BUSINESS COLLEGE

Present value (with changing interest rates). Marty has been offered an injury settlement of $12 comma 000 payable in 3 years. He wants to know what the present value of the injury settlement is if his opportunity cost is 5%. (The opportunity cost is the interest rate in this problem.) What if the opportunity cost is 6.5%? What if it is 11.5%?

Answers

Answer 1

Answer:

Answer:

If opportunity cost is 5%, PV=10,366.05

If opportunity cost is 6.5%, PV=9,934.19

If opportunity cost is 11.5%, PV=8,656.79

Explanation:

PV=Σ $((CF_(t) )/((1+i)^(t) ))$

If opportunity cost is 5%: PV = $(12,000 )/((1+0.05)^(3) )$ =10,366.05

If opportunity cost is 6.5%: PV = $(12,000 )/((1+0.065)^(3) )$ =9,934.19

If opportunity cost is 11.5%: PV = $(12,000 )/((1+0.115)^(3) )$ =8,656.79

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A property was acquired for $950,000 and then produced cash flows of $100,000, $120,000, $135,000, $135,000, and $125,000 at the end of years one through five, respectively. The property was then sold for $1,200,000 at the end of the fifth year. What was the internal rate of return for this investment?

Answers

Answer:

IRR= 17%

Explanation:

The internal rate of return is the profitability (IRR) of the money that remains invested during a project life. To calculated we need to use the net present value formula (NPV). The IRR is the rate at which the NPV is cero. I attached the formula but it is better to calculate the IRR using excel.

First, you have to copy all cash flows including the investment with a negative sign. Then you use the financial formula "IRR" in this way:

"=IRR(C3:C8)" (I attached the excel figure)

In this case, you have to sum the cash flow produced by the property plus the earnings of the its sale on year 5.

Novak Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the-years'-digits method, and (3) the double-declining-balance method.Year Straight-Line Sum-of-the-Years'-Digits Double-Declining-Balance
1 $15,750 $26,250 $35,000
2 15,750 21,000 21,000
3 15,750 15,750 12,600
4 15,750 10,500 7,560
5 15,750 5,250 2,590
Total $78,750 $78,750 $78,750

Required:
a. What is the cost of the asset being depreciated?
b. What amount, if any, was used in the depreciation calculations for the salvage value for this asset?
c. Which method will produce the highest charge to income in Year 1?
d. Which method will produce the highest charge to income in Year 4?
e. Which method will produce the highest book value for the asset at the end of Year 3?
f. If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?

Answers

Answer:

a. What is the cost of the asset being depreciated?

the cost of the asset = $35,000 / 0.4 = $87,500

b. What amount, if any, was used in the depreciation calculations for the salvage value for this asset?

salvage value = $87,500 - (5 x $15,750) = $8,750

c. Which method will produce the highest charge to income in Year 1?

double declining results in the highest depreciation expense

d. Which method will produce the highest charge to income in Year 4?

straight line results in the highest depreciation expense

e. Which method will produce the highest book value for the asset at the end of Year 3?

straight line, book value = $87,500 - (3 x $15,750) = $40,250

f. If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?

double declining balance, since the carrying value is lowest = $87,500 - $35,000 - $21,000 - $12,600 = $18,900

e.g. if the assets is sold at $30,000, the gain = $11,100

under straight line method a $30,000 resale price would result in a loss(= $30,000 - $40,250 = -$10,250), while sum of years' digit would result in a gain = $30,000 - ($87,500 - $26,250 - $21,000 - $15,750) = $5,500

Blue Spruce Corp. reported net income of $377000 for the year. During the year, accounts receivable increased by $27000, accounts payable decreased by $12000 and depreciation expense of $59000 was recorded. Net cash provided by operating activities for the year is

Answers

Answer:

The correct solution is "$397000".

