ACC560 Case 4 ANSWERS

# ACC560 Case 4 ANSWERS - Week 8 Case 4 Greetings Inc Capital...

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Week 8 Case 4: Greetings Inc.: Capital Budgeting Course: Managerial Accounting (ACC 560) 1. Calculate the net present value using the numbers provided. Assume that annual cash flows occur at the end of the year. Answer: Present value of net cash flows: Annual cash flow savings for Wall Decor = \$175,000 X 3.60478* = \$630,837 Annual additional store cash flow from increased sales = \$100,000 X 3.60478 = \$360,478 Sale of ink and paper supplies at end of 5 years = \$50,000 X 0.56743** = \$28,372 Present value of net cash flows = \$630,837 + \$360,478 + \$28,372 = \$1,019,687 *Present value of an annuity of 1 for 5 years at 12% = 3.604787 **Present value of 1 for 5 years at 12% = 0.56743 Capital investment: Cost of equipment (zero residual value) = \$800,000 Cost of ink and paper supplies (purchased immediately) = \$100,000 Capital investment = \$800,000 + \$100,000 = \$900,000 Net Present value = Present value of net cash flows - Capital investment = \$1,019,687 - \$900,000 = \$119,687 The analysis shows that if Mr. Burns approves the purchase of equipment, the net present value of the project is \$119,687. This suggests that the project should be undertaken. 2. Mr. Burns is concerned that the original estimates may be too optimistic. He has suggested that you do a sensitivity analysis assuming all costs are 10% higher than expected and that all inflows are 10% less than expected. 1

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Answer: Computation of revised amounts: Available Data Original Amounts Revised Amounts Cost of equipment (zero residual value) \$800,000 \$880,000 (=\$800,000X110%) Cost of ink and paper supplies (purchase immediately) \$100,000 \$110,000 (=\$100,000X110%) Annual cash flow savings from Wall Decor \$175,000 \$157,500 (=\$175,000X90%) Annual additional store cash inflow from increased sales \$100,000 \$90,000 (=\$100,000X90%) Sale of ink and paper supplies at end of 5 years \$50,000 \$45,000 (=\$50,000X90%) Present value of net cash flows: Annual cash flow savings for Wall Decor = \$157,500 X 3.60478* = \$567,753 Annual additional store cash flow from increased sales = \$90,000 X 3.60478 = \$324,430 Sale of ink and paper supplies at end of 5 years = \$45,000 X 0.56743** = \$25,534 Present value of net cash flows = \$567,753 + \$324,430 + \$25,534 = \$917,717 *Present value of an annuity of 1 for 5 years at 12% = 3.604787 **Present value of 1 for 5 years at 12% = 0.56743
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## This note was uploaded on 11/15/2011 for the course ACCOUNTING ACC560 taught by Professor Joseph during the Spring '09 term at Strayer.

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ACC560 Case 4 ANSWERS - Week 8 Case 4 Greetings Inc Capital...

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