Exercise 8-13

Exercise8-13 IRRwith Uneven Cash Flows

NOTE:No Excel template is provided for this problem. Please create yourown spreadsheet to calculate the solution.

Powers,Inc., has a project that requires an initial investment of $43,000and has the following expected stream of cash flows:

Required:

Calculatethe project`s internal rate of return. Do not enter the percent sign(%). Round your final answer to two decimal places.IRR: %

Exercise8-15 IRR: TaxEffects

NOTE:No Excel template is provided for this problem. Please create yourown spreadsheet to calculate the solution.

ThePearce Club, Inc., is considering investing in an exercise machinethat costs $5,000 and would increase revenues by $1,500 a year forfive years. The machine would be depreciated over its five-yearuseful life via the straight-line method and would have no salvagevalue.

Required:

Calculatethe equipment`s internal rate of return. Assume that the tax rate is30 percent. Do not enter the percent sign (%). Round your finalanswer to two decimal places.%

Exercise8-20 PaybackMethod

TheHappy Day Care Center is considering an investment that will requirean initial cash outlay of $300,000 to purchase nondepreciable assetsthat have a 10-year life. The organization requires a minimum 4-yearpayback.

Required:

Assumethat the investment generates equivalent annual cash flow. Whatminimum amount of annual cash flows must be generated by the projectfor the company to make the investment?$

Exercise 9-7 Sales Budget

Tim`s Temple Tools sells small eyeglass repair tools for $1.25 each. Tim`s marketing department prepared the following first-quarter sales forecast (in units):

Required:

Prepare Tim`s sales budget for each month of the quarter.

&nbsp

January

February

March

Quarter

Projected sales (units)

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Price per unit

x $

&nbsp

&nbsp

x $

&nbsp

&nbsp

x $

&nbsp

&nbsp

x $

&nbsp

&nbsp

Total projected sales ($)

$

&nbsp

&nbsp

$

&nbsp

&nbsp

$

&nbsp

&nbsp

$

&nbsp

&nbsp

Exercise9-11 ProductionBudget

MountainHigh makes and sells specialty mountain bikes. On June 30, thecompany had 50 bikes in finished-goods inventory. The company`spolicy is to maintain a bike inventory of 5 percent of the nextmonth`s sales. The company expects the following sales activity forthe third quarter of the year:

Required:

Whatis the projected production for August?bikes

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Exercise9-14PurchasesBudget

CrosserCompany budgets on a quarterly basis. The following beginning andending inventory levels (in units) are planned for the first andsecond quarters of 2012:

Required:

IfCrosser Company were to manufacture 400,000 finished units (in total)during the first two quarters of 2012, how many units of raw materialwould it need to purchase?

Preparethe purchases budget for the first six months of 2012. Enter allamounts as positive numbers.

&nbsp

Dec. 31, 2011 and June 30, 2012

Required production in units

Raw material needed per unit

Units of raw material needed

Add: Desired ending inventory

Total budgeted needs

Less: Beginning inventory

Units of raw material to be purchased

Exercise9-18Cash Receipts Budget

ThirstQuencher sells plastic water bottles to outdoor enthusiasts for $1.25each. The company`s marketing manager prepared the following salesforecast (in units) for the first half of the year:

Historically,the cash collection of sales has been as follows: 55 percent of salescollected in month of sale, 35 percent of sales collected in monthfollowing sale, and 9 percent of sales collected in second monthfollowing sale. The remaining 1 percent is never collected becausecustomers do not pay.

Required:

Forthe following task, round the per unit answers to the nearest cent,if required.

Preparea cash receipts budget for each month of the second quarter (April,May, and June).

