ACCT221 Assessment—Fall 2017 LO Functional Knowledge Brummel Limited bronzes acc
ID: 2795047 • Letter: A
Question
ACCT221 Assessment—Fall 2017
LO Functional Knowledge
Brummel Limited bronzes accounting textbooks for students who want to cherish those fond memories of studying accounting. At the present time, Brummel’s operation is all done manually. Kane Manufacturing wants Brummel to automate its operation with one of Kane’s bronzing machines. Selected information relating to the two proposals is as follows:
Proposal X
Proposal Y
Equipment cost
$220,000
$410,000
Sales
$280,000
$380,000
Variable cash operating costs
132,000
182,000
Depreciation expense
37,000
79,000
Fixed cash operating costs
73,000
60,000
Brummel suspects that bronzed accounting textbooks will only be popular for the next five years due to the burgeoning market for textbook apps. The company’s required rate of return is 14%.
Required:
Build an worksheet to compute the following:
1table calculating cash flows for each year for Proposal X and Proposal Y
2Calculate the following for each investment:
Payback period
Simple rate of return
Net present value
Internal rate of return
3using the table you created in questions 1 and 2, determine the impact on payback, simple rate of return, net present value, and internal rate of return for each of the following independent scenarios (assume all other information remains the same as in the original problem):
The cost of Proposal Y has increased to $500,000
Proposal X requires additional cash operating costs of $10,000 each year
The NPV and IRR of Proposal X and Proposal Y assuming the required rate of return is 21%
Use this table to submit your answers:
Payback
Simple Rate of Return
NPV
IRR
Cost of Proposal Y increased to $500,000
Proposal X requires additional cash operating costs of $10,000 each year
The NPV and IRR of Proposal X and Proposal Y assuming the required rate of return is 21%
Discuss all your work. What recommendations would you make based on your findings? Justify your response.
Compare and contrast the payback and accounting rate of return methods to NPV and IRR methods for capital budgeting analysis.
What would be the impact on the NPV and IRR if there is a salvage value?
How do the concepts of time value of money impact your discipline? Give an example to support your narrative.
Proposal X
Proposal Y
Equipment cost
$220,000
$410,000
Sales
$280,000
$380,000
Variable cash operating costs
132,000
182,000
Depreciation expense
37,000
79,000
Fixed cash operating costs
73,000
60,000
Explanation / Answer
1-
Proposal X
Proposal Y
cost of equipment
220000
cost of equipment
410000
sales
280000
sales
380000
less variable cost
132000
less variable cost
182000
contribution
148000
contribution
198000
less fixed cost
73000
less fixed cost
60000
operating profit
75000
operating profit
138000
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 14%
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 14%
0
-220000
-220000
0
-410000
-410000
1
75000
65789.47
1
138000
121052.6
2
75000
57710.06
2
138000
106186.5
3
75000
50622.86
3
138000
93146.07
4
75000
44406.02
4
138000
81707.08
5
75000
38952.65
5
138000
71672.88
payback period in years = initial investment/operating profit
220000/75000
2.933333
payback period in years = initial investment/operating profit
410000/138000
2.971014
Net present value
sum of present value of cash flow
37481.07
Net present value
sum of present value of cash flow
63765.17
simple rate of return in % = operating profit/initial investment
75000/220000
34.09%
simple rate of return in % = operating profit/initial investment
138000/410000
33.66%
IRR = using IRR function in excel spreadsheet =irr(-220000,75000,75000,75000,75000,75000)
20.88%
IRR = using IRR function in excel spreadsheet =irr(-410000,138000,138000,138000,138000,138000)
20.30%
Cost of Proposal Y increased to $500,000
Proposal X
cost of equipment
500000
sales
380000
less variable cost
182000
contribution
198000
less fixed cost
60000
operating profit
138000
Cost of Proposal Y increased to $500,000
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 14%
0
-500000
-500000
1
138000
121052.6
2
138000
106186.5
3
138000
93146.07
4
138000
81707.08
5
138000
71672.88
payback period in years = initial investment/operating profit
500000/138000
3.623188
Net present value
sum of present value of cash flow
-26234.8
simple rate of return in % = operating profit/initial investment
138000/500000
27.60%
IRR = using IRR function in excel spreadsheet =irr(-500000,138000,138000,138000,138000,138000)
11.79%
Proposal X requires additional cash operating costs of $10,000 each year
Proposal Y
cost of equipment
220000
sales
280000
less variable cost
142000
contribution
138000
less fixed cost
73000
operating profit
65000
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 14%
0
-220000
-220000
1
65000
57017.54
2
65000
50015.39
3
65000
43873.15
4
65000
38485.22
5
65000
33758.96
payback period in years = initial investment/operating profit
220000/65000
3.384615
Net present value
sum of present value of cash flow
3150.263
simple rate of return in % = operating profit/initial investment
65000/220000
29.55%
IRR = using IRR function in excel spreadsheet =irr(-220000,65000,65000,65000,65000,65000)
14.59%
The NPV and IRR of Proposal X and Proposal Y assuming the required rate of return is 21%
proposal X
proposal Y
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 21%
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 21%
0
-220000
-220000
0
-410000
-410000
1
75000
61983.47
1
138000
114049.6
2
75000
51226.01
2
138000
94255.86
3
75000
42335.54
3
138000
77897.4
4
75000
34988.05
4
138000
64378.02
5
75000
28915.75
5
138000
53204.97
