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olga55 [171]
3 years ago
5

Problem 3.10 Net Present Value. Assume that your firm wants to choose between two project options: Project A: $500,000 invested

today will yield an expected income stream of $150,000 per year for 5 years, starting in Year 1. Project B: an initial investment of $400,000 is expected to produce this revenue stream: Year 1 = 0, Year 2 = $50,000, Year 3 = $200,000, Year 4 = $300,000, and Year 5 = $200,000. Assume that a required rate of return for your company is 10% and that inflation is expected to remain steady at 3% for the life of the project. Which is the better investment? Why?
Business
1 answer:
Slav-nsk [51]3 years ago
4 0

Answer:

Project B is a better investment

Explanation:

Given:

Project A's initial investment is $500,000

Expected cash inflow starting from year 1 for 5 years is $150,000

Required rate of return is 10% and inflation is 3%. So required rate of return is 13%

NPV of project A = -500,000 + Present value of annuity of $150,000, 5 years at 13%

Present value of annuity factor of $1, 13%, 5 periods = 3.5172

NPV of project A = -500,000 + (150,000 × 3.5172)

                           = $27,580

Poject B's initial investment =  $400,000

Use present value factor of $1, 13% to compute present value of cash inflows:

Year 1 = 0

Year 2 = 50,000 × 0.7831 = 39,155

Year 3 = 200,000 × 0.6931 = 138,620

Year 4 = 300,000 × 0.6133 = 183,990

Year 5 = 200,00 × 0.5428 = 108,560

NPV of project B = -400,000 + (39,155 + 138,620 + 183,990 + 108,560)

                           = $70,325

Since project B's NPV is higher than project A, project B is a better investment.

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PA12. <br> LO 5.4Complete this production cost report:
Lubov Fominskaja [6]

Using weighted average method

Statement of equivalent units

                                                   Material    Conversion

                                                    Units         Units

Units transferred out                   70,000       70,000

Add: Closing work-in-progress   <u> 25,000 </u>      <u> 6,250</u>

Average divisor                            <u> 95,000 </u>    <u>76,250</u>

                        Computation of cost per unit

                                                              Material   Conversion

                                                                   $               $

Cost of beginning work-in-progress   3,500      16,000

Cost added                                           <u> 25,000 </u>   <u>45,000</u>

Total cost                                               <u> 28,500 </u>   <u>61,000</u>

Material cost per unit = <u>$28,500</u>

                                         95,000 units

                                    = $0.30 per unit

Conversion cost per unit = <u>$61,000</u>

                                            76,250 units    

                                          = $0.80 per unit

 Value of units transferred out

  Material = 70,000 x $0.30  = $21,000

  Conversion = 70,000 x $0.80 = $56,000

  Value of closing work-in-progress

  Material = 25,000 x $0.30 = $7,500

  Conversion = 6,250 x $0.80 = $5,000

Explanation:

In this case, we will obtain the average divisor by adding the ending work-in-progress to the units transferred out. Then, we will determine the total cost of material and conversion ,which is the aggregate of cost of opening work-in -progress and cost added during the year. We also need to obtain the unit cost of material and conversion, which is total cost of material and conversion divided by the average divisor.  

Finally, we will value the units transferred out and ending work-in-progress at unit cost of material and conversion.                                                                                                                                                                              

8 0
2 years ago
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 8 percent, −15 percent, 19 perc
sattari [20]

Answer:

a). Arithmetic average return=12.80%

b). The variance of the company's returns=116.2

c). Standard deviation=10.78

Explanation:

a). The arithmetic average return can be expressed as;

Arithmetic average return=Sum of returns/Number of returns

where;

Sum of returns=8%+(-15%)+19%+31%+21%=64

Number of returns=5

replacing;

Arithmetic average return=64/5=12.80%

b). Variance of the company's returns

Step 1: Write down formula for variance

Variance=∑(Xi-X)²/n-1

where;

Xi=term in data set

X=sample mean

∑=sum

n=sample size

Step 2: write down each data set

X1=8%, X2=-15%, X3=19%, X4=31%, X5=21%

Step 3: Subtract the mean from each data set

Take the absolute value of each data

X1-X=8-12.8=-4.8

X2-X=15-12.8=2.2

X3-X=19-12.8=6.2

X4-X=31-12.8=18.2

X5-X=21-12.8=8.2

Step 4: Square each result and sum

∑(Xi-X)²=4.8²+2.2²+6.2²+18.2²+8.2²=464.8

Step 5: Divide by n-1

n=number of data points=5

n-1=5-1=4

∑(Xi-X)²/n-1=464.8/4=116.2

The variance of the company's returns=116.2

c). Standard deviation=√variance=√116.2

Standard deviation=10.78

5 0
3 years ago
Assume the following information for Kingbird Corp. Accounts receivable (beginning balance) $139,000 Allowance for doubtful acco
dezoksy [38]

Answer:

Prepare journal entries of sales, collections, write offs of accounts receivable, and reverse entries:

Date        Account details and explanations      Debit          Credit

                 Accounts receivable                          944,000  

                sales revenue                                                        944,000

                 Allowance for doubtful accounts      5300

                Accounts receivable                                                    5300

                Accounts receivable                            1800

                 Allowance for doubtful accounts                                1800

                cash                                                        1800

                 Accounts receivable                                                    1800

Calculating the ending balance of accounts receivable and unadjusted ending balance of allowance for doubtful accounts:

                  particulars                                                             Amount ($)

                 beginning balance of accounts receivable           139,000

                 Add: Net credit sales                                               944,000

                 less :  Collections                                                     908,000

                 Write-offs                                                                       5,300

                  Add: Reinstated amount                                              1800

                 less:  Collections                                                            1800

                  Ending  balance of accounts receivable                169700

                   particulars                                                             Amount ($)

                 beginning balance of doubtful accounts               11,370

                 less :  Write-offs                                                        5300

                 Add: Reinstated amount                                           1800

                 Ending  balance of unadjusted  balance                 7870

                 allowance of  doubtful accounts

Preparing journal entry to record bad debt

Date    Account details and explanations         Debit          Credit

           Bad debt expense ( 169700*8%) - 7870  12789

               allowance of  doubtful accounts                            12789

7 0
3 years ago
Dana and Larry are married and live in Texas. Dana earns a salary of $45,000 and Larry has $25,000 of rental income from his sep
vodomira [7]

Answer:

D) $25,000

Explanation:

Even though Dana and Larry are married, since they are filing separate tax returns, then all the income that Larry must declare are his $25,000 earned as rental income.

If they were filing together, then they would declare $70,000 as combined income (= $25,000 + $45,000).

3 0
3 years ago
Seojun acquired an activity several years ago, and in the current year, it generates a loss of $50,000. Seojun has AGI of $140,0
ahrayia [7]

Answer:

Seojun's Adjusted Gross income is $140,000.

Explanation: Adjusted Gross income(AGI) is a term used in Financial accounting to describe the total amount of gross income remaining after certain deductions have been made to the Gross income of a business entity over a given period of time.

Since Seojun is not a Material participant,the $50,000 loss can not be considered in calculating Seojun's Adjusted Gross income.

7 0
3 years ago
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