chapter Q&A.pdf - 161 Mattice Corporation is...

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1 161) Mattice Corporation is considering investing $440,000 in a project. The life of the project would be 5 years. The project would require additional working capital of $34,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $123,000. The salvage value of the assets used in the project would be $49,000. The company uses a discount rate of 11%. (Ignore income taxes.) See separate Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. Required: Compute the net present value of the project. 164) Tiff Corporation has provided the following data concerning a proposed investment project (Ignore income taxes.): Initial investment $ 960,000 Life of the project 5 years Working capital required $ 20,000 Annual net cash inflows $ 288,000 Salvage value $ 144,000 The company uses a discount rate of 16%. The working capital would be released at the end of the project. See separate Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. Required: Compute the net present value of the project.
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2 70. Brewer Corp. is considering dropping its talking dog product line due to continuing losses. Revenue and cost data for the talking dog line for the past year follow: If the talking dog is discontinued, then Brewer could avoid $110,000 per year in fixed costs. Required: (1) What is the change in annual operating income from discontinuing the talking dog product line? ___________ (2) Assuming all other conditions stay the same, at what level of annual sales of the talking dog (in units) should Brewer be indifferent at to discontinuing or continuing the product line? ___________ (3) Suppose that if the talking dog is dropped, the production and sale of other products would increase so as to generate a $15,000 increase in the contribution margin received from the other products. If all other conditions are the same, what is the change in annual operating income from dropping the talking dog? _____ 100. Services Division reported income of $112,000 on an investment in operating assets of $800,000 for Year 1. The division expects this level of performance to continue for Year 2. Senior management of Vargas Corporation has asked the Consumer Services Division to consider adding a new service line that would result in the following revenues and costs: Required: 1) Compute the ROI that would be generated by the new product line. 2) Compute the ROI for the Consumer Services Division without the new product line. 3) Compute the Consumer Services Division's residual income without the new product line and with the new product line. The target ROI is 11%. 4) Would the new product line benefit the company as a whole? ROI for the company as a whole is 10%. Will the Consumer Services Division likely add the new product line given the company's use of ROI as a performance measure? Why or why not? Which performance evaluation measure will more likely motivate the division manager to do what is best for the company as a whole?
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3 68. Jones Corp. currently sells 50,000 units to its normal customers, but it has a capacity to produce 60,000 units. Its product sells for $60 per unit and the variable costs incurred in
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