |
Table (3)
In this case, the initial investment of $630,000 falls between $428,400 and $651,600. Hence, the payback period is calculated as follows:
Therefore, the payback period for the given investment is 2.90 years.
3.
Ascertain the
3.
Explanation of Solution
Ascertain the Net present value of the closed-loop system and describe whether the company should invest in the system:
Year | Cash inflow | Present value factor @10% | Present value |
1 | $205,200 | 0.862 | $ 176,882 |
2 | $223,200 | 0.743 | $ 165,838 |
3 | $223,200 | 0.641 | $ 143,071 |
4 | $223,200 | 0.552 | $ 123,206 |
5 | $223,200 | 0.476 | $ 106,243 |
6 | $223,200 | 0.410 | $ 91,512 |
7 | $223,200 | 0.354 | $ 79,013 |
8 | $205,200 | 0.305 | $ 62,586 |
9 | $187,200 | 0.263 | $ 49,234 |
10 | $187,200 | 0.227 | $ 42,494 |
Total present value | $ 1,040,080 | ||
Less: | $ 630,000 | ||
Net present value | $ 410,080 |
Table (4)
The company should invest in the system because the net present value is positive.
4.
State the effect that the inclusion of after tax would have on the payback period and on the net present value.
4.
Explanation of Solution
State the effect that the inclusion of after tax would have on the payback period and on the net present value:
Payback period:
In this case, the annual cash flows increase by $135,000. Therefore the cash inflow for year 1 would increase to $340,200
Initial investment = $630,000.
Year | Cash inflow | Accumulated cash flow |
1 | $340,200 | $340,200 |
2 | $358,200 | $698,400 |
3 | $358,200 | $1,056,600 |
4 | $358,200 | $1,414,800 |
5 | $358,200 | $1,773,000 |
6 | $358,200 | $2,131,200 |
7 | $358,200 | $2,489,400 |
Table (5)
In this case, the initial investment of $630,000 falls between $340,200 and $698,400. Hence, the payback period is calculated as follows:
Therefore, the payback period for the given investment is reduced by 1.81 years
Net present value:
Particulars | Amounts in ($) | Amounts in ($) |
Fines and sales (a) | $135,000 | |
NPV for 10 years (b) | $4.833 | |
Fines and sales effect | $652,455 | |
Lawsuit avoidance | $300,000 | |
NPV for 3 years | $0.641 | |
Add: Lawsuit avoidance | $192,300 | |
Total NPV | $844,755 |
Table (6)
Therefore, the net present value is increased by $434,676
Want to see more full solutions like this?
Chapter 19 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Pollution Prevention, P2 Investment Heaps Company produces jewelry that requires electroplating with gold, silver, and other valuable metals. Electroplating uses large amounts of water and chemicals, producing wastewater with a number of toxic residuals. Currently, Heaps uses settlement tanks to remove waste; unfortunately, the approach is inefficient, and much of the toxic residue is left in the water that is discharged into a local river. The amount of toxic discharge exceeds the legal, allowable amounts, and the company is faced with substantial, ongoing environmental fines. The environmental violations are also drawing unfavorable public reaction, and sales are being affected. A lawsuit is also impending, which could prove to be quite costly. Management is now considering the installation of a zero-discharge, closed-loop system to treat the wastewater. The proposed closed-loop system would not only purify the wastewater, but also produce cleaner water than that currently being…arrow_forwardPollution Prevention, P2 Investment Heaps Company produces jewelry that requires electroplating with gold, silver, and other valuable metals. Electroplating uses large amounts of water and chemicals, producing wastewater with a number of toxic residuals. Currently, Heaps uses settlement tanks to remove waste; unfortunately, the approach is inefficient, and much of the toxic residue is left in the water that is discharged into a local river. The amount of toxic discharge exceeds the legal, allowable amounts, and the company is faced with substantial, ongoing environmental fines. The environmental violations are also drawing unfavorable public reaction, and sales are being affected. A lawsuit is also impending, which could prove to be quite costly. Management is now considering the installation of a zero-discharge, closed-loop system to treat the wastewater. The proposed closed-loop system would not only purify the wastewater, but also produce cleaner water than that currently being…arrow_forwardMercer Asbestos Removal Company removes potentially toxic asbestos insulation from buildings. There has been a long-simmering dispute between the company's estimator and the work supervisors. The on-site supervisors claim the estimators do not adequately distinguish between routine work, such as removing asbestos insulation around heating pipes in older homes, and nonroutine work, such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: "My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $2.80 to determine the bid price. Because our average cost is only $2.315 per square foot, that leaves enough cushion to take care of the additional costs of nonroutine work. Besides, it is difficult to know what is routine or not…arrow_forward
- Mercer Asbestos Removal Company removes potentially toxic asbestos insulation from buildings. There has been a long-simmering dispute between the company’s estimator and the work supervisors. The on-site supervisors claim the estimators do not adequately distinguish between routine work, such as removing asbestos insulation around heating pipes in older homes, and nonroutine work, such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: “My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $2.50 to determine the bid price. Because our average cost is only $2.235 per square foot, that leaves enough cushion to take care of the additional costs of nonroutine work. Besides, it is difficult to know what is routine or not…arrow_forwardMercer Asbestos Removal Company removes potentially toxic asbestos Insulation from buildings. There has been a long-simmering dispute between the company's estimator and the work supervisors. The on-site supervisors claim the estimators do not adequately distinguish between routine work, such as removing asbestos Insulation around heating pipes in older