ACCTG 241 Lecture 2: Chapter 12, Lecture 2

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pearmallard749

8 Feb 2017

School

Kansas State University

Department

Accounting

Course

ACCTG 241

Professor

Sara Mason

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Document Summary

Identify the cash flows: find the present value of the future cash flows, compute the net present value of future cash flows, accept or reject proposal. Wc = current assets current liabilities: cash expenditures from using the asset (net of tax) Income taxes: significantly affect cash inflows and outflows. Operati(cid:374)g (cid:272)ash outflows redu(cid:272)e the (cid:272)o(cid:373)pa(cid:374)(cid:455)"s ta(cid:454) lia(cid:271)ilit(cid:455) How to determine net of tax accounts: cash receipts and expenditures. Cash flow * (1-tax rate: tax shield from depreciation. Depreciation amount * tax rate: proceeds from sale of asset with gain. Proceeds (gain * tax rate: proceeds from sale of asset with loss. Total cash inflows are ,000 and the tax rate is 20%, what are the net cash inflows: 100,000 (1-. 2) = . 8 = 80% of the 100,000 = ,000. Depreciation: tax shield that generates tax savings, does not directly decrease cash. Consequently, the related amount of income taxes due on income: tax savings with differ depending on depreciation method used.

Related Questions

Capital Budgeting
Glacier Creek Textiles is planning to purchase new manufacturing equipment. The equipment has an acquisition cost of $100,000, an estimated useful life of five years and no residual value. The company uses a 12% rate of return to evaluate capital projects. The cash flows for the five years:

Year	Net Cash Outflows	Net Cash Inflows
Year	Amount invested	Net Cash Inflows
0	($100,000)
1		25,000
2		29,000
3		26,000
4		28,000
5		35,000


Requirements
1. Compute the accounting rate of return.
2. Compute the net present value of the investment using Excel's PV function.
3. Compute the net present value of the investment using Excel's NPV function.
4. Compute the profitability index, rounded to two decimal places.
5. Compute the internal rate of return of the investment using Excel's IRR function. Display to two decimal places, but do not round.

Excel Skills
1. Function PV
2. Function NPV
3. Function IRR

	Evaluate Glacier Creek Textiles' new manufacturing equipment.

	Data
	Annual discount Rate	0.12
	Cash Flow Year 0 (Cost)	(100,000)
	Cash Flow Year 1	25,000
	Cash Flow Year 2	29,000
	Cash Flow Year 3	26,000
	Cash Flow Year 4	28,000
	Cash Flow Year 5	35,000
	Useful Life in years	5
	Residual value	0



Requirement 1	Compute the Accounting Rate of Return

	Average annual operating income	Average amount invested	Accounting Rate of Return - ARR
	xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx	xxxxxxxxxxxxxx	xxxxxxxxxxxxxxxxx



Requirement 2	Compute the net present value of the investment using Excel's PV function.

	Period	Cash Flows
	1	(22,321)	Note: The first period is shown as an example.
	2	xxxxxxxx
	3	xxxxxxxx
	4	xxxxxxxx
	5	xxxxxxxx
	Present value of net cash flows	xxxxxxxx	Note: PV calculates the present value as a negative amount.
	Cost of Asset	xxxxxxxx
	Net Present Value	xxxxxxxx



Requirement 3	Compute the net present value of the investment using Excel's NPV function


	Present value of net cash flows	xxxxxxxxxx
	Cost of asset	xxxxxxxxxx
	Net Present Value	xxxxxxxxxx


Requirement 4	Compute the profitability index, rounded to two decimal places.

	Profitability index	xxxxxxxxxx


Requirement 5	Compute the internal rate of return of the investment using Excel's IRR function.
	Display to two decimal places, but do not round.

	IRR	xxxxxxxxx	Note: IRR requires a negative amount for the investment.

Places with xxxxx's are what needs to be filled in, and it's for excel so if I could see the references to which numbers and the formula used that would be helpful. Thank you!!

tanimpala296

Rockyford Company must replace some machinery that has zero book value and a current market value of $1,600. One possibility is to invest in new machinery costing $41,000. This new machinery would produce estimated annual pretax cash operating savings of $16,400. Assume the new machine will have a useful life of four years and depreciation of $10,250 each year for book and tax purposes. It will have no salvage value at the end of four years. The investment in this new machinery would require an additional $2,300 investment of net working capital. (Assume that when the old machine was purchased the incremental net working capital required at the time was $0.)