Thirst QuencherCash Receipts Budget

Month

Sales

April

May

June

February

$

$

&nbsp

&nbsp

March

$

$

$

&nbsp

April

$

$

$

$

May

$

&nbsp

$

$

June

$

&nbsp

&nbsp

$

Total cash receipts from sales

&nbsp

$

$

$

Problem9-26Sales and CashCollections Budgets

MountainMash produces ice cream for wholesale distribution to grocers,restaurants, and independent ice cream shops. March, April, May,June, and July are busy months for the company as its customers gearup for the spring and summer rush. Mountain Mash has projected thefollowing level of sales (in gallons) for March through July:

Thecompany has a set wholesale selling price of $3.50 per gallon.Mountain Mash`s customers purchase ice cream on credit, with theagreement that they must pay invoices within 30 days. Nonetheless,not all customers pay within that time frame. Mountain Mash`s creditmanager has developed the following table to show the typical cashcollection pattern:

Required:

A.&nbspPrepare a sales budgetfor March, April, May, June, and July. When required, round answersto the nearest cent.

Mountain MashSales Budget

&nbsp

March

April

May

June

July

Budgeted sales (gallons)

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Selling price per gallon

$

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

Total budgeted sales

$

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

B.&nbspPrepare a cash receiptsbudget for May, June, and July.

Mountain MashCash Receipts Budget

Month

Sales

May

&nbsp

June

&nbsp

July

&nbsp

March

$

$

&nbsp

&nbsp

&nbsp

April

$

$

&nbsp

$

&nbsp

&nbsp

May

$

$

&nbsp

$

&nbsp

$

&nbsp

June

$

&nbsp

$

&nbsp

$

&nbsp

July

$

&nbsp

&nbsp

$

&nbsp

Total cash receipts from sales

&nbsp

$

&nbsp

$

&nbsp

$

C.&nbspIf sales and cashcollections are exactly as the company estimates, how much willcustomers owe Mountain Mash as of the end of July?$

Exercise8-7Basic NPV with SalvageValue

SchaeferOrganic Farms purchased a new tractor at a cost of $80,000. Annualoperating cash inflows are expected to be $30,000 each year for fouryears. At the end of the tractor`s useful life, the salvage value ofthe tractor is expected to be $5,000.

Required:

Whatis the net present value if the cost of capital is 12 percent? Usethe timevalue of money chartsfor your calculations. (Ignore income taxes.) Round your answer tothe nearest whole number.$

Exercise8-9 UnderstandingNPV

Wilson,Inc., has a project with an expected cash inflow of $1 million at theend of Year 5. Wilson has a second project with an expected cashinflow of $200,000, to be received at the end of each year for thenext five years.

Required:

Ifboth projects have the same total expected cash outflows, what can besaid of the net present value of the first project compared with thatof the second project?

Exercise8-10 NPV

Aplanned factory expansion project has an estimated initial cost of$800,000. Based on a discount rate of 20 percent, the present valueof the future cost savings from the expansion is $843,000.

Required:

Toyield exactly a 20 percent return on investment, the actualinvestment expenditure should not exceed the $800,000 estimated costby more than what amount?$

Case9-38 Comprehensive Budget Problem

Tina`s Fine Juices is a bottler oforange juice located in the Northeast. The company produces bottledorange juice from fruit concentrate purchased from suppliers inFlorida, Arizona, and California. The only ingredients in the juiceare water and concentrate. The juice is blended, pasteurized, andbottled for sale in 12-ounce plastic bottles. The process is heavilyautomated and is centered on five machines that control the mixingand bottling of the juice. The amount of labor required is very smallper bottle of juice. The average worker can process 10 bottles ofjuice per minute, or 600 bottles per hour. The juice is sold by anumber of grocery stores under their store brand name and in smallerrestaurants, delis, and bagel shops under the name of Tina`s FineJuices. Tina`s has been in business for several years and uses asophisticated sales forecasting model based on previous sales,expected changes in demand, and economic factors affecting theindustry. Sales of juice are highly seasonal, peaking in the firstquarter of the calendar year.

Forecasted sales for the last twomonths of 2012 and all of 2013 are as follows:

Following is some other informationthat relates to Tina`s Fine Juices:

  1. Juice is sold for $1.05 per 12-ounce bottle, in cartons that hold 50 bottles each.

  2. Tina`s Fine Juices tries to maintain at least 10 percent of the next month`s estimated sales in inventory at the end of each month.

