Managerial Accounting Application Problems Week 6

Managerial Accountingapplication Problems Week 6be12 1rihanna Company

Managerial Accounting application Problems Week 6 BE12-1 Rihanna Company is considering purchasing new equipment for $450,000. It is expected that the equipment will produce net annual cash flows of $60,000 over its 10-year useful life. Annual Depreciation will be $45,000. Compute the cash payback period.

BE12-4 Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $200,000 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. How much would the reduction in downtime have to be worth in order for the project to be acceptable? Assume a discount rate of 9%. (Hint: Calculate the net present value)

BE12-6 Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $250,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $46,000 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $260,000, will have a total useful life of 11 years and will produce net annual cash flows of $39,000 per year. Evaluate the success of the project. Assume a discount rate of 10%.

E12-5 Bruno Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $430,000. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $101,000 for the next 6 years. Management requires a 10% rate of return on all investments. Instructions Calculate the internal rate of return on this new machine. Should the investment be accepted?

Paper For Above instruction

Introduction

Managerial accounting plays a crucial role in strategic decision-making, investment appraisal, and project evaluation within organizations. This paper addresses several managerial accounting problems involving investment analysis, cash flow evaluations, and profitability assessments. By analyzing each scenario, we illustrate the application of concepts such as payback period, net present value (NPV), and internal rate of return (IRR). These tools aid managers in making informed decisions regarding capital investments, operational improvements, and project acceptability.

Problem 1: Calculating the Cash Payback Period for Rihanna Company

Rihanna Company is evaluating the purchase of equipment costing $450,000, with an expected annual net cash inflow of $60,000 over a 10-year useful life. The equipment's annual depreciation is $45,000. The cash payback period measures how quickly the initial investment can be recovered through cash inflows, ignoring depreciation and considering only cash flows.

To compute the payback period, divide the initial investment by annual net cash flows:

Payback Period = Initial Investment / Annual Cash Flows = $450,000 / $60,000 = 7.5 years

This indicates Rihanna Company will recover its initial investment in 7.5 years, which is within the 10-year useful life, suggesting a satisfactory investment concerning payback criteria.

Problem 2: Net Present Value of Downtime Savings for Caine Bottling Corporation

Caine Bottling is considering purchasing a bottling machine costing $200,000 with an 8-year life and no salvage value. The machine's increased reliability is expected to reduce downtime, leading to savings worth \(X\). To decide whether this investment is acceptable, management must determine the minimum worth of downtime reductions that make the project financially viable.

Using the net present value (NPV) approach with a discount rate of 9%, we find the value of annual savings (or reduction in downtime worth annually, denoted as S):

NPV = Sum of Present Values of Savings over 8 years = 0 (break-even point)

0 = \(\sum_{t=1}^{8} \frac{S}{(1 + 0.09)^t} - 200,000\)

Solving for S:

S = \(\frac{200,000}{\sum_{t=1}^{8} \frac{1}{(1 + 0.09)^t}}\)

Calculating the denominator, the present value of an annuity of 1 over 8 years at 9%, which is approximately 5.535, gives:

S = \(\frac{200,000}{5.535} \approx \$36,125\)

Therefore, the reduction in downtime has to be worth at least \$36,125 annually for the project to break even and be considered acceptable.

Problem 3: Post-Audit Evaluation of Quillen Company's Project

Initially, Quillen Company estimated an investment of $250,000, a 9-year life, zero salvage value, and annual cash flows of $46,000. Now, after one year, actual figures show a cost of $260,000, a revised useful life of 11 years, and annual cash flows of $39,000.

To assess whether the project remains viable, calculating the net present value (NPV) at a 10% discount rate is necessary:

NPV = \(\sum_{t=1}^{11} \frac{39,000}{(1 + 0.10)^t} - 260,000\)

Using the present value of an annuity of 1 at 10% for 11 years, approximately 6.813, the total present value of cash flows is:

PV of cash flows = 39,000 × 6.813 ≈ 265,407

Subtracting the actual initial investment:

NPV = 265,407 - 260,000 = \$5,407

A positive NPV indicates that the project is still marginally profitable, suggesting a successful investment.

Problem 4: Calculating the Internal Rate of Return for Bruno Corporation

Bruno Corporation considers a $430,000 investment to acquire a CAD/CAM machine, expected to generate an incremental cash flow of $101,000 annually for six years. The company's required rate of return is 10%.

The IRR is the discount rate that makes the NPV zero:

NPV = 0 = \(\sum_{t=1}^{6} \frac{101,000}{(1 + IRR)^t} - 430,000\)

Using the present value of an annuity of 1 for 6 years at the IRR:

430,000 = 101,000 × PVIFA (IRR, 6 years)

The PVIFA for 6 years equal to \(\frac{430,000}{101,000} \approx 4.257\)

Now, we find the IRR corresponding to a PVIFA of approximately 4.257. Checking PVIFA tables indicates that IRR is approximately 13.4%.

Since 13.4% exceeds the company's required 10%, the investment is acceptable, as it offers a higher rate of return than the minimum threshold.

Conclusion

In conclusion, managerial accounting tools such as payback period, NPV, and IRR are essential in evaluating capital investment projects. The analysis of Rihanna Company's equipment suggests a payback period acceptable within the planned lifespan. Caine Bottling's project requires a minimum annual savings of about $36,125 to be viable, while Quillen’s post-audit indicates the project remains marginally successful with a positive NPV. Bruno Corporation’s IRR of approximately 13.4% justifies proceeding with the purchase, as it exceeds the required rate of return. Overall, these financial assessments provide critical insights for strategic investment decisions within organizations.

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