Ming Company is considering two alternatives. Alternative A will have sales of $150,000 and costs of $100,000.

Alternative B will have sales of $180,000 and costs of $120,000. Compare Alternative A to Alternative B showing
incremental revenues, costs, and net income. (If affect on net income of adopting Alternative B is a decrease use
either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45). Enter all other amounts as positive
amounts and subtract where necessary.)
Net Income
 
Alternative Alternative Increase

  A B (Decrease)

Revenues $ 150000 $ 180000 $ 30000

Costs 100000 120000 -20000
Net Income $ 50000 $ 60000 $ 10000

Alternative B is better than Alternative A .

   

Felton Company has a factory machine with a book value of $90,000 and a remaining useful life of 4 years. A new
machine is available at a cost of $200,000. This machine will have a 4-year useful life with no salvage value. The
new machine will lower annual variable manufacturing costs from $600,000 to $440,000. Complete the analysis
showing whether the old machine should be retained or replaced.  (If an amount is blank enter 0, all boxes must be
filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number,
e.g. -45 or parenthesis, e.g. (45).)

  Net 4-Year Income

Increase
  Retain Equipment Replace Equipment (Decrease)
Variable manufacturing costs $ 2,400,000 $ 1,760,000 $ 640,000
New machine cost 0 200,000 -200000

        Total $ 2,400,000 $ 1,960,000 $ 440,000

The old factory machine should be replaced .

Correct.

   

Stacy McGuire recently opened her own basketweaving studio. She sells finished baskets in addition to the raw
materials needed by customers to weave baskets of their own. Stacy has put together a variety of raw material kits,
each including materials at various stages of completion. Unfortunately, owing to space limitations, Stacy is unable
to carry all varieties of kits originally assembled and must choose between two basic packages.

The basic introductory kit includes undyed, uncut reeds (with dye included) for weaving one basket. This basic
package costs Stacy $12 and sells for $27. The second kit, called Stage 2, includes cut reeds that have already been
dyed. With this kit the customer need only soak the reeds and weave the basket. Stacy is able to produce the second
kit by using the basic materials included in the first kit and adding one hour of her own time, which she values at
$18 per hour. Because she is more efficient at cutting and dying reeds than her average customer, Stacy is able to
make two kits of the dyed reeds, in one hour, from one kit of undyed reeds. The kit of dyed and cut reeds sells for
$33.
Complete the incremental analysis below to determine whether Stacy's basketweaving shop should carry the basic
introductory kit with undyed and uncut reeds, or the Stage 2 kit with reeds already dyed and cut. (Round all
answers to 2 decimal places, e.g. 5.25. If an amount is blank enter 0, all boxes must be filled to be correct. If the
impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g.
(45). Enter all other amounts amounts as positive and subtract where necessary.)
Net Income
  Sell Process Further Increase
(Basic kit) (Stage 2 Kit) (Decrease)

Sales per unit $ 27 $ 33 $6

Costs per unit      

   Direct materials $ 12 $6 $6

   Direct labor 0 9 -9

$ 12 $ 15 $ -3
       Total

$ 15 $ 18 $3
Net income per unit
Should Stacy carry the Stage 2 kits?
Yes
(1) The cost of materials decreases because Stacy can make two Stage 2 Kits from the materials for a basic kit.
(2) The total time to make the two kits is one hour at $18 per hour or 9.00 per unit.
Stacy should carry the Stage 2 Kits. The incremental revenue, $6.00, exceeds the incremental processing costs,
$3.00. Thus, net income will increase by processing the kits further.

Crone Enterprises uses a word processing computer to handle its sales invoices. Lately, business has been so good
that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices.
Management is considering updating its computer with a faster model that would eliminate all of the overtime
processing.

 
Current Machine New Machine
Original purchase cost $15,000   $21,000  
Accumulated depreciation 6,000   -       
Estimated operating costs 24,000   20,000  
Useful life 5 years   5 years  
If sold now, the current machine would have a salvage value of $5,000. If operated for the remainder of its useful
life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value
after 5 years.
Complete the analysis to determine if the current machine should be replaced. (Ignore the time value of money. If
an amount is blank enter 0, all boxes must be filled to be correct. If the impact on net income is a decrease use
either a negative sign preceding the amount, e.g. -45 or parenthesis, e.g. (45). Enter all other amounts as positive
amounts and subtract where necessary.)
  Retain Machine Replace Machine Net Income
Increase
 (Decrease)

Operating costs $ 120,000 $ 100,000 $ 20,000

New machine cost (Depr.) 0 21,000 -21,000

Salvage value (old)

0 5000 5000

   Total $ 120,000 $ 116,000 $ 4,000

The current machine should be replaced .