Net present value
sum of present value of cash flow
-551.175
Net present value
sum of present value of cash flow
-6214.16
IRR = using IRR function in excel spreadsheet =irr(-220000,75000,75000,75000,75000,75000)
20.88%
IRR = using IRR function in excel spreadsheet =irr(-410000,138000,138000,138000,138000,138000)
20.30%
Proposal X
Proposal Y
recommendation
payback period in years = initial investment/operating profit
2.933333
2.971014
Project X as its Payback period is low
Net present value
37481.07
63765.17
Project Y as it NPV is greater than project X
simple rate of return in % = operating profit/initial investment
34.09%
33.66%
Project X as it simple return is greater than Y
IRR = using IRR function in excel spreadsheet =irr(-220000,75000,75000,75000,75000,75000)
20.88%
20.30%
Project X as its IRR is greater than project Y
Simple rate of return and payback period are known as traditional method of capital budgeting and do not follow concept of time value of money while IRR and NPV follow the concept of time value of money
if there is a salvage value, NPV and IRR would be increased as this would result in increased cash flow
Concept of time value of money, applies in all the investment and capital budgeting decisions
1-
Proposal X
Proposal Y
cost of equipment
220000
cost of equipment
410000
sales
280000
sales
380000
less variable cost
132000
less variable cost
182000
contribution
148000
contribution
198000
less fixed cost
73000
less fixed cost
60000
operating profit
75000
operating profit
138000
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 14%
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 14%
0
-220000
-220000
0
-410000
-410000
1
75000
65789.47
1
138000
121052.6
2
75000
57710.06
2
138000
106186.5
3
75000
50622.86
3
138000
93146.07
4
75000
44406.02
4
138000
81707.08
5
75000
38952.65
5
138000
71672.88
payback period in years = initial investment/operating profit
220000/75000
2.933333
payback period in years = initial investment/operating profit
410000/138000
2.971014
Net present value
sum of present value of cash flow
37481.07
Net present value
sum of present value of cash flow
63765.17
simple rate of return in % = operating profit/initial investment
75000/220000
34.09%
simple rate of return in % = operating profit/initial investment
138000/410000
33.66%
IRR = using IRR function in excel spreadsheet =irr(-220000,75000,75000,75000,75000,75000)
20.88%
IRR = using IRR function in excel spreadsheet =irr(-410000,138000,138000,138000,138000,138000)
20.30%
Cost of Proposal Y increased to $500,000
Proposal X
cost of equipment
500000
sales
380000
less variable cost
182000
contribution
198000
less fixed cost
60000
operating profit
138000
Cost of Proposal Y increased to $500,000
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 14%
0
-500000
-500000
1
138000
121052.6
2
138000
106186.5
3
138000
93146.07
4
138000
81707.08
5
138000
71672.88
payback period in years = initial investment/operating profit
500000/138000
3.623188
Net present value
sum of present value of cash flow
-26234.8
simple rate of return in % = operating profit/initial investment
138000/500000
27.60%
IRR = using IRR function in excel spreadsheet =irr(-500000,138000,138000,138000,138000,138000)
11.79%
Proposal X requires additional cash operating costs of $10,000 each year
Proposal Y
cost of equipment
220000
sales
280000
less variable cost
142000
contribution
138000
less fixed cost
73000
operating profit
65000
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 14%
0
-220000
-220000
1
65000
57017.54
2
65000
50015.39
3
65000
43873.15
4
65000
38485.22
5
65000
33758.96
payback period in years = initial investment/operating profit
220000/65000
3.384615
Net present value
sum of present value of cash flow
3150.263
simple rate of return in % = operating profit/initial investment
65000/220000
29.55%
IRR = using IRR function in excel spreadsheet =irr(-220000,65000,65000,65000,65000,65000)
14.59%
The NPV and IRR of Proposal X and Proposal Y assuming the required rate of return is 21%
proposal X
proposal Y
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 21%
Year
operating profit/cash flow
present value of cash flow = operating profit/(1+r)^n r= 21%
0
-220000
-220000
0
-410000
-410000
1
75000
61983.47
1
138000
114049.6
2
75000
51226.01
2
138000
94255.86
3
75000
42335.54
3
138000
77897.4
4
75000
34988.05
4
138000
64378.02
5
75000
28915.75
5
138000
53204.97
Net present value
sum of present value of cash flow
-551.175
Net present value
sum of present value of cash flow
-6214.16
IRR = using IRR function in excel spreadsheet =irr(-220000,75000,75000,75000,75000,75000)
20.88%
IRR = using IRR function in excel spreadsheet =irr(-410000,138000,138000,138000,138000,138000)
20.30%
Proposal X
Proposal Y
recommendation
payback period in years = initial investment/operating profit
2.933333
2.971014
Project X as its Payback period is low
Net present value
37481.07
63765.17
Project Y as it NPV is greater than project X
simple rate of return in % = operating profit/initial investment
34.09%
33.66%
Project X as it simple return is greater than Y
IRR = using IRR function in excel spreadsheet =irr(-220000,75000,75000,75000,75000,75000)
20.88%
20.30%
Project X as its IRR is greater than project Y
Simple rate of return and payback period are known as traditional method of capital budgeting and do not follow concept of time value of money while IRR and NPV follow the concept of time value of money
if there is a salvage value, NPV and IRR would be increased as this would result in increased cash flow
Concept of time value of money, applies in all the investment and capital budgeting decisions
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