homes, and nonroutine work, such as removing asbestos-contaminated celling plaster In Industrial buildings. The on-site supervisors belleve nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way. "My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $2.70 to determine the bid price. Because our average cost is only $2.405 per square foot, that leaves enough cushion to take care of the additional costs of nonroutine work. Besides, it is difficult to know what is routine or not…arrow_forwardThe EPA is in process of investigating a possible water contamination issue at the manufacturing facility of NW forest products. The EPA has not yet proposed a penalty assessment. Management feels the possibility of a penalty is remote but if an assessment is made an unfavorable settlement is estimated to be $25 million . Determine how the estimated cost of the settlement will affect the current financial statements.arrow_forward
- Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has been a long-simmering dispute between the company’s estimator and the work supervisors. The on-site supervisors claim that the estimators do not adequately distinguish between routine work such as removal of asbestos insulation around heating pipes in older homes and nonroutine work such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: “My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $2.80 to determine the bid price. Since our average cost is only $2.58 per square foot, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up. Besides, it is…arrow_forwardAlgonac Moldings produces a product made from a metal alloy. Two suppliers, Liebold Metal and Cecil Distributors, supply the alloy. Neither supplier can meet Algonac's typical demand, because of capacity constraints. The material from Liebold is less expensive to buy but more difficult to use, resulting in greater waste. The metal alloy is highly toxic and any waste requires costly handling to avoid environmental accidents. Last year the cost of handling the waste totaled $1,756,920. Additional data from last year's operations are shown as follows: Amount of material purchased (tons) Amount of waste (tons) Cost of purchases Req A1 Req A2 Liebold Metals Required: a. Allocate the cost of the waste-handling to the two suppliers based on: 1. Amount of material purchased. 2. Amount of waste. 3. Cost of material purchased. Req A3 Allocated waste handling cost 68.8 11.0 $ Complete this question by entering your answers in the tabs below. 2,178,581 Liebold Metals Cecil Distributors Amount of…arrow_forwardAlgonac Moldings produces a product made from a metal alloy. Two suppliers, Liebold Metal and Cecil Distributors, supply the alloy. Neither supplier can meet Algonac's typical demand, because of capacity constraints. The material from Liebold is less expensive to buy but more difficult to use, resulting in greater waste. The metal alloy is highly toxic and any waste requires costly handling to avoid environmental accidents. Last year the cost of handling the waste totaled $1,200,000. Additional data from last year’s operations are shown as follows: Liebold Metals Cecil Distributors Amount of material purchased (tons) 64.8 115.2 Amount of waste (tons) 9.0 11.0 Cost of purchases $ 1,488,000 $ 3,312,000 Required: Allocate the cost of the waste handling to the two suppliers based on: Amount of material purchased. Amount of waste. Cost of material purchased. Amount of material purchased. Note: Do not round intermediate calculations. A.)…arrow_forward
- Mercer Asbestos Removal Company removes potentially toxic asbestos Insulation and related products from buildings. There has been a long-simmering dispute between the company's estimator and the work supervisors. The on-site supervisors claim that the estimators do not adequately distinguish between routine work, such as removal of asbestos Insulation around heating pipes in older homes, and nonroutine work, such as removing asbestos-contaminated celling plaster In Industrial buildings. The on-site supervisors believe that nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: "My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $2.80 to determine the bid price. Since our average cost is only $2.575 per square foot, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up. Besides,…arrow_forwardA plastic-manufacturing company owns andoperates a polypropylene production facility that converts the propylene from one of its cracking facilitiesto polypropylene plastics for outside sale. The polypropylene production facility is currently forced tooperate at less than capacity due to an insufficiencyof propylene production capacity in its hydrocarboncracking facility. The chemical engineers are considering alternatives for supplying additional propyleneto the polypropylene production facility. Two feasiblealternatives are to build a pipeline to the nearest outside supply source and to provide additional propylene by truck from an outside source. The engineersalso gathered the following projected cost estimates.• Future costs for purchased propylene excludingdelivery: $0.215 per lb.• Cost of pipeline construction: $200,000 per pipeline mile.• Estimated length of pipeline: 180 miles.• Transportation costs by tank truck: $0.05 per lb,utilizing a common carrier.• Pipeline operating…arrow_forwardMercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has been a long-simmering dispute between the company’s estimator and the work supervisors. The on-site supervisors claim that the estimators do not adequately distinguish between routine work, such as removal of asbestos insulation around heating pipes in older homes, and nonroutine work, such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: “My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $2.70 to determine the bid price. Since our average cost is only $2.405 per square foot, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up. Besides,…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningBusiness Its Legal Ethical & Global EnvironmentAccountingISBN:9781305224414Author:JENNINGSPublisher:CengageBusiness/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:Cengage