COST ACCT-W/ACCESS >C< NON-MAJORS
15th Edition
ISBN: 9781269768191
Author: Horngren
Publisher: PEARSON C
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Chapter 21, Problem 21.35P
Recognizing
As part of this ovehaul, Johnny is also looking at replacing his old Guitar Hero equipment with a Rock Band Pro machine. The Guitar Hero setup was purchased for $25,200 and has
The Rock Band Pro machine is more energy efficient and durable. It would reduce the utilities costs by 30% and cut the maintenance cost in half. The Rock Band Pro costs $49,000 and has an expected disposal value of $5,000 at the end of its useful life of 11 years.
Johnny charges an entrance fee of $5 per hour for customers to play an unlimited number of games. He does not believe that replacing Guitar Hero with Rock Band Pro will have an impact on this charge or materially change the number of customers who will visit Entertainment World.
- 1. Johnny wants to evaluate the Rock Band Pro purchase using capital budgeting techniques. To help him, read through the problem and separate the cash flows into four groups: (1) net initial investment cash flows, (2) cash flow savings from operations, (3) cash flows from terminal disposal of investment, and (4) cash flows not relevant to the capital budgeting problem.
Required
- 2. Assuming a tax rate of 40%, a required
rate of return of 8%, and straight-line depreciation over the remaining useful life of equipment, should Johnny purchase Rock Band Pro?
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Johnny Buster owns Entertainment World, a place that combines fast food, innovative beverages, and arcade games. Worried about the shifting tastes of younger audiences, Johnny contemplates bringing in new simulators and virtual reality games to maintain customer interest. As part of this overhaul, Johnny is also looking at replacing his old Guitar Hero equipment with a Rock Band Pro machine. The Guitar Hero setup was purchased for $25,200 and has accumulated depreciation of $23,000, with a current trade-in value of $2,700. It currently costs Johnny $600 per month in utilities and another $5,000 a year in maintenance to run the Guitar Hero equipment. Johnny feels that the equipment could be kept in service for another 11 years, after which it would have no salvage value. The Rock Band Pro machine is more energy efficient and durable. It would reduce the utilities costs by 30% and cut the maintenance cost in half. The Rock Band Pro costs $49,000 and has an expected disposal value of…
Johnny Buster owns Entertainment World, a place that combines fast food, innovative beverages, and arcade games. Worried about the shifting tastes of younger audiences, Johnny contemplates bringing in new simulators and virtual reality games to maintain customer interest. As part of this overhaul, Johnny is also looking at replacing his old Guitar Hero equipment with a Rock Band Pro machine. The Guitar Hero setup was purchased for $25,200 and has accumulated depreciation of $23,000, with a current trade-in value of $2,700. It currently costs Johnny $600 per month in utilities and another $5,000 a year in maintenance to run the Guitar Hero equipment. Johnny feels that the equipment could be kept in service for another 11 years, after which it would have no salvage value. The Rock Band Pro machine is more energy efficient and durable. It would reduce the utilities costs by 30% and cut the maintenance cost in half. The Rock Band Pro costs $49,000 and has an expected disposal value of…
- "Jack's T-Shirt Emporioum" produces novelty T-Shirts, with the
primary equipment being a screen print machine.
a "Jack's" generates $60,000 a year in profit.
- Jack (the owner) feels that he could increase sales if he had a
new machine with advanced capabilities (e.g. embroidery), so he
purchases a new machine for $30,000 (cash). Jack estimates this
machine to have an effective useful life of 5 years, and $5,000
residual (salvage) value, so Depreciable Value = $25,000.
The new machine will depreciate over 5 years at $5,000 / year.
o In this years financial statements, Jack reflects the purchase as a
$5,000 expense, thus reducing his profit to $55,000.
o Jack will show a $5,000 expense for Machine Purchase over the
following 4 years.
%3D
Quiz#5: In the “Jack's" example, what amount will be recorded in the Cash Flow Statement
related to this machine purchase?
Chapter 21 Solutions
COST ACCT-W/ACCESS >C< NON-MAJORS
Ch. 21 - Capital budgeting has the same focus as accrual...Ch. 21 - List and briefly describe each of the five stages...Ch. 21 - Prob. 21.3QCh. 21 - Only quantitative outcomes are relevant in capital...Ch. 21 - How can sensitivity analysis be incorporated in...Ch. 21 - Prob. 21.6QCh. 21 - Describe the accrual accounting rate-of-return...Ch. 21 - Prob. 21.8QCh. 21 - Lets be more practical. DCF is not the gospel....Ch. 21 - All overhead costs are relevant in NPV analysis....
Ch. 21 - Prob. 21.11QCh. 21 - Distinguish different categories of cash flows to...Ch. 21 - Prob. 21.13QCh. 21 - How can capital budgeting tools assist in...Ch. 21 - Distinguish the nominal rate of return from the...Ch. 21 - Prob. 21.16ECh. 21 - Prob. 21.17ECh. 21 - Capital budgeting methods, no income taxes. City...Ch. 21 - Prob. 21.19ECh. 21 - Capital budgeting with uneven cash flows, no...Ch. 21 - Prob. 21.21ECh. 21 - Payback and NPV methods, no income taxes. (CMA,...Ch. 21 - Prob. 21.23ECh. 21 - Prob. 21.24ECh. 21 - Prob. 21.25ECh. 21 - Prob. 21.26ECh. 21 - Prob. 21.27ECh. 21 - Prob. 21.28ECh. 21 - Prob. 21.29PCh. 21 - Prob. 21.30PCh. 21 - Prob. 21.31PCh. 21 - Prob. 21.32PCh. 21 - Prob. 21.33PCh. 21 - Prob. 21.34PCh. 21 - Recognizing cash flows for capital investment...Ch. 21 - Prob. 21.36PCh. 21 - NPV of information system, income taxes. Saina...
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