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Year Income from Net cash flow Income from Net cash flow
operation operation
1 $12000 $ 44,000 $ 26,000 $ 58,000
2 18,000 50,000 20,000 52,000
3 20,000 52,000 16,000 48,000
4 16,000 48,000 16,000 48,000
5 22,000 54,000 6,000 38,000
Each project requires an investment of $ 160,000. Straight-line depreciation will be used, and no
residual value is expected. The committee has selected a rate of 15% for purposes of the net
present value analysis.
Instruction:
(1) Compute the following
(a) The average rate of return for each project.
(b) The net present value for each project. Use the present value of $ 1 table attached.
Present Value of 1
1 0.9804 0.9615 0.9524 0.9434 0.9259 0.9091 0.8929 0.8772 0.870 0.8621
2 0.9612 0.9246 0.9070 0.8900 0.8573 0.8264 0.7972 0.7695 0.756 0.7432
3 0.9423 0.8890 0.8638 0.8396 0.7938 0.7513 0.7118 0.6750 0.658 0.6407
4 0.9238 0.8548 0.8227 0.7921 0.7350 0.6830 0.6355 0.5921 0.572 0.5523
5 0.9057 0.8219 0.7835 0.7473 0.6806 0.6209 0.5674 0.5194 0.497 0.4761
Period 2% 4% 5% 6% 8% 10% 12% 14% … 15%. 16%
6 0.8880 0.7903 0.7462 0.7050 0.6302 0.5645 0.5066 0.4556 0.432 0.4104
7 0.8706 0.7599 0.7107 0.6651 0.5835 0.5132 0.4523 0.3996 0.376 0.3538
8 0.8535 0.7307 0.6768 0.6274 0.5403 0.4665 0.4039 0.3506 0.327 0.3050
9 0.8368 0.7026 0.6446 0.5919 0.5002 0.4241 0.3606 0.3075 0.284 0.2630
10 0.8203 0.6756 0.6139 0.5584 0.4632 0.3855 0.3220 0.2697 0.247 0.2267
(2) Why is the net present value of project B greater then project A even though its
average rate of return is less.
(3 ) Prepare a summary for the capital investment committee, advising it on the relative merits of
the two projects.
6. At the beginning of the 2006 school year, Hakim Davis decided to prepare a
Cash budget for the months of September, October, November and December. The
Budget must plan for enough cash on December 31 to pay the spring semester tuition.
The following information relates to the budget:
Instructions:-
1. What is (a) the contribution margin ratio [30%]and (b) the unit contribution margin? [6]
2. Determine the break-even point in units.[ 48000 units]
3. Construct a cost –volume-profit chart, indicating the break-even point.
4. Construct a profit-volume chart, indicating the break-even point.
5. What is the margin of safety? [20%]
6. The comparative balance sheet of Dowling Company for December 31, 2007 & 2006 is
as follows:
Dowling Company
Comparative Balance sheet for December 31, 2007 & 2006
Assets 2007 2006
Cash $ 140350 $ 95900
Accounts receivable (net) $ 95300 $ 102300
Inventories $ 165200 $ 157900
Prepaid expenses
Liabilities & Stock Holders’ Equity $ 6240
2007 $ 5860
2006
Investments (Long term)
Accounts payable ( Merchandise creditors) $ 35700
$ 43500 $ 84700
$ 46700
Land
Accrued expenses (operating expenses) $$14000
75000 $$12500
90000
Buildings
Income Tax payable $ 375000
7900 $ 260000
$ 8400
Accumulated Depreciation – Buildings
Dividends payable ($ 71300)
$ 14000 $($10000
58300)
Machinery & Equipment
Mortgage note payable, due 2017 428300
$ 40000 $$ 0428300
Accumulated
Bonds payableDepreciation – Machinery & Equipment ($ 148500)
$ 150000 ($ 138000)
$ 250000
Patents
Common stock, $ 30 par $$450000
58000 $$375000
65000
Total Assets
Excess of issue price over par – Common stock $ 1159290
$ 66250 $ 1093660
41250
Retained earnings $ 373640 $ 349810
Total Liabilities & Stock Holders’ equity $ 1159290 $ 1093660
Dowling Company
Income Statement for the year ended Dec 31, 2007
Sales $1,100,000
Cost of merchandise sold $ 710,000
Gross profit $ 390,000
Operating expenses:
Depreciation expenses $ 23,500
Patent amortization $ 7,000
Other operating expenses $ 196,000
Total operating expenses $226,500
Income from operation
Other Income:
Gain on sale of investments $ 11,000
Other expenses:
Interest expense $ 26,000 ($15,000)
Income before income tax $ 148,500
Income tax expense $50,000
Net income $ 98,500