Markus Company sells 1,000 bonds of its debt investment in Berta Inc. for $20,000. The original cost of the 1,000 bonds was $18,
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Complete question is given at the end of the question.
Answer with Explanation:
<u>Requirement 1:</u>
Net Income is an accounting profits which includes both cash flow items and non cash flow items. It can be calculated as under:
Net Income = (Sales - Cost - Depreciation) - (Income Before Tax * Tax Rate)
The computation is given in the Second excel sheet attached.
<u>Requirement 2:</u>
According to relevant costing principles if the cost is relevant then it must satisfy following conditions:
- Must be cash flow in nature.
- Must be Future related (no past commitments).
- Differential or must be incremental
So this means that the depreciation would not be taken into account as it is not a relevant cost and thus must not be included as an incremental cost.
Incremental Cash flow can be calculated using the following formula:
Incremental Cash Flow = Net Income + Depreciation (Removing its impact) - Working Capital Injection + Working Capital Withdrawal
The calculation for each year is shown in the second attachment.
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<u>Requirement 3:</u>
The NPV can be calculated by discounting each year cash flow by the rate of return which in this case is 12%.
The formula for calculating the NPV is as under:
NPV = Investment in year zero - Net Cash Flow of Y1 / (1 + r)^1 - Net Cash Flow of Y2 / (1 + r)^2 - Net Cash Flow of Y3 / (1 + r)^3 - Net Cash Flow of Y4 / (1 + r)^4
The computation of NPV is given in the second attachment given below:
