ORIE 3150 Homework #10 Due Thursday, December 4, 2008 Please use an <a href="/keyword/excel-spreadsheet/" >excel spreadsheet</a> for the IRR and NPV problems. Note that the NPV function in Excel provides incorrect answers; use the method demonstrated in class. 1. Satina Corporation is considering the purchase of a new factory machine. The machine will cost $420,000 today. It will have a useful life of 10 years, with a $20,000 salvage value. Satina plans to use straight line depreciation. The machine will produce annual net income of $60,000 over the useful life. a) Compute the payback period. b) Compute the internal rate of return (IRR). 2. Lamar Company is studying a project that would have an eight-year useful life and require a $2,400,000 investment. At the end of eight years, the project would terminate and the equipment would have no salvage value. The project would provide the same amount of net income each year, as follows: Sales Revenue Variable Expenses Contribution Margin Fixed Expenses: Advertising Depreciation <a href="/keyword/net-operating-income/" >net operating income</a> Income Tax Net Income The appropriate interest rate is 12%. a) What is the <a href="/keyword/net-present-value/" >net present value</a> (NPV) of the project? b) What is the internal rate of return (IRR) of the project? 3. Rock Creek Marina is considering whether to continue to expand its marina. The company has already spent $200,000 in construction costs, but the marina is reconsidering whether to proceed further with the project. An additional $800,000 would need to be spent to drive pilings and construct the docks. The new docks could be rented out to boat owners for $300,000 per year. Maintenance would cost $120,000 per year. Depreciation would be straight line with a useful life of 10 years and negligible salvage value. The alternative would be to abandon the project, which can be done at zero cost. If the appropriate interest rate is 15%, determine whether Rock Creek should finish the project. $3,000,000 (1,800,000) 1,200,000 (700,000) (300,000) 200,000 (80,000) 120,000 Page 1 4. Hunting Products Research Inc. of El Dorado, Arkansas, makers of the Loggy Bayou line of archery tree stands, had the following costs and prices associated with the production last month for one of its deer hunting stands. Beginning Inventory: Production: Sales Direct materials Direct labor Manufacturing Overhead Selling expenses Admin. expenses Selling price 0 1000 units 840 units $37,450 total $18,680 total $60,000 total $10,000 total $7,000 total $155.75 per unit a) Provide the statement of operating income for the month using absorption costing b) Provide the statement of operating income for the month using variable costing. 50% of the manufacturing overhead is fixed cost, the remainder is variable. Selling expenses and administrative expenses are both 100% fixed costs. Direct materials and direct labor are 100% variable costs. 5. Pneumotech manufactures industrial air compressors. The following data are for October 2008. The company had 200 units in beginning inventory. In October, 1,500 units were produced, and 1,600 were sold. The average selling price was $5,500. Variable Costs (per unit) Direct Materials $ 750 Direct Labor 1,400 Variable MOH 400 Variable selling and admin. 120 Fixed Costs (total) Manufacturing Overhead $ 1,500,000 Selling and admin. 100,000 a) Compute the cost of <a href="/keyword/ending-inventory/" >ending inventory</a> using absorption costing. Assume that Pneumotech uses FIFO inventory costing and carries the beginning inventory at $3,750 fully absorbed cost per unit. b) Compute the cost of <a href="/keyword/ending-inventory/" >ending inventory</a> using variable costing. Assume that Pneumotech uses FIFO inventory costing and carries the beginning inventory at $2,600 variable cost per unit. c) Provide an operating <a href="/keyword/income-statement/" >income statement</a> for the month, using absorption costing. d) Provide an operating <a href="/keyword/income-statement/" >income statement</a> for the month, using variable costing. Page 2