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Calculation of net present value, company's margin, turnover

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1. Bill Anders retires in 8 years. He has \$650,000 to invest and is considering a franchise for a fast-food outlet. He would have to purchase equipment costing \$500,000 to equip the outlet and invest an additional \$150,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about \$160,000. Mr. Anders would close the outlet in 8 years. He estimates that the equipment could be sold at that time for about 10% of its original cost. Mr. Anders' required rate of return is 16%.
Required:
What is the investment's net present value when the discount rate is 16 percent? Is this an acceptable investment?
2. Financial data for Windsor, Inc. for last year appear below:
Windsor, Inc.
Statements of Financial Position

Beginning Ending
Assets Balance Balance
Cash......................................... \$ 250,000 \$ 260,000
Accounts receivable...................... 120,000 135,000
Inventory................................... 230,000 205,000
Plant and equipment (net)............. 420,000 380,000
Investment in Pine Company.......... 220,000 250,000
Land (undeveloped)...................... 430,000 430,000
Total assets................................ \$1,670,000 \$1,660,000

Liabilities and owners' equity
Accounts payable......................... \$ 160,000 \$ 140,000
Long-term debt........................... 800,000 800,000
Owners' equity............................ 710,000 720,000
Total liabilities and owners' equity... \$1,670,000 \$1,660,000

Windsor, Inc.
Income Statement

Sales................................. \$1,750,000
Less operating expense......... 1,470,000
Net operating income........... 280,000
Less interest and taxes:
Interest expense............... \$96,000
Tax expense..................... 70,000 166,000
Net income......................... \$ 114,000
The company paid dividends of \$104,000 last year. The "Investment in Pine Company" on the statement of financial position represents an investment in the stock of another company.
Required:
a. Compute the company's margin, turnover, and return on investment for last year.
b. The Board of Directors of Windsor, Inc. has set a minimum required return of 25%. What was the company's residual income last year?
3. Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following product-line income data:
Product
Total A B C
Sales........................... \$100,000 \$50,000 \$20,000 \$30,000
Variable expenses.......... 60,000 30,000 10,000 20,000
Contribution margin........ 40,000 20,000 10,000 10,000
Fixed expenses:
Rent......................... 5,000 2,500 1,000 1,500
Depreciation............... 6,000 3,000 1,200 1,800
Utilities...................... 4,000 2,000 500 1,500
Supervisors' salaries.... 5,000 1,500 500 3,000
Maintenance............... 3,000 1,500 600 900
Administrative expenses............................ 10,000 3,000 2,000 5,000
Total fixed expenses...... 33,000 13,500 5,800 13,700
Net operating income..... \$ 7,000 \$ 6,500 \$ 4,200 \$(3,700)

The following additional information is available:
1. The factory rent of \$1,500 assigned to Product C is avoidable if the product were dropped.
2. The company's total depreciation would not be affected by dropping C.
3. Eliminating Product C will reduce the monthly utility bill from \$1,500 to \$800.
4. All supervisors' salaries are avoidable.
5. If Product C is discontinued, the maintenance department will be able to reduce monthly expenses from \$3,000 to \$2,000.
6. Elimination of Product C will make it possible to cut two persons from the administrative staff; their combined salaries total \$3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.
4. The Hayes Company manufactures and sells several products, one of which is called a slip differential. The company normally sells 30,000 units of the slip differential each month. At this activity level, unit costs are:
Direct materials............................ \$4
Direct labor.................................. 3
Variable selling.............................. 3
Fixed selling................................. 1
An outside supplier has offered to produce the slip differentials for the Hayes Company, and to ship them directly to the Hayes Company's customers. This arrangement would permit the Hayes Company to reduce its variable selling expenses by one third (due to elimination of freight costs). The facilities now being used to produce the slip differentials would be idle and fixed manufacturing overhead would continue at 60 percent of its present level. The total fixed selling expenses of the company would be unaffected by this decision.
Required:
What is the maximum acceptable price quotation for the slip differentials from the outside supplier?
5. Jerston Company has an annual plant capacity of 3,000 units. Data concerning this product are given below:
Annual sales at regular selling prices............ 2,500 units
Manufacturing costs:
Variable............................................... \$20 per unit
Fixed (annual)....................................... \$75,000
Variable (sales commissions)................... \$6 per unit
Fixed (annual)....................................... \$15,000

The company has received a special order for 500 units at a selling price of \$45 each. Regular sales would not be affected, and sales commissions on the 500 units would be reduced by one-third. This special order would have no impact on total fixed costs.
Required:
Determine whether the company should accept the special order. Show all computations.
6. Holton Company makes three products in a single facility. Data concerning these products follow:
Products
A B C
Selling price per unit........................ \$76.10 \$72.70 \$77.10
Direct materials.............................. \$33.10 \$40.60 \$46.40
Direct labor.................................... \$24.00 \$13.10 \$7.20
Variable manufacturing overhead....... \$4.60 \$4.40 \$3.30
Variable selling cost per unit.............. \$1.60 \$3.20 \$2.00
Mixing minutes per unit.................... 2.80 1.90 2.60
Monthly demand in units................... 3,000 1,000 2,000
The mixing machines are potentially the constraint in the production facility. A total of 14,700 minutes are available per month on these machines.
Direct labor is a variable cost in this company.
Required:
a. How many minutes of mixing machine time would be required to satisfy demand for all three products?
b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)
7. Financial statements for Rarett Company appear below:
Rarett Company
Statement of Financial Position
December 31, 2002 and 2001
(dollars in thousands)

2002 2001
Current assets:
Cash and marketable securities.............. \$ 110 \$ 110
Accounts receivable, net....................... 150 150
Inventory........................................... 140 140
Prepaid expenses................................ 80 80
Total current assets............................... 480 480
Noncurrent assets:
Plant & equipment, net......................... 1,100 1,050
Total assets.......................................... \$1,580 \$1,530

Current liabilities:
Accounts payable................................ \$ 60 \$ 110
Accrued liabilities................................. 100 70
Notes payable, short term.................... 160 180
Total current liabilities............................. 320 360
Noncurrent liabilities:
Bonds payable.................................... 390 400
Total liabilities........................................ 710 760
Stockholders' equity:
Preferred stock, \$10 par, 15%.............. 120 120
Common stock, \$10 par....................... 180 180
Additional paid-in capital--common stock.. 170 170
Retained earnings................................ 400 300
Total stockholders' equity........................ 870 770
Total liabilities & stockholders' equity......... \$1,580 \$1,530

Rarett Company
Income Statement
For the Year Ended December 31, 2002
(dollars in thousands)

Sales (all on account)............................. \$1,900
Cost of goods sold................................. 1,330
Gross margin........................................ 570
Operating expenses................................ 220
Net operating income............................. 350
Interest expense................................... 40
Net income before taxes......................... 310
Income taxes (30%).............................. 93
Net income........................................... \$ 217
Required:
Compute the following for 2002:
a. Current ratio.
b. Acid-test (quick) ratio.
c. Average collection period (age of receivables).
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.