  3. The company needs to prepare two purchases budgets: one for the concentrate used in its orange juice and one for the bottles that are purchased from an outside supplier. Tina`s has determined that it takes 1 gallon of orange concentrate for every 32 bottles of finished product. Each gallon of concentrate costs $4.80. Tina`s also requires 20 percent of next month`s direct material needs to be on hand at the end of the budget period. Bottles can be purchased from an outside supplier for $0.10 each.

  4. Factory workers are paid an average of $15 per hour, including fringe benefits and payroll taxes. If the production schedule doesn`t allow for full utilization of the workers and machines, one or more workers are temporarily moved to another department.

  5. Most of the production process is automated, the juice is mixed by machine, and machines do the bottling and packaging. Overhead costs are incurred almost entirely in the mixing and bottling process. Consequently, Tina`s has chosen to use a plantwide cost driver (machine hours) to apply manufacturing overhead to products.

  6. Variable overhead costs will be in direct proportion to the number of bottles of juice produced, but fixed overhead costs will remain constant, regardless of production. For budgeting purposes, Tina`s separates variable overhead from fixed overhead and calculates a predetermined overhead rate for variable manufacturing overhead costs.

  7. Variable overhead is estimated to be $438,000 for the year, and the production machines will run approximately 8,000 hours at the projected production volume for the year (4,775,000 bottles). Therefore, Tina`s predetermined rate for variable overhead is $54.75 per machine hour ($438,000 ÷ 8,000 machine hours).Tina`s has also estimated fixed overhead to be $1,480,000 per year ($123,333 per month), of which $1,240,000 per year ($103,333 per month) is depreciation on existing property, plant, and equipment.

  8. All of the company`s sales are on account. On the basis of the company`s experience in previous years, the company estimates that 50 percent of the sales each month will be paid for in the month of sale. The company also estimates that 35 percent of the month`s sales will be collected in the month following sale and that 15 percent of each month`s sales will be collected in the second month following sale.

  9. Tina`s has a policy of paying 50 percent of the direct material purchases in the month of purchase and the balance in the month after purchase. Overhead costs are also paid 50 percent in the month they are incurred and 50 percent in the next month.

  10. Selling and administrative expenses are $100,000 per month and are paid in cash as they are incurred.

Required:

Enter all amounts as positivenumbers. When required, round amounts to two decimal places, unlessotherwise directed.

A. &nbspPrepare a salesbudget for the first quarter of 2013.

Sales Budget:

&nbsp

January

February

March

1st Qtr

Proj. sales (bottles)

&nbsp

&nbsp

&nbsp

&nbsp

x price per unit

x

$

x

$

x

$

x

$

Proj. sales ($)

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

$

B. &nbspPrepare a productionbudget for the first quarter of 2013.

Production Budget:

&nbsp

December

January

February

March

April

1st Qtr

Proj. sales (bottles)

370,000

395,000

+ Proj. ending inv.

35,000

37,500

Projected needs

405,000

432,500

– Proj. beg. inv.

-37,000

-39,500

Proj. prod`n (bottles)

368,000

393,000

C. &nbspPrepare a purchasesbudget for the first quarter of 2013. Do not round price per gallonand round your other answers to the nearest dollar.

Material Purchases Budget-Concentrate:

&nbsp

December

January

February

March

April

1st Qtr

Proj. production (bottles)

&nbsp

368,000

&nbsp

&nbsp

&nbsp

&nbsp

393,000

&nbsp

÷ 32 (bottles per gallon)

÷

32

÷

÷

÷

÷

32

÷

Raw material needed for prod`n

&nbsp

11,500

&nbsp

&nbsp

&nbsp

&nbsp

12,281

&nbsp

+ Proj. ending inventory

&nbsp

2,234

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Projected needs

&nbsp

13,734

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

– Proj. beginning inventory

&nbsp

-2,300

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Concentrate needed to purchase

&nbsp

11,434

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

x Price per gallon

x

$4.80

x

$

x

$

x

$

&nbsp

&nbsp

x

$

Projected purchases($)

