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# Accounting:Cost allocation, Capital budgeting and Time value

11-30 Exercise in Compound Interest

Suppose Subaru of America, Inc. wishes to borrow money from UBS. They agree on an annual rate of 10%.

1. Suppose Subaru agree to repay \$500 million at the end of 4 years. How much will UBS lend Subaru?
2 Suppose Subaru agrees to repay a total of \$500 million at a million at the end of each of the next 4 years. How much UBS lend Subaru?

11-31 Exercise in compound interest

Suppose you are a loan officer for a bank. A start-up company has qualified for a loan. You are pondering various proposals for repayment:

1. Lump sum of \$ 500,000 four years hence. How much will you lend if your desired rate of return is
(a) 12%, compounded annually, and
(b) 16 %, compounded annually?
2. Repeat number 1, but assume that the interest rates are compounded semiannually.
3. Suppose the loan is to paid in full by equal payments of \$ 125,000 at the end of each of the next 4 years. How much will you lend if your desired rate of return is
(a) 12%, compounded annually.
(b) 16%, compounded annually?

11-34 Simple NPV

Banerjee Company expect to receive \$200 at the end of each of next 5 years and an additional \$1,000 at the end of the fifth year. Therefore, the total payment will be \$2,000. What is the NPV of the payments at an interest rate of 8% ?

12-29 Allocation of computer costs
Recall that the budget formula was \$ 100,000 fixed costs monthly plus \$ 200 per hour of computer time used. Based on long-run predicted usage, the fixed costs were allocated on lump-sum basis, 30% to business and 70% to engineering.

(1) Show the total Allocation if the business used 210 hours and engineer used 390 hours in a given month. Assume that the actual costs coincided exactly with the budgeted amount for total usage of 600 hours
(2) Assume the same facts as in number 1 except that the fixed costs were allocated on the bases of actual hours of usage. Show the total allocation of costs to each school. As the dean of the school of business, would you prefer this method in number 1?

12-30 Fixed - and variable- Cost pools

The city of castle Rock singed a lease for a photocopy machine at \$2,500 per month and\$0.02 per copy. Operating costs for toner, paper, operator salary, and so on are all variable at \$ 0.03 per copy. Department had projected a need for 100,000 copies a month. The city planning department predicted its usage at 36,000 copies a month. It made 42,000 copies in August.

(1) Suppose one predetermined rate per copy was used to allocate all photocopy costs. What rate would be used and how much cost would be allocated to the city planning department in August?
(2) Suppose fixed and variable-cost pools were allocated separately. Specify how each pool should be allocated. Compute the cost allocated to the city planning department in august
(3) Which method , the one in number 1 or the one in number 2 do you prefer ? Explain

#### Solution Summary

The problem set deal with topics in accounting including: Capital budgeting, Cost allocation and Loan calcaulations.

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