Managerial Accounting 1B

Financial

and Managerial Accounting

Chapter 24

1.Exercise 24-1

Payback period computation; even cash flows L.O. P1

Compute the payback period for

each of these two separate investments:

a.

A new operating system for an existing

machine is expected to cost $260,000 and have a useful life of five years.

The system yields an incremental after-tax income of $75,000 each year after

deducting its straight-line depreciation. The predicted salvage value of the

system is $10,000.(Round your answer to 2

decimal places.)

Payback period

b.

A machine costs $190,000, has a

$10,000 salvage value, is expected to last nine years, and will generate an

after-tax income of $30,000 per year after straight-line depreciation.(Round your answer to 1 decimal place.)

Payback period

2.

Exercise 24-2 Payback period computation; uneven cash flows L.O.

P1

Wenro Company is considering the

purchase of an asset for $90,000. It is expected to produce the following net

cash flows. The cash flows occur evenly throughout each year.

Year

1

Year

2

Year

3

Year

4

Year

5

Total

Net cash flows

$

30,000

$

20,000

$

30,000

$

60,000

$

19,000

$

159,000

Compute the payback period for

this investment. (Round your intermediate

calculations to 3 decimal places and final answer to 1 decimal place.)

Payback period

3.

Exercise 24-3 Payback period computation; declining-balance

depreciation L.O. P1

A machine can be purchased for

$300,000 and used for 5 years, yielding the following net incomes. In

projecting net incomes, double-declining balance depreciation is applied,

using a 5-year life and a $50,000 salvage value.

Year

1

Year

2

Year

3

Year

4

Year

5

Net incomes

$

20,000

$

50,000

$

100,000

$

75,000

$

200,000

Compute the machines payback

period (ignore taxes). (Round your

intermediate calculations to 3 decimal places and final answer to 2 decimal

places.)

Payback period

4.

Exercise 24-4 Accounting rate of return L.O. P2

A machine costs $500,000 and is

expected to yield an after-tax net income of $15,000 each year. Management predicts

this machine has a 10-year service life and a $100,000 salvage value, and it

uses straight-line depreciation. Compute this machines accounting rate of

return. (Omit the “%” sign in your

response.)

Accounting rate of

return

5.

Exercise 24-6 Computing net present value L.O. P3

K2B Co. is considering the

purchase of equipment that would allow the company to add a new product to

its line. The equipment is expected to cost $240,000 with a 12-year life and

no salvage value. It will be depreciated on a straight-line basis. K2B Co.

concludes that it must earn at least a 8% return on this investment. The

company expects to sell 96,000 units of the equipments product each year.

The expected annual income related to this equipment follows. (Use.mhhe.com/connect/0078110882/Images/tableb.3.JPG”>Table B.3)

Sales

$

150,000

Costs

Materials,

labor, and overhead (except depreciation)

80,000

Depreciation

on new equipment

20,000

Selling

and administrative expenses

15,000

Total costs and

expenses

115,000

Pretax income

35,000

Income taxes (30%)

10,500

Net income

$

24,500

Compute the net present value of

this investment. (Round “PV Factor”

to 4 decimal places. Round your intermediate calculations and final answer to

the nearest dollar amount. Omit the “$” sign in your response.)

Managerial Accounting 1BFinancial

and Managerial AccountingChapter 241.Exercise 24-1

Payback period computation; even cash flows L.O. P1Compute the payback period for

each of these two separate investments:a.A new operating system for an existing

machine is expected to cost $260,000 and have a useful life of five years.

The system yields an incremental after-tax income of $75,000 each year after

deducting its straight-line depreciation. The predicted salvage value of the

system is $10,000.(Round your answer to 2

decimal places.) Payback periodb.A machine costs $190,000, has a

$10,000 salvage value, is expected to last nine years, and will generate an

after-tax income of $30,000 per year after straight-line depreciation.(Round your answer to 1 decimal place.) Payback period 2.Exercise 24-2 Payback period computation; uneven cash flows L.O.

P1Wenro Company is considering the

purchase of an asset for $90,000. It is expected to produce the following net

cash flows. The cash flows occur evenly throughout each year. Year

1Year

2Year

3Year

4Year

5Total Net cash flows $30,000 $20,000 $30,000 $60,000 $19,000 $159,000 Compute the payback period for

this investment. (Round your intermediate

calculations to 3 decimal places and final answer to 1 decimal place.) Payback period3.

Exercise 24-3 Payback period computation; declining-balance

depreciation L.O. P1A machine can be purchased for

$300,000 and used for 5 years, yielding the following net incomes. In

projecting net incomes, double-declining balance depreciation is applied,

using a 5-year life and a $50,000 salvage value. Year

1Year

2Year

3Year

4Year

5 Net incomes $20,000 $50,000 $100,000 $75,000 $200,000 Compute the machines payback

period (ignore taxes). (Round your

intermediate calculations to 3 decimal places and final answer to 2 decimal

places.) Payback period4.Exercise 24-4 Accounting rate of return L.O. P2A machine costs $500,000 and is

expected to yield an after-tax net income of $15,000 each year. Management predicts

this machine has a 10-year service life and a $100,000 salvage value, and it

uses straight-line depreciation. Compute this machines accounting rate of

return. (Omit the “%” sign in your

response.) Accounting rate of

return5.Exercise 24-6 Computing net present value L.O. P3K2B Co. is considering the

purchase of equipment that would allow the company to add a new product to

its line. The equipment is expected to cost $240,000 with a 12-year life and

no salvage value. It will be depreciated on a straight-line basis. K2B Co.

concludes that it must earn at least a 8% return on this investment. The

company expects to sell 96,000 units of the equipments product each year.

The expected annual income related to this equipment follows. (Use.mhhe.com/connect/0078110882/Images/tableb.3.JPG”>Table B.3) Sales$150,000 Costs Materials,

labor, and overhead (except depreciation) 80,000 Depreciation

on new equipment 20,000 Selling

and administrative expenses 15,000 Total costs and

expenses 115,000 Pretax income 35,000 Income taxes (30%) 10,500 Net income$24,500 Compute the net present value of

this investment. (Round “PV Factor”

to 4 decimal places. Round your intermediate calculations and final answer to

the nearest dollar amount. Omit the “$” sign in your response.)