Managerial Accounting for Managers (4th Edition)Complete Problems E8-12 and P8-23 in the textbook and present your responses in an Excel spreadsheet.
For assistance, here is some hints on completion of the first assigned problem, E8-12. We need to use Present Value analysis to solve. The 104,950 really includes a present value amount for each year. In other words, the PV of year 1 + PV of year 2 + PV of Year 3 = 104,950, which is the current present value. Step 1 is to determine the present value of the cash flow in year 1. We do this by finding the factor in Exhibit 8B-1 in Appendix 8B for the correct period and interest rate. We then multiply the rate times the cash flow of 30,000 to determine the PV of Year 1 amount. We do the same thing with Year 2, using the correct factor and interest rate. Then, we can take the total PV of 104,950 less the PV of Year 1 and Year 2. This will give us the PV amount of Year 3. (For example, if Year 1 PV was 25,000 and PV of Year 2 was 35,000, we would know PV of Year 3 was 104,950 – 25,000 – 35,000 = 44,950). However, we are not done yet, as we need to take the PV amount of Year 3 and use the factor from the table to find out what the cash flow would be for that amount.
E8-12 The Cambro Foundation, a nonprofit organization, is planning to invest $104,950 in a project that will last for three years. The project will produce net cash inflows as follows:
Year 1 ………………..$30,000
Year 2………………..$40,000
Year 3………………..
Assuming that the project will yield exactly a 12% rate of return, what is the expected net cash inflow for Year 3?
P8- 23 Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 18% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Initial investment: Product A Product B
cost of equipment (zero salvage value) …… $170,000 $380,000
Sales revenues ……………………… $250,000 $350,000
Variable expenses …………………… .$120,000 $170,000
Depreciation expense ……………….. .$34,000 $76,000
Fixed out-of-pocket operating costs …….. .$70,000 $50,000
Required
- Calculate the payback period for each product.
- Calculate the net present value for each product.
- Calculate the internal rate of return for each product.
- Calculate the project profitability index for each product.
- Calculate the simple rate of return for each product.
- Which of the two products should Lou’s division pursue? Why?