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Problem
Nowadays Manufacturing is considering an investment proposal withthe following information:
Cost $900,000
Useful life 8 years (straight-line depreciation)
Annual Cash inflows $200,000 (estimated per year for 8 years)
Residual value $ 60,000
Required rate of return 12%
Answer the following questions concerning this proposal. Show yourwork.
a. What is the payback period of this project?
b. What is the NPV of this project?
c. Is the IRR greater or less than 12%?
d. Should the project be accepted based on NPV?


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Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

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ACCT202 – Principles of Accounting II

Problem #1
Hear Right Company has identified certain variable and fixed costsin the production of its hearing aid components. Management wantsyou to divide its mixed costs into its fixed and variable portions.Here are the high and low cost data for the firm:
Total
Month Units Costs ($’s)
February 20,000 54,000
October 40,000 77,400
Using the high-low method, determine the total amount of fixedcosts and the amount of variable cost per unit. Show yourwork.

Assume the firm sells their hearing aid components at a sales priceof $3.17 per unit. How many units must be sold for Hear Right tobreak even on its hearing components? Show your work.

Problem #2
You examine the financial statements of a firm and find that forevery unit of Product Y sold, the firm sells 1.5 units of productX. The sales price and variable cost per unit for Product X are$100 and $70, respectively; the sales price and variable cost perunit for Product Y are $80 and $60, respectively. Assuming aconstant product mix and fixed costs of $260,000, how many of eachproduct line must be sold to break even? What is total salesrevenue(in dollars) at the break-even point? Show your work.

Problem #3
West Star Company manufactures and sells computer monitors at $200each. The following is the cost information for the manufacture andsale of one monitor, given the normal manufacture and sales levelof 5000 is:

Direct materials $48 per unit
Direct labor 64 per unit
Variable overhead 36 per unit
Variable selling and admin. expenses 12 per unit
Fixed manufacturing overhead $125,000, in total

West Star actually has the capacity to produce 7000 monitors, butdemand has not been high enough to do so. West Star received aspecial order for 1500 monitors at a sales price of $175 per unit.West Star will pay a reduced sales commission on the special order,reducing variable selling and administrative expenses from $12 perunit to $8 per unit. What is the net effect of the special order onthe company’s profit? Show your work.


Problem #4
Swanton Company currently sells 3 products and details of revenuesand costs are given below. The company is thinking of discontinuingthe production of paper clip holders. However, because manycustomers buy the products as a set, Swanton estimates that thesales of the other two products will decrease by 20%.#
Desk
Calendars Pen sets Paper-clip
Holders
Sales $280,000 $240,000 $24,000
Variable costs 160,000 160,000 26,000
Direct fixed costs 40,000 20,000 5,000
Indirect fixed costs 30,000 40,000 6,000

What is the net benefit or net loss of dropping the production andsale of paper clip holders? Show your work.

Problem #5
Nowadays Manufacturing is considering an investment proposal withthe following information:
Cost $900,000
Useful life 8 years (straight-line depreciation)
Annual Cash inflows $200,000 (estimated per year for 8 years)
Residual value $ 60,000
Required rate of return 12%
Answer the following questions concerning this proposal. Show yourwork.
a. What is the payback period of this project?
b. What is the NPV of this project?
c. Is the IRR greater or less than 12%?
d. Should the project be accepted based on NPV?


Directions: Yourassignment this week is to answer the four questions below. Pleasenote that Question #1 has 2 parts, Part A and Part B. Please showyour work for full credit and use the box provided. Please add morerows or columns to the box if needed.
1. Gomez Corporation isconsidering two alternative investment proposals with the followingdata:
Proposal X Proposal Y
Investment $850,000 $468,000
Useful life 8 years 8 years
Estimated annual net $125,000 $78,000
cash inflows for 8 years
Residual value $40,000 $ -
Depreciation method Straight-line Straight-line
Required rate of return 14% 10%
1a. How long is the paybackperiod for Proposal X?
1b. What is the accountingrate of return for Proposal Y?
2. You have beenawarded a scholarship that will pay you $500 per semester at theend of each of the next 8 semesters that you earn a GPA of 3.5 orbetter. You are a very serious student and you anticipate receivingthe scholarship every semester. Using a discount rate of 3% persemester, which of the following is the correct calculation fordetermining the present value of the scholarship? PLEASE STATE WHYYOU CHOSE THE ANSWER THAT YOU DID.
A) PV = $500 × 3% × 8
B) PV = $500 × (Annuity PV factor, i = 3%, n =8)
C) PV = $500 × (Annuity FV factor, i = 6%, n =4)
D) PV = $1,000 × (PV factor, i = 3%, n = 4)
3. Maersk MetalStamping is analyzing a special investment project. The projectwill require the purchase of two machines for $30,000 and $8,000(both machines are required). The total residual value at the endof the project is $1,500. The project will generate cash inflows of$11,000 per year over its 8-year life.
If Maersk requiresa 6% return, what is the net present value (NPV) of this project?(Use present value tables or Excel.)
4. HincapieManufacturing is evaluating investing in a new metal stampingmachine costing $30,924. Hincapie estimates that it will realize$12,000 in annual cash inflows for each year of the machine's3-year useful life.
Approximately,what is the the internal rate of return (IRR) for the machine? (Usepresent value tables or Excel.)
Using payback, NPV, and profitability index to make capital investment decisions
Splash City is considering purchasing a water park in Omaha, Nebraska, for $1,910,000. The new facility will generate
annual net cash inflows of $487,000 for eight years. Engineers estimate that the facility will remain useful for
eight years and have no residual value. The company uses straight-line depreciation, and its stockholders
demand an annual return of 10% on investments of this nature.
Requirements
1.) Compute the payback, the NPV, and the profitability index of this investment.
2.) Recommend whether the company should invest in this project.

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