
a.
Compute the
a.

Explanation of Solution
Net present value method:
Net present value method is used to compare the initial
Calculate the net present value of the equipment:
Particulars | Amount ($) |
Present value of annual net | $4,520,000 |
Present value of residual value (2) | $64,400 |
Total present value | $4,584,400 |
Amount to be invested | ($3,000,000) |
Net present value | $1,584,400 |
Table (1)
Hence, the net present value of the equipment is $1,584,400.
Working Note 1:
Calculate the present value of annual net cash flows:
Working Note 2:
Calculate the present value of annual net cash flows:
b.
Compute the net present value of the equipment, assuming 12% desired
b.

Explanation of Solution
Calculate the net present value of the equipment:
Estimated Annual Net Cash Flow | |||
Particulars | Amount ($) | Amount ($) | Amount ($) |
Estimated annual net cash flows | $400,000 | $600,000 | $800,000 |
Multiply: Present value factor from Exhibit 5 | |||
Present value of annual net cash flows | $2,260,000 | $3,390,000 | $4,520,000 |
Present value of residual value (2) | $64,400 | $64,400 | $64,400 |
Total present value | $2,324,400 | $3,454,400 | $4,584,400 |
Amount to be invested | ($3,000,000) | ($3,000,000) | ($3,000,000) |
Net present value | ($675,600) | $454,400 | $1,584,400 |
Table (2)
Hence, the net present value of the equipment for annual net cash flow of $400,000 is ($675,600), for annual net cash flow of $600,000 is $454,400 and for annual net cash flow of $800,000 is $1,584,400.
c.
Compute the net present value of the equipment, assuming 15% desired rate of return for the given annual net cash flows.
c.

Explanation of Solution
Calculate the net present value of the equipment:
Estimated Annual Net Cash Flow | |||
Particulars | Amount ($) | Amount ($) | Amount ($) |
Estimated annual net cash flows | $400,000 | $600,000 | $800,000 |
Multiply: Present value factor from Exhibit 5 | |||
Present value of annual net cash flows | $2,007,600 | $3,011,400 | $4,015,200 |
Present value of residual value (3) | $49,400 | $49,400 | $49,400 |
Total present value | $2,057,000 | $3,060,800 | $4,064,600 |
Amount to be invested | ($3,000,000) | ($3,000,000) | ($3,000,000) |
Net present value | ($943,000) | $60,800 | $1,064,600 |
Table (3)
Hence, the net present value of the equipment for annual net cash flow of $500,000 is ($811,700), for annual net cash flow of $700,000 is $417,300 and for annual net cash flow of $900,000 is $1,646,300.
Working Note 3:
Calculate the present value of annual net cash flows:
d.
Identify the minimum annual net cash flow required to generate a positive net present value.
d.

Explanation of Solution
Calculate the minimum annual net cash flows:
Hence, the minimum annual net cash flow required to generate a positive net present value is $519,575.
e.
Interpret the results in parts (a), (b) and (c).
e.

Explanation of Solution
Every business desires to get maximum profit with minimum investment. The net cash flow of $800,000 is generated from the investment which has a present value of $1,584,400. This clearly indicates the management could invest in the equipment. However, when there is a decrease in the annual net cash flows there is also a drastic decrease in the present value of the equipment. The annual net cash flow must be above $519,575 to generate a profit by the company.
Want to see more full solutions like this?
Chapter 26 Solutions
Financial and Managerial Accounting - Workingpapers
- Brahma Manufacturing uses a job order cost system and applies overhead based on estimated rates. The overhead application rate is based on total estimated overhead costs of $310,000 and direct labor hours of 10,500. During the month of March 2022, actual direct labor hours of 11,200 were incurred. Use this information to determine the amount of factory overhead that was applied in March. (Round the answer to the nearest whole dollar.)helparrow_forwardThe records of Tillman Corporation's initial and unaudited accounts show the following ending inventory balances, which must be adjusted to actual costs: Units Unaudited Costs Work-in-process inventory 53,500 $ 352,880 Finished goods inventory 20,500 129,650 As the auditor, you have learned the following information. Ending work-in-process inventory is 35 percent complete with respect to conversion costs. Materials are added at the beginning of the manufacturing process, and overhead is applied at the rate of 90 percent of the direct labor costs. There was no finished goods inventory at the start of the period. The following additional information is also available: Units Costs Direct Materials Direct Labor Beginning inventory (25% complete as to labor) 32,000 $ 118,840 $ 16,440 Units started 118,000 Current costs 537,060 221,600 Units completed and transferred to finished goods inventory 96,500 Required: Prepare a production cost report for…arrow_forwardGeneral Accountarrow_forward
- Watts Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. The company estimated manufacturing overhead at $225,000 for the year and direct labor hours a 100,000. Actual manufacturing overhead costs incurred during the year totaled $270,000. Actual direct labor hours were 105,000. What was the overapplied or underapplied overhead for the year?arrow_forwardNeed answerarrow_forwardI don't need ai answer general accounting questionarrow_forward
- What are the total assets of the companyarrow_forwardI want answerarrow_forwardAssume that the operating results for last year were as follows: Sales $1,000,000 Variable expenses $500,000 Contribution margin $500,000 Fixed expenses $160,000 Net operating income $340,000 a. Compute the degree of operating leverage at the current level of sales. b. The president expects sales to increase by 17% next year. By how much should net operating income increase?arrow_forward
- Brahma Manufacturing uses a job order cost system and applies overhead based on estimated rates. The overhead application rate is based on total estimated overhead costs of $310,000 and direct labor hours of 10,500. During the month of March 2022, actual direct labor hours of 11,200 were incurred. Use this information to determine the amount of factory overhead that was applied in March. (Round the answer to the nearest whole dollar.)arrow_forwardGeneral accountingarrow_forwardDo fast answer of this accounting questionsarrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning



