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Payback, ROAI, NPV & Flexible Budget Variances

I.C. Icecream is considering 2 possible expansion plans. Proposal A involves opening 8 stores in northern Alaska at a total cost of $ 4,000,000/-Under another strategy,proposal B I.C. Icecream would focus on Southern Alaska and opening 5 stores at a total cost od $ 3,000,000/-. Selected data regarding the two proposals are as under

Proposal A Proposal B
Required Investment $4,000,000 $3,000,000
Estimated Life of store locations 8 years 8 years
Estimated Salvage Value - 200,000.00
Estimated annual net cash flows 800,000.00 700,000.00
Depreciation on equipment ( straight line method) 500,000.00 350,000.00
Estimated annual Income ? ?

Evaluate each proposal using
Pay back period
Return on average investment
NPV @ 12 %

State which proposal you would recommend and explain the reasoning behind your choice.

XL industries uses flexible budgets and performance reports in planning and controlling its manufacturing operations. The following annual performance report for the widget production department was presented to the president of the company:-

Costs "Budgeted Cost
for 4000 units" "Actual Cost
for 5000 units"
Per unit Total
Variable manufacturing costs
Direct Material $25 $100,000 $120,000
Direct Labour $50 $200,000 $210,000
Indirect Labour $12 $48,000 $50,000
Indirect material and supplies $10 $40,000 $43,000
Total variable manufacturing costs $97.00 $388,000.00 $423,000.00

Fixed manufacturing Costs $53.00 $212,000.00 $219,000

Prepare a flexible budget for the actual level of sales achieved, analyse the variance between budgeted and actual cost and give your comments

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I.C. Icecream is considering 2 possible expansion plans. Proposal A involves opening 8 stores in northern Alaska at a total cost of $ 4,000,000/-Under another strategy,proposal B I.C. Icecream would focus on Southern Alaska and opening 5 stores at a total cost od $ 3,000,000/-. Selected data regarding the two proposals are as under

Proposal A Proposal B
Required Investment $4,000,000 $3,000,000
Estimated Life of store locations 8 years 8 years
Estimated Salvage Value - 200,000.00
Estimated annual net cash flows 800,000.00 700,000.00
Depreciation on equipment ( straight line method) 500,000.00 350,000.00
Estimated annual Income ? ?

Evaluate each proposal using
Pay back period
Return on average investment
NPV @ 12 %

State which proposal you would recommend and explain the reasoning behind your choice.

Cash flow
Year Proposal A Proposal B
0 ($4,000,000) ($3,000,000)
1 $800,000 $700,000 Estimated annual net cash flow
2 $800,000 $700,000 "
3 $800,000 $700,000 "
4 $800,000 $700,000 "
5 $800,000 $700,000 "
6 $800,000 $700,000 "
7 $800,000 $700,000 "
8 $800,000 $900,000 (Estimated annual net cash flow + Estimated Salvage value)

Payback Period

Payback period is the number of years in which the initial investment is recouped
Payback = Year before full recovery + (unrecovered cost at start of yr/CF during yr)

Proposal A

Year Cash flow Cumulative cash ...

Solution Summary

The solution provides answers to 2 questions - one on capital budgeting and the other on flexible budget variances.

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