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    Finance questions

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    Hi,

    ** Please help with the attached problems. **

    Thank you so much.

    James Hardy recently rejected a $14,000,000, five-year contract with the Vancouver Seals.
    The contract offer called for an immediate signing bonus of $4,000,000 and annual
    payments of $2,000,000. To sweeten the deal, the president of player personnel for the
    Seals has now offered a $16,000,000, five-year contract. This contract calls for annual
    increases and a balloon payment at the end of five years.

    Year 1 $2,000,000
    Year 2 2,100,000
    Year 3 2,200,000
    Year 4 2,300,000
    YearS 2,400,000
    Year 5 balloon pymt 5,000,000
    Total $16,000,000
    Quality Shoe Company is considering investing in one of two machines that attach heels to shoes.
    Machine A costs $60,000 and is expected to save the company $18,000 per year for six
    years. Machine B costs $85,000 and is expected to save the company $23,000 per year
    for six years. Determine the net present value for each machine and decide which machine
    should be purchased if the required rate of return is 10 percent. Ignore taxes.
    National Cruise Line, Inc. is considering the acquisition of a new ship that will cost $180,325,005. In this regard, the president of the company asked the CFO to analyze cash flows associated with operating the ship under two alternative itineraries: Itinerary 1, Caribbean Winter/Alaska Summer and Itinerary 2, Caribbean Winter/Eastern Canada Summer. The CFO estimated the following cash flows, which are expected to apply to each of the next 15 years: $180,325,005
    In this regard, the president of the company asked the CFO to analyze cash flows associated with operating the
    ship under two alternative itineraries: Itinerary 1, Caribbean Winter/Alaska Summer and Itinerary 2, Caribbean
    Winter/Eastern Canada Summer. The CFO estimated the following cash flows, which are expected to apply to
    each of the next 15 years:
    Caribbean/Alaska Caribbean/Eastern Canada
    Net revenue $119,789,010 $103,904,336
    Less:
    Direct program expenses (24,091,051) (22,812,140)
    Indirect program expenses (19,437,162) (19,437,162)
    Non-operating expenses (20,186,695) (20,186,401)
    Add back depreciation 12,021,667 12,021,667
    Cash flow per year $68,095,769 $53,490,300

    Associated Penguin Productions is evaluating a film project. The president of Associated
    Penguin estimates that the film will Gost $18,000,000 to produce. In its first year, the film
    is expected to generate $14,500,000 in net revenue, after which the film will be released to
    video. Video is expected to generate $7,000,000 in net revenue in its first year, $1,500,000
    in its second year, and $500,000 in its third year. For tax purposes, amortization of the
    cost of the film will be $14,000,000 in year 1 and $4,000,000 in year 2. The company's
    tax rate is 40 percent, and the company requires a 12 percent rate of return on its films.
    The Boston Culinary Institute is evaluating a classroom remodeling project. The cost of the remodel
    will be $200,000 and will be depreciated over 5 years using the straight-line
    method. The remodeled room will accommodate 5 extra students per year. Each
    student pays annual tuition of $15,000 The before-tax incremental cost of a student (e.g., the cost
    of food prepared and consumed by a student) is $1,360 per year. The company's tax rate
    is 40% and the company requires a 12% rate of return on the remodeling
    project.

    Required:
    Assuming a 5 -year time horizon, what is the internal rate of return of the remodeling
    project? Should the company invest in the remodel?
    Van Doren Corporation is considering producing a new product, Autodial. Marketing data
    indicate that the company will be able to sell 35,000 units per year at $35. The product
    will be produced in a section of an existing factory that is cun-ently not in use.

    To produce Autodial, Van Doren must buy a machine that costs $410,000. The
    machine has an expected life of five years and will have an ending residual value of
    $12,000. Van Doren will depreciate the machine over five years using the straight-line
    method for both tax and financial reporting purposes.

    In addition to the cost of the machine, the company will incur incremental manufacturing
    costs of $350,000 for component parts, $400,000 for direct labor, and
    $185,000 of miscellaneous costs. Also, the company plans to spend $135,000 annually
    for advertising Autodial. Van Doren has a tax rate of 40 percent, and the company's required
    rate of return is 12 percent.
    The results of operations for the Preston Manufacturing Company for the fourth
    quarter of 2007 were as follows (in thousands):

    Sales $500,000
    Less variable cost of sales 300,000
    Contribution margin 200,000
    Less fixed production costs $100,000
    Less fixed selling and administrative expenses 50,000 150,000
    Income before taxes 50,000
    Less taxes on income 20,000
    Net income $30,000

    Note: Preston Manufacturing uses the variable costing method. Thus, only variable
    production costs are included in inventory and cost of goods sold. Fixed production
    costs are charged to expense in the. period incurred.

    The company's balance sheet as of the end of the fourth quarter of 2007 was as
    Bowser Products operates a small plant in New Mexico that produces dog food in
    batches of 1,000 pounds. The product sells for $3 per pound. Standard costs for 2009 are:

    Standard direct labor cost = $15 per hour
    Standard direct labor hours per batch = 8 hours
    Standard cost of material A = $0.20 per pound
    Standard pounds of material Aper batch = 800 pounds·
    Standard cost of material B = $0.40 per pound
    Standard pounds of material B per batch = 200 pounds
    Fixed overhead cost per batch = $400

    At the start of 2009, the company estimated monthly production and sales of 40
    batches. The company estimated that all overhead costs were fixed and amounted to
    $16,000 per month. During the month of June, 2009 (typically a somewhat slow
    month) 30 batches were produced (not an unusual level of production for this month).
    The following costs were incurred:

    Direct labor costs were $4,800 for 300 hours
    24,500 pounds of material Acosting $4,655 were purchased and used
    5,900 pounds of material B costing $2,419 were purchased and used
    Fixed overhead of $15,500 was incurred

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    Solution Summary

    The solution explains various questions relating to time value of money, budgeting, capital investments and variance calculations

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