Net Income
  Increase
Retain Machine Replace Machine (Decrease)

Operating costs $120,000 (1) $100,000 (2) $20,000  

New machine cost (Depr.) 0   21,000   (21,000)  

Salvage value (old) 0 5,000 5,000

     

   Total $120,000  $116,000   $4,000  

(1) $24,000 × 5.
(2) $20,000 × 5.

The current machine should be replaced. The incremental analysis shows that net income for the five-year period
will be $4,000 higher by replacing the current machine.

Timmons Corporation is considering three long-term capital investment proposals. Relevant data on each project are
as follows.

Project
Brown   Red    Yellow  
    Capital investment $190,000 $220,000 $250,000
Annual net income:
Year 1 25,000 20,000 26,000
2 16,000 20,000 24,000
3 13,000 20,000 23,000
4 10,000 20,000 17,000
5 8,000 20,000 20,000
Total $72,000 $100,000 $110,000
Salvage value is expected to be zero at the end of each project. Depreciation is computed by the straight-line
method. The company's minimum rate of return is the company's cost of capital which is 12%.
Compute the following and rank the projects for each category:
Compute the average annual rate of return for each project. (Round your answers to 1 decimal place, e.g. 5.2.)
Brown    15.2 %    rank  3

Red    18.2 %    rank 1

Yellow    17.6 %    rank 2

Compute the cash payback period for each project. (Round your answers to 2 decimal places, e.g. 5.25.)

Brown    3.46 years    rank 3

Red    3.44 years    rank 2

Yellow    3.40 years    rank 1

Compute the net present value for each project. (Round your answers to 0 decimal places, e.g. 5,210.)

Brown    $ 2206     rank 3

Red    $ 10706     rank 2

Yellow    $ 11109     rank 1

Which project do you recommend? Yellow

Project Brown = $14,400 ÷ [($190,000 + $0) ÷ 2] = 15.2%.

Project Red = $20,000 ÷ [($220,000 + $0) ÷ 2] = 18.2%.
Project Yellow = $22,000 ÷ [($250,000 + $0) ÷ 2] = 17.6%.

Project Brown
Year Net Annual Cash Flow Cumulative Net Cash Flow
1 $63,000 ($25,000 + $38,000) $ 63,000
2 $54,000 ($16,000 + $38,000)  $117,000
3 $51,000 ($13,000 + $38,000) $168,000
4 $48,000 ($10,000 + $38,000) $216,000
5 $46,000 ($ 8,000 + $38,000) $262,000

Cash Payback 3.46 years

$190,000 - $168,000 = $22,000
$22,000 ÷ $48,000 = .46
Project Red = $220,000 ÷ [($20,000 + $44,000)] = 3.44 years
Project Yellow
Year Net Annual Cash Flow Cumulative Net Cash Flow
1 $76,000 ($26,000 + $50,000) $ 76,000
2 $74,000 ($24,000 + $50,000)  $150,000
3 $73,000 ($23,000 + $50,000) $223,000
4 $67,000 ($17,000 + $50,000) $290,000
5 $70,000 ($20,000 + $50,000) $360,000
Cash Payback 3.40 years
$250,000 - $223,000 = $27,000
$27,000 ÷ $67,000 = .40
Project Red
Item Amount Years PV Factor Present Value
Net Annual cash flows $64,000 1-5 3.60478 $230,706  
Capital investment 220,000  
Positive net present value $ 10,706  
Project
Brown Yellow
Net Annual Cash Net Annual Cash
Year Discount Factor Flow PV Flow PV
1 .89286 $ 63,000    $ 56,250   $ 76,000   $ 67,857  
2 .79719 54,000   43,048   74,000   58,992  
3 .71178 51,000   36,301   73,000   51,960  
4 .63552 48,000   30,505   67,000   42,580  
5 .56743 46,000   26,102   70,000   39,720  
Total  $262,000   192,206   $360,000   261,109  
Capital investment   190,000     250,000  
Net present value    $2,206     $11,109  
Project Annual Rate of Return Cash Payback Net Present Value

Brown 3 3 3

Red 1 2 2

Yellow 2 1 1

The best project is Yellow.