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Business Accounting Horngren's Cost Accounting, Student Value Edition (16th Edition)

1. Discounted Cash Flow Method: Discounted cash flow method refers to the method to evaluate a project after considering the time value of money or discounted cash flows . Under this method all the cash flows during the life of the projects are discounted on the basis of cost of capital. Net Present Value (NPV): NPV is a technique used in capital budgeting to see the project is profitable for the company or not. The acceptance of the project is based on the result of NPV as if it is positive then it should be selected and in the case of negative NPV it should be rejected. To compute: The NPV. Explanation: Statement that shows the calculation of NPV Particulars Cash flows Present value @16% Present values Initial investment in 0 year 100,000,000 1 Year 1 82,000,000 0.862 70,684,000.00 Year 2 82,000,000 0.743 60,926,000.00 Year 3 82,000,000 0.641 52,562,000.00 Year 4 82,000,000 0.552 45,264,000.00 Total 229,436,000.00 Net present value 129,436,000.00 Table (1) Spreadsheet working Notes: Figure (1) Working notes: Statement that shows the calculation of net cash flows Particulars 1 2 3 4 Sale price 100 100 100 100 Variable cost 50 50 50 50 Contribution margin per unit 50 50 50 50 Unit produced and sold 2,000,000 2,000,000 2,000,000 2,000,000 Total contribution 100,000,000 100,000,000 100,000,000 100,000,000 Less: fixed cost 18,000,000 18,000,000 18,000,000 18,000,000 Net cash flows 82,000,000 82,000,000 82,000,000 82,000,000 Table (2) Spreadsheet working note: Figure (2) Conclusion: Thus, the NPV of investment proposal is $129,436,000. 2 (a) To compute: The NPV if reduction in selling price by 20% Explanation: Statement that shows the calculation of NPV Particulars Cash flows Present value @16% Present values Initial investment in 0 year 100,000,000 1 Year 1 42,000,000 0.862 36,204,000.00 Year 2 42,000,000 0.743 31,206,000.00 Year 3 42,000,000 0.641 26,922,000.00 Year 4 42,000,000 0.552 23,184,000.00 Total 117,516,000.00 Net present value 17,516,000.00 Table (3) Spreadsheet working Notes: Figure (3) Working note: Statement that shows the calculation of net cash flows Particulars 1 2 3 4 Sale price 80 80 80 80 Variable cost 50 50 50 50 Contribution margin per unit 30 30 30 30 Unit produced and sold 2,000,000 2,000,000 2,000,000 2,000,000 Total contribution 60,000,000 60,000,000 60,000,000 60,000,000 Less: fixed cost 18,000,000 18,000,000 18,000,000 18,000,000 Net cash flows 42,000,000 42,000,000 42,000,000 42,000,000 Table (4) Spreadsheet working Notes: Figure (4) Conclusion: Thus, the NPV of investment proposal is $17,516,000. 2 (b) To compute: The NPV if increase in variable cost by 20% Explanation: Statement that shows the calculation of NPV Particulars Cash flows Present value @16% Present values Initial investment in 0 year 100,000,000 1 Year 1 62,000,000 0.862 53,444,000.00 Year 2 62,000,000 0.743 46,066,000.00 Year 3 62,000,000 0.641 39,742,000.00 Year 4 62,000,000 0.552 34,224,000.00 Total 173,476,000.00 Net present value 73,476,000.00 Table (5) Spreadsheet working Notes: Figure (5) Working Notes: Statement that shows the calculation of net cash flows Particulars 1 2 3 4 Sale price 100 100 100 100 Variable cost 60 60 60 60 Contribution margin per unit 40 40 40 40 Unit produced and sold 2,000,000 2,000,000 2,000,000 2,000,000 Total contribution 80,000,000 80,000,000 80,000,000 80,000,000 Less: fixed cost 18,000,000 18,000,000 18,000,000 18,000,000 Net cash flows 62,000,000 62,000,000 62,000,000 62,000,000 Table (6) Spreadsheet working Notes: Figure (6) Conclusion: Thus, the NPV of investment proposal is $73,476,000. 3. To explain: How the management will use the result calculated in part 1 and 2. Answer: The management can see that with the change in the selling price and in variable cost the NPV of the project will change with a very high amount. Explanation: When selling price is reducing by 20% the net cash flow will change to $42,000,000 and NPV will be $17,516,000. When the variable cost is increase by 20% the net cash flow is change to $62,000,000 and NPV will be $73,476,000. Conclusion: Thus, it is observed that with change in the percentage of variable cost and in selling price the NPV will be change.