Explanation:

Given:

Net income,

= $377000

Depreciation,

= $59000

Accounts receivable increase,

= $27000

Accounts payable decreased,

= $12000

Now,

From operating activities, the cash flow will be:

= $Net \ income+ Depreciation-Account \ receivable \ increase-Accounts \ payable \ decrease$ By putting the values, we get

= $377000 + 59000 - 27000 - 12000$

= $397000$ ($)

Williams Company computed its cost per equivalent unit for direct materials to be $1.90 and its cost per equivalent unit for conversion to be $3.85. A total of 245,000 units of product were completed and transferred out as finished goods during the month. The ending Work in Process inventory consists of 26,000 equivalent units of direct materials and 26,000 equivalent units of conversion costs. The amount that should be reported in ending Work in Process Inventory is:

Answers

Answer:The amount that should be reported in ending Work in Process Inventory is:

=$149,500

Explanation:

Work-in-process inventory is materials that are unfinished or partially completed in a production process.

Work in Process inventory = Direct materials cost+ conversion cost

= (equivalent units of direct materials x direct material cost per unit) + (equivalent units of direct materials x conversation cost per unit )

=26,000 x $1.90 + 26,000 x $3.85

$49,400 + $100.100

=$149,500

The amount that should be reported in ending Work in Process Inventory is:

=$149,500

Answer:1408750

Explanation:

Direct Materials 245,000 x 1.90 = 465500

Conversión 245,000x3.85= 943250

Total transferred to finished goods = 465500+943250=1408750

There are three categories of cash flows: single cash flows, also referred to as "lump sums," a stream of unequal cash flows, and annuities. Based on your understanding of annuities, answer the following questions. Which of the following statements about annuities are true? Check all that apply. Ordinary annuities make fixed payments at the end of each period for a certain time period. An annuity due is an annuity that makes a payment at the end of each period for a certain time period. An annuity due earns more interest than an ordinary annuity of equal time. A perpetuity is a constant, infinite stream of equal cash flows that can be thought of as an infinite annuity.

Answers

Answer:

All statement are correct except the the second one.

Explanation:

Ordinary annuities make fixed payments at the end of each period for a certain time period.

True. the differentiating feature between ordinary annuities and annuity dues is the timing of the cash-flows- If payments are made at the end of each period, the payment stream is an ordinary annuity but if payments are made at the beginning of each period, then the stream is an annuity due.

An annuity due is an annuity that makes a payment at the end of each period for a certain time period.

False. with an annuity due, payments are made at the beginning of each period.

An annuity due earns more interest than an ordinary annuity of equal time.

True. Payments are made sooner in an annuity due, with the 1st payment made at the beginning of the first period and the last payment being made at the beginning of the last period. Thus each payment earns interest and as a result, both the present value and the future value are higher than that of an ordinary annuity.

A perpetuity is a constant, infinite stream of equal cash flows that can be thought of as an infinite annuity.

True. A perpetuity is a stream of cash-flows starting at a certain date with equal payments at equal intervals but with no terminal date. Therefore the stream of cash-flows is expected to continue forever- which makes it an infinite annuity.

A stainless steel knife set is one item it stocks. Demand (2,400 sets per year) is relatively stable over the entire year. Whenever new stock is ordered, a buyer must ensure that numbers are correct for stock on-hand and then phone in a new order. The total cost involved to place an order is about $5. RW figures that holding inventory in stock and paying for interest on borrowed capital, insurance, and so on, add up to about $4 holding cost per unit per year.Analysis of the past data shows that the standard deviation of demand from retailers is about four units per day for a 365-day year. Lead time to get the order is seven days.What is the economic order quantity?

Answers

Answer:

Annual demand (D) = 2,400 sets

Holding cost (H) = $4

Ordering cost (Co) = $5

EOQ = √2 x 2,400 x $5

EOQ = 77 units

Explanation:

Economic order quantity(EOQ) is the square root of 2 multiplied by annual demand and ordering cost per order divided by the holding cost per item per annum. EOQ is the quantity of stock that is bought each time a replenishment order is placed.

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