Work4Me Managerial Accounting Simulations. Problem Eleven

Transcription

1 Work4Me Managerial Accounting Simulations 1 st Web-Based Edition Problem Eleven Capital Budgeting Starlight Packaging Page 1

2 INTRODUCTION Starlight Packaging produces a single product that it sells to public storage facilities. Starlight management is considering capital budgeting decisions under several scenarios: Scenario A: Purchase new production equipment for its product line, eliminating a labor-cost intensive process Scenario B: Purchase new production equipment to produce and sell a new product Scenario C: Purchase new production equipment or renovate existing production equipment (annual revenues are generated) Scenario D: Purchase new equipment or renovate existing equipment (no revenues are generated) Problem Assignment: Your task is to complete Capital Budgeting Decision forms for each of the Scenarios and answer the questions in the examination for Problem 11 Capital Budgeting Decisions. ****************************************************************************** Scenario A Purchase new production equipment, eliminating a labor-cost intensive process Information for preparing the Capital Budgeting Decision form is: Purchase price of equipment $80,000 Life of the equipment 5 years Annual cost savings of labor cost $20,000 Salvage value of the equipment $2,000 Required rate of return 12% Log In to Managerial Accounting Work4Me. From the program Menu Bar select Problems, then select Problem 11 Capital Budgeting. Move the pointer to Support on the program Menu Bar and select Present Value Tables. Page 2

3 Select the appropriate present value table(s), Print the table(s) setting the printer preference to Landscape, and complete the schedule below: Item Year(s) Factor Present Value of Cash Flows Annual cost savings 1-5 Initial investment Now Net present value Change the discount rate to 8% and complete the schedule below: Item Year(s) Factor Present Value of Cash Flows Annual cost savings 1-5 Initial investment Now Net present value Change the discount rate to 6% and complete the schedule below: Item Year(s) Factor Present Value of Cash Flows Annual cost savings 1-5 Initial investment Now Net present value ****************************************************************************** Scenario B Purchase new production equipment to produce and sell a new product Log In to Managerial Accounting Work4Me. From the program Menu Bar select Problems, then select Problem 11 Capital Budgeting. Move the pointer to Capital Budgeting in the program Menu Bar and select Capital Budgeting Net Present Value Method. Information for preparing the Capital Budgeting Net Present Value Method form: Starlight is considering making a capital investment in new production equipment in order to sell a new packaging product its engineering department recently developed. The accounting department has gathered the following information: Page 3

4 Details for Purchasing New Production Equipment Purchase price of new equipment $100,000 Salvage value of new equipment $5,000 Cost to overhaul equipment $9,000 Working capital needed $120,000 The equipment will be sold for salvage at the end of Year 5 of the investment. It is anticipated that technological advancements will require an overhaul of the equipment in Year 4 of the investment. At the end of Year 5, the working capital will be released. The required rate of return is 8%. Details of Projected Sales of New Product Annual sales revenues $180,000 Annual cost of goods sold $115,000 Annual out-of-pocket expenses $25,000 Complete the Capital Budgeting Decision Net Present Value Method form: 1. Enter Purchase price of equipment as Tab to Salvage value of equipment and enter Tab to Cost to overhaul equipment and enter Tab to Working capital needed and enter Tab to Sales revenues and enter Tab to Cost of goods sold and enter Tab to Out-of-pocket costs and enter Tab to Discount Rate and enter Tab to the Year(s) column for overhaul of equipment and enter Tab to the Year(s) column for Annual net cash inflows form sales of product and enter Tab to the Year(s) column for Salvage value of equipment and enter Tab to the Year(s) column for Working capital released and enter 5 Page 4

5 13. Click on Budget 14. Click on Print and print the budget Set the printer preference to Landscape and click on OK 15. Change the Discount Rate to Click on Budget 17. Click on Print and print the budget Set the printer preference to Landscape and click on OK 18. Change the Discount Rate to Click on Budget. 20. Click on Print and print the budget Set the printer preference to Landscape and click on OK ****************************************************************************** Scenario C Purchase new production equipment to replace existing equipment using the total-cost approach If you are still running Problem 11, select Capital Budgets from the program Menu Bar and select Capital Budgeting Total Cost Approach. Starlight provides you with the following information to help its management decide whether to make extensive renovation to a current piece of equipment or to sell the equipment at its current salvage value and purchase a new replacement. Item New Equipment Old Equipment Annual revenues $400,000 $380,000 Annual cash operating costs 190, ,000 Initial investment 400,000 Renovation costs 210,000 Repairs in five (5) years 40,000 90,000 Salvage value in ten (10) years 30,000 20,000 Salvage value, now 20,000 The discount rate selected by management is 12%. Page 5