&nbsp

$54,883.20

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

&nbsp

&nbsp

$

Material Purchases Budget-Bottles:

&nbsp

December

January

February

March

April

1st Qtr

Proj. production (bottles)

&nbsp

368,000

&nbsp

&nbsp

&nbsp

&nbsp

393,000

&nbsp

+ Proj. ending inventory

&nbsp

71,500

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Projected needs

&nbsp

439,500

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

– Proj. beginning inventory

&nbsp

-73,600

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Bottles needed to purchase

&nbsp

365,900

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

x Price per bottle

x

$0.10

x

$

x

$

x

$

&nbsp

&nbsp

x

$

Projected purchases ($)

&nbsp

$36,590

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

&nbsp

&nbsp

$

D. &nbspPrepare a directlabor budget for the first quarter of 2013. Round the direct laborhours needed for production to three decimal places and other answersto nearest whole number.

Direct Labor Budget:

&nbsp

January

February

March

1st Qtr

Projected production (bottles)

&nbsp

&nbsp

&nbsp

&nbsp

÷ Bottles per hour

÷

÷

÷

÷

Direct labor hours needed for prod`n(Round to three decimal places.)

&nbsp

&nbsp

&nbsp

&nbsp

x Direct labor rate per hour

x

$

x

$

x

$

x

$

Projected direct labor cost

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

$

E. &nbspPrepare an overheadbudget for the first quarter of 2013.

Overhead Budget:

&nbsp

December

January

February

March

1st Qtr

Projected production (bottles)

&nbsp

368,000

&nbsp

&nbsp

&nbsp

&nbsp

÷ Bottles per hour

÷

600

÷

÷

÷

÷

Budgeted machine hours(Round amounts to three decimal places.)

&nbsp

613.333

&nbsp

&nbsp

&nbsp

&nbsp

x Variable overhead rate

x

$54.75

x

x

x

x

Projected variable overhead(Round amounts to the nearest dollar.)

&nbsp

$33,580

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

$

Projected fixed overhead

&nbsp

123,333

&nbsp

&nbsp

&nbsp

&nbsp

Total projected overhead

&nbsp

$156,913

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

$

less: Depreciation (non cash)

&nbsp

-103,333

&nbsp

&nbsp

&nbsp

&nbsp

Budg. cash outflows for overhead

&nbsp

$53,580

&nbsp

$

&nbsp

$

&nbsp

$

&nbsp

$

F.&nbspPrepare cash receiptsand disbursements budgets for the first quarter of 2013. Round youranswers to the nearest dollar.

Cash Receipts Budget:

&nbsp

January

&nbsp

February

&nbsp

March

&nbsp

1st Qtr

From November sales

$

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

$

From December sales

&nbsp

$

&nbsp

&nbsp

&nbsp

From January sales

&nbsp

&nbsp

$

&nbsp

From February sales

&nbsp

&nbsp

&nbsp

&nbsp

From March sales

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Total cash receipts-sales

$

&nbsp

$

&nbsp

$

&nbsp

$

Cash Disbursements Budget:

&nbsp

January

&nbsp

February

March

1st Qtr

DM purchases-concentrate

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

December

$

&nbsp

&nbsp

&nbsp

$

January

&nbsp

$

&nbsp

February

&nbsp

&nbsp

$

March

&nbsp

&nbsp

&nbsp

DM purchases-bottles

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

December

&nbsp

&nbsp

&nbsp

January

&nbsp

&nbsp

February

&nbsp

&nbsp

March

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Total disbursements for DM

$

&nbsp

$

$

$

Total disbursements for DL

$

&nbsp

$

$

$

Manufacturing overhead costs

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

December

&nbsp

&nbsp

&nbsp

January

&nbsp

&nbsp

February

&nbsp

&nbsp

March

&nbsp

&nbsp

&nbsp

Total disbursements for OH

$

&nbsp

$

$

$

Total disbursements for S&ampA

&nbsp

Total cash disbursements

$

&nbsp

$

$

$