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Simora [160]
3 years ago
9

At the end of 2019, Uma Corporation is considering a major long-term project in an effort competitive in its industry. The produ

ction and sales departments have determined the potential annual cash flow savings that could accrue to the firm if it acts soon. Specifically, they estimate that a mixed stream of future cash flow savings will occur at the end of the years 2021 through 2026. The years 2027 through 2031 will see consecutive and equal cash flow savings at the end of each year. The firm estimates that its discount rate over the first 6 years will be 7%. The expected discount rate over the years 2027 through 2031 will be 11%. The project managers will find the project acceptable if it results in present cash flow savings of at least $860,000. The following cash flow savings data are supplied to the finance department for analysis.
a. Determine the value (at the beginning of 2019) of the future cash flow savings expected to be generated by this project.
b. Based solely on the one criterion set by management, should the firm undertake this specific project? Explain.
c. What is the "interest rate risk," and how might it influence the recommendation made in part b? Explain.
Discount rate for years 2020 - 2025 7%
Discount rate for years 2026 - 2030 11%
Cash Present
Year Year (n) Flow Value
2020 1 $110,000
2021 2 120,000
2022 3 130,000
2023 4 150,000
2024 5 160,000
2025 6 150,000
2026 7 90,000
2027 8 90,000
2028 9 90,000
2029 10 90,000
2030 11 90,000
Could you please fill the present value for each year in excel and showing me the formula for each year?
The concept of interest-rate risk states that changes in the interest rates may adversely affect the value of an investor's securities portfolio. While this is not a securities problem, the relationship between the change in rates and the subsequent change in the value of an asset hold true. If the the interest rates were to rise just 1%, the present value of the expected savings would fall below the required $860,000 limit set by mangement.
Business
1 answer:
bonufazy [111]3 years ago
4 0

Answer:

A. $820,036.47

B. No, the firm should not undertake this specific project

C. If the interest rate go higher by 1 percent the risk is that the present cash flow savings limits of the amount of $860,000 set by the management will fall.

Explanation:

a. Calculation to Determine the value of the future cash flow savings expected to be generated by this project.

PRESENT VALUE

2020 = $110,000/(1.07)^1

2020= $102,803.74

2021= $120,000/(1.07)^2

2021=$104,812.65

2022 =$130,000/(1.07)^3

2022=$106,118.72

2023 =$150,000/(1.07)^4

2023=$114,434.28

2024 =$160,000/(1.07)^5

2021=$114,077.79

2025 =$150,000/(1.07)^6

2025=$99,951.33

2026 =$90,000/(1.11)^7

2026=$433,49.26

2027 =$90,000/(1.11)^8

2027=$39,053.38

2028 =$90,000/(1.11)^9

2028=$351,83.23

2029 =$90,000/(1.11)^10

2029=$31,696.60

2030 =$90000/(1.11)^11

2030=$28,555.49

TOTAL VALUE $820,036.47

Therefore the value of the future cash flow savings expected to be generated by this project is $820,036.47 .

b. Based on the criterion that was set by the management, the firm should NOT undertake this specific project reason been that the total amount of the PRESENT VALUE (PV) cash inflow of the amount of $820,036.47 is LESSER than the present cash flow savings of the amount of $860,000 that was set by the management.

c. Based on the information given in a situation were the interest rate go higher by 1 percent the risk is that the present cash flow savings limits of the amount of $860,000 set by the management will fall.

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5 0
3 years ago
Accrued salaries payable of $100000 were not recorded on December 31, 2017. Office supplies on hand of $57000 on December 31, 20
Dennis_Churaev [7]

Answer:

In 2017

Net Income and Retained Earning are overstated by $100,000

Expenses and Payables are understated by $100,000.

In 2018

Inventory, Net Income and Retained Earning are understated by $57,000

Expenses are overstates by $57,000

Explanation:

Accrued Salaries is Recorded as follow

Dr. Salaries Expense

Cr. Salaries Payament

Non recording of this entry will result in understatement of Expenses and Payables by $100,000 over statement of Net income and retained earning by the same amount.

Treatment of Office supplies of $57,000 as expense will overstate the expenses  and understate the the inventory, Net income and Retained Earning.

7 0
3 years ago
Value Catering uses two measures of activity, jobs and meals, in the cost formulas in its budgets and performance reports. The c
sertanlavr [38]

Answer:

$3,504

Explanation:

Catering supplies = $500 + $76 x j + $14 x m

where,

j = number of jobs in a month

m = number of meals in a month

therefore,

Planning budget for June, use the Actual number of jobs and meals into the formula (Actual Activity).

June Catering supplies = $500 + $76 x 13+ $14 x 144

                                       =  $3,504

Conclusion

The catering supplies in the planning budget for June would be closest to $3,504.

6 0
3 years ago
The closing process is necessary in order to
goldfiish [28.3K]

Answer:

The closing process is necessary in order to confirm that net income or net loss and owner withdrawals for the period are closed into the owner's capital account.

Explanation:

Most economies around the world follow a specific accounting period which is commonly referred to as financial year or tax year. Before a new financial year begins, the accounts from the ongoing financial year have to be closed legitimately through a process called the 'closing process'. This process culminates in confirming that the net income secured or the net loss bore by the owner is included in no other account than the owner's capital account.

In order to carry out the closing process, the accountant has to commence with identifying the accounts that are required to be closed with or before the ending of the predefined financial period. He then has to record the last entries in these accounts as 'closing entries'. Once the accounts are closed, he has to calculate the trial balance and interpret the outcome. Closing of temporary accounts through a valid closing process dispenses the ease of calculating profit and loss in any given financial period coming to end.

5 0
3 years ago
Leather Shop earned net income of $ 71,000 after deducting depreciation of $ 5,000 and all other expenses. Current assets decrea
Thepotemich [5.8K]

Answer:

$89,000

Explanation:

Given that,

Net Income = $71,000

Depreciation = $5,000

Increase in Current Liabilities = $9,000

Decrease in Current Assets = $4,000

Net Cash from Operating Activities:

= Net Income + Depreciation + Increase in Current Liabilities + Decrease in Current Assets

= $71,000 + $5,000 + $9,000 + $4,000

= $89,000

Therefore, the Leather Shops cash provided by operating activities​ (indirect method) is $89,000.

7 0
3 years ago
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