1. Discounted Cash Flow Method: Discounted cash flow method refers to the method to evaluate a project after considering the time value of money or discounted cash flows . Under this method all the cash flows during the life of the projects are discounted on the basis of cost of capital. Net Present Value (NPV): NPV is a technique used in capital budgeting to see the project is profitable for the company or not. The acceptance of the project is based on the result of NPV as if it is positive then it should be selected and in the case of negative NPV it should be rejected. To compute: The NPV. Explanation: Statement that shows the calculation of NPV Particulars Cash flows Present value @16% Present values Initial investment in 0 year 100,000,000 1 Year 1 82,000,000 0.862 70,684,000.00 Year 2 82,000,000 0.743 60,926,000.00 Year 3 82,000,000 0.641 52,562,000.00 Year 4 82,000,000 0.552 45,264,000.00 Total 229,436,000.00 Net present value 129,436,000.00 Table (1) Spreadsheet working Notes: Figure (1) Working notes: Statement that shows the calculation of net cash flows Particulars 1 2 3 4 Sale price 100 100 100 100 Variable cost 50 50 50 50 Contribution margin per unit 50 50 50 50 Unit produced and sold 2,000,000 2,000,000 2,000,000 2,000,000 Total contribution 100,000,000 100,000,000 100,000,000 100,000,000 Less: fixed cost 18,000,000 18,000,000 18,000,000 18,000,000 Net cash flows 82,000,000 82,000,000 82,000,000 82,000,000 Table (2) Spreadsheet working note: Figure (2) Conclusion: Thus, the NPV of investment proposal is $129,436,000. 2 (a) To compute: The NPV if reduction in selling price by 20% Explanation: Statement that shows the calculation of NPV Particulars Cash flows Present value @16% Present values Initial investment in 0 year 100,000,000 1 Year 1 42,000,000 0.862 36,204,000.00 Year 2 42,000,000 0.743 31,206,000.00 Year 3 42,000,000 0.641 26,922,000.00 Year 4 42,000,000 0.552 23,184,000.00 Total 117,516,000.00 Net present value 17,516,000.00 Table (3) Spreadsheet working Notes: Figure (3) Working note: Statement that shows the calculation of net cash flows Particulars 1 2 3 4 Sale price 80 80 80 80 Variable cost 50 50 50 50 Contribution margin per unit 30 30 30 30 Unit produced and sold 2,000,000 2,000,000 2,000,000 2,000,000 Total contribution 60,000,000 60,000,000 60,000,000 60,000,000 Less: fixed cost 18,000,000 18,000,000 18,000,000 18,000,000 Net cash flows 42,000,000 42,000,000 42,000,000 42,000,000 Table (4) Spreadsheet working Notes: Figure (4) Conclusion: Thus, the NPV of investment proposal is $17,516,000. 2 (b) To compute: The NPV if increase in variable cost by 20% Explanation: Statement that shows the calculation of NPV Particulars Cash flows Present value @16% Present values Initial investment in 0 year 100,000,000 1 Year 1 62,000,000 0.862 53,444,000.00 Year 2 62,000,000 0.743 46,066,000.00 Year 3 62,000,000 0.641 39,742,000.00 Year 4 62,000,000 0.552 34,224,000.00 Total 173,476,000.00 Net present value 73,476,000.00 Table (5) Spreadsheet working Notes: Figure (5) Working Notes: Statement that shows the calculation of net cash flows Particulars 1 2 3 4 Sale price 100 100 100 100 Variable cost 60 60 60 60 Contribution margin per unit 40 40 40 40 Unit produced and sold 2,000,000 2,000,000 2,000,000 2,000,000 Total contribution 80,000,000 80,000,000 80,000,000 80,000,000 Less: fixed cost 18,000,000 18,000,000 18,000,000 18,000,000 Net cash flows 62,000,000 62,000,000 62,000,000 62,000,000 Table (6) Spreadsheet working Notes: Figure (6) Conclusion: Thus, the NPV of investment proposal is $73,476,000. 3. To explain: How the management will use the result calculated in part 1 and 2. Answer: The management can see that with the change in the selling price and in variable cost the NPV of the project will change with a very high amount. Explanation: When selling price is reducing by 20% the net cash flow will change to $42,000,000 and NPV will be $17,516,000. When the variable cost is increase by 20% the net cash flow is change to $62,000,000 and NPV will be $73,476,000. Conclusion: Thus, it is observed that with change in the percentage of variable cost and in selling price the NPV will be change.