If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment will occur during the next four calendar years.

Rockyford is subject to a 40% income-tax rate for all ordinary income and capital gains and has a 11% weighted-average after-tax cost of capital. All operating and tax cash flows are assumed to occur at year-end. (For Parts 2 and 3, use the relevant table from Appendix CâTable 1 or Table 2.)

Required:

1.	Determine the after-tax cash flow arising from disposing of the old machinery.

2.	Determine the present value of the after-tax cash flows for the next four years attributable to the cash operating savings. (Round your answer to the nearest whole dollar amount.)

3.	Determine the present value of the tax shield effect of depreciation for year 1. (Round your answer to the nearest whole dollar amount.)

Which one of the following is the proper treatment for the additional $2,300 of net working capital required in the current year?

	It should be ignored in capital budgeting because it is not a capital investment.
	It is a sunk cost that needs no consideration in capital budgeting.
	It should be treated as part of the initial investment when determining the net present value.
	It should be spread over the machineryâs four-year life as a cash outflow in each of the years.
	It should be included as part of the cost of the new machine and depreciated. May I please receive a step-by-step walkthough for each problem.

ceruleancamel846

Supreme Chips is a manufacturer of prototype chips based inâ Dublin, Ireland. Nextâ year, in 2018â,Supreme Chips expects to deliver 575 prototype chips at an average price of $90,000. Supreme Chips' marketing vice president forecasts growth of 55 prototype chips per year through 2024.
Thatâ is, demand will be 575 in 2018â,630 in 2019â,685 in 2020â, and so on.

The plant cannot produce more than 545 prototype chips annually. To meet future âdemand,Supreme Chips must either modernize the plant or replace it. The old equipment is fully depreciated and can be sold for $4,700,000. if the plant is replaced. If the plant isâ modernized, the costs to modernize it are to be capitalized and depreciated over the useful life of the updated plant. The old equipment is retained as part of the modernize alternative. The following data on the two options areâ available:

	Modernize	Replace
Initial investment in 2018	$34,800,000	$66,100,000
Terminal disposal value in 2024	$6,600,000	$16,800,000
Useful life	7 years	7 years
Total annual cash operating cost per prototype chip	$74,500	$65,000

Supreme Chips usesâ straight-line depreciation, assuming zero terminal disposal value. Forâ simplicity, we assume no change in prices or costs in future years. The investment will be made at the beginning of 2018â, and all transactions thereafter occur on the last day of the year.Supreme âChips' required rate of return is 6â%.There is no difference between the modernize and replace alternatives in terms of required working capital. Supreme Chips has a special waiver on income taxes until 2024.

Requirement 1. Sketch the cash inflows and outflows of the modernize and replace alternatives over the 2018â-2024 period.

âFirst, determine the cash inflows and outflows of the modernize alternative over the 2018 to 2024 period. â(Use a minus sign or parentheses for a cash outflows. Leave unused cellsâ blank.)

	Units	Net cash	Initial	Proceeds from
Year	sold	contributions	investments	sale of equipment
Jan 1, 2018			$(34,800,000)
Dec 31, 2018	575	$8,912,500
Dec 31, 2019	630	9,765,000
Dec 31, 2020	685	10,617,500
Dec 31, 2021	740	11,470,000
Dec 31, 2022	795	12,322,500
Dec 31, 2023	850	13,175,000
Dec 31, 2024	905	14,027,500		$6,600,000

âNext, determine the cash inflows and outflows of the replace alternative over the 2018 to 2024 period. â(Use a minus sign or parentheses for a cash outflows. Leave unused cellsâ blank.)

	Units	Net cash	Initial	Proceeds from
Year	sold	contributions	investments	sale of equipment
Jan 1, 2018			$(66,100,000)	$4,700,000
Dec 31, 2018	575	$14,375,000
Dec 31, 2019	630	15,750,000
Dec 31, 2020	685	17,125,000
Dec 31, 2021	740	18,500,000
Dec 31, 2022	795	19,875,000
Dec 31, 2023	850	21,250,000
Dec 31, 2024	905	22,625,000		$16,800,000

Requirement 2. Calculate payback period for the modernize and replace alternatives. â(Round your answers to two decimalâ places.)

The payback period for the investment assuming the modernize alternative is ____ years.

3.	Calculate net present value of the modernize and replace alternatives

burgundycrocodile71

ACCTG 241 Lecture 2: Chapter 12, Lecture 2

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