6 Complete the Capital Budgeting Decision Total-Cost Approach: New Equipment 1. Enter Initial Investment of equipment as Tab to Projected repairs of equipment and enter Tab to Net annual cash inflows and enter the net annual cash inflow, without commas or dollar signs. 4. Tab to Salvage value and enter Old Equipment 5. Tab to Renovation costs and enter Tab to Projected repairs and enter Tab to Net annual cash inflows and enter the net annual cash inflow, without commas or dollar signs. 8. Tab to Salvage value and enter Tab to Discount Rate and enter.12 New Equipment 10. Tab to the Year(s) column for Projected repairs and enter Tab to the Year(s) column for Net annual cash inflows and enter Tab to the Year(s) column for Salvage value of new equipment and enter 10 Old Equipment 13. Tab to the Year(s) column for Projected repairs and enter Tab to the Year(s) column for Net annual cash inflows and enter Tab to the Year(s) column for Salvage value and enter Click on Budget. 17. Print the budget Set the printer preference to Landscape and click on OK ****************************************************************************** Scenario D Purchase new production equipment to replace the existing equipment using the least-cost method From the program Menu Bar select Capital Budgeting and click on Capital Budgeting Least Cost Approach. Starlight is considering the replacement of its executive airplane, Kitty-Hawk One, with a newer airplane, Kitty-Hawk Two. Kitty-Hawk Two will carry one passenger in addition to the pilot. Starlight provides you with the following information for making the decision whether to buy the newer airplane or make an immediate overhaul of Kitty-Hawk One. Page 6

7 Item New Airplane Old Airplane Initial investment $260,000 $210,000 Annual cash operating costs $70,000 $98,000 Overhaul costs $80,000 Salvage value now $35,000 Salvage value in seven years $45,000 $00 Remaining life 7 years Remaining life with overhaul 7 years The discount rate chosen by management for this decision is 10%. Complete the Capital Budgeting Decision Least-Cost Approach: New Airplane 1. Enter Initial investment of the new airplane as Tab to Salvage value of the new airplane and enter Tab to Annual cash operating costs and enter Old Airplane 4. Tab to Overhaul costs and enter Tab to Salvage value of the old airplane (now) and enter Tab to Annual cash operating costs and enter Tab to Remaining Useful Life and enter 7 8. Tab to the Discount Rate and enter Click on Budget. 10. Print the budget: Set the printer preference to Landscape and click on OK This completes the assignment on Capital Budgeting Decisions. Complete the examination on the following page. If the examination and the examination results are to be ed to your instructor, move the pointer to Examinations, select Problem 11 Capital Budgeting, and follow the directions on the examination. Page 7

8 MANAGERIAL WORK4ME PROBLEM 11 CAPITAL BUDGETING NAME CLASS DAY AND TIME DATE 1. The following questions relate to Scenario A: The proper present value table used in determining the factor for the annual cost savings is: A) Present value of a lump sum B) Present value an annuity C) Future value of a lump sum D) Future value of an annuity 2. What is the present value factor at the discount rate of 12%, for 5 time periods? 3. If the cost of capital (required rate of return) is 10% instead of 12%, the capital investment proposal of Scenario A should be: A) accepted B) rejected 4. Which discount rate is closest to the internal rate of return? A).12 B).08 C).06 D) None of the above 5. The following questions relate to Scenario B: The present value factor for the overhaul of the equipment was determined from which table? A) Present value of a lump sum B) Present value an annuity C) Future value of a lump sum D) Future value of an annuity 6. The present value factor for the annual net cash inflows from the sales of the product was determined from which table? A) Present value of a lump sum B) Present value an annuity C) Future value of a lump sum D) Future value of an annuity 7. What was the net present value of the capital investment proposal at the discount rate of 8%? $ Page 8

9 8. What was the present value of annual cash inflows from the sales of the product at the discount rate of 8%? 9. The internal rate of return is: A) greater than 8% B) less than 8% 10. The capital investment proposal should be: A) accepted at 10% B) accepted at 11% 11. The following questions relate to Scenario C: What is the net present value of investing in the new equipment? 12. Which decision should management make? A) renovate the old equipment B) purchase the new equipment 13. What is the net present value in favor of investing in the new equipment? 14. If the renovation costs were equal to the cost of the initial investment, how much would be the net present value of the cash inflows from retaining the old equipment. 15. If the discount rate used is 18%, what will be the difference in the net present value between the two projects? 16. The following questions relate to Scenario D: The net present value factor for the annual cash operating costs of Kitty-Hawk One (old airplane) is: A) the present value of a lump sum B) the present value of an annuity 17. How much did the present value cost of retaining and overhauling Kitty-Hawk One (old airplane) exceed the present value cost of investing in the new airplane? 18. Might there be considerations other than financial in a decision to purchase the new airplane and dispose of the old airplane? A) Yes B) No $ $ $ $ $ $ Page 9

10 19. Would a discount rate of greater than 13% have changed the outcome in favor of investing in a new airplane? A) Yes B) No 20. An incremental-cost approach to this least-cost decision would have resulted in what amount of net present value in favor of investing in the new airplane? A) $18,456 B) $34,560 C) $14,389 D) None of the above Page 10