Solution Summary: The author explains the Discounted Cash Flow Method, which evaluates a project after considering the time value of money or discounted cash flows. The Net Present Value (NPV) is used in capital budgeting to see the project

Horngren's Cost Accounting, Student Value Edition (16th Edition)

Horngren's Cost Accounting, Student Value Edition (16th Edition)

16th Edition

ISBN: 9780134476032

Author: Srikant M. Datar, Madhav V. Rajan

Publisher: PEARSON

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Horngren's Cost Accounting, Student Value Edition (16th Edition)

Ch. 21 - Capital budgeting has the same focus as accrual...Ch. 21 - List and briefly describe each of the five stages...Ch. 21 - Prob. 21.3Q Ch. 21 - Only quantitative outcomes are relevant in capital...Ch. 21 - How can sensitivity analysis be incorporated in...Ch. 21 - Prob. 21.6Q Ch. 21 - Describe the accrual accounting rate-of-return...Ch. 21 - Prob. 21.8Q Ch. 21 - Lets be more practical. DCF is not the gospel....Ch. 21 - All overhead costs are relevant in NPV analysis....

Ch. 21 - Prob. 21.11Q Ch. 21 - Distinguish different categories of cash flows to...Ch. 21 - Prob. 21.13Q Ch. 21 - How can capital budgeting tools assist in...Ch. 21 - Distinguish the nominal rate of return from the...Ch. 21 - A company should accept for investment all...Ch. 21 - Prob. 21.17MCQ Ch. 21 - Which of the following statements is true if the...Ch. 21 - Prob. 21.19MCQ Ch. 21 - Nicks Enterprises has purchased a new machine tool...Ch. 21 - Prob. 21.21E Ch. 21 - Capital budgeting methods, no income taxes. Yummy...Ch. 21 - Capital budgeting methods, no income taxes. City...Ch. 21 - Prob. 21.24E Ch. 21 - Capital budgeting with uneven cash flows, no...Ch. 21 - Comparison of projects, no income taxes. (CMA,...Ch. 21 - Payback and NPV methods, no income taxes. (CMA,...Ch. 21 - DCF, accrual accounting rate of return, working...Ch. 21 - Prob. 21.29E Ch. 21 - Prob. 21.30E Ch. 21 - Project choice, taxes. Klein Dermatology is...Ch. 21 - Prob. 21.32E Ch. 21 - Selling a plant, income taxes. (CMA, adapted) The...Ch. 21 - Prob. 21.36P Ch. 21 - NPV and AARR, goal-congruence issues. Liam...Ch. 21 - Payback methods, even and uneven cash flows. Sage...Ch. 21 - Replacement of a machine, income taxes,...Ch. 21 - Recognizing cash flows for capital investment...Ch. 21 - NPV, inflation and taxes. Fancy Foods is...Ch. 21 - NPV of information system, income taxes. Saina...

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