Alpha Company plans to expand into a new geographic area. The executives and sha
ID: 2449573 • Letter: A
Question
Alpha Company plans to expand into a new geographic area. The executives and shareholders expect the following events to take place over a two-year period and the events actually take place. So, I am saying that the expectations are actually realized.
Year 1
January 1: Issue stock for $10,000 cash Purchase equipment for $8,000. The equipment is depreciated straight line over 2 years with no salvage value.Purchase inventory for $2,000 cash
December 31:Sell all the inventory for $8,000 cash
Year 2
January 1: Purchase additional inventory for $2,000
December 31: Sell all the inventory for $8,000 Pay out all the cash as dividends.
1. Assume the appropriate discount rate is 10 percent. What is the present value of the project from the point of view of the person who purchased the stock?
2. What amount of financial income will Alpha report each year?
3. Assume the appropriate discount rate is 10 percent. What is the present value of the financial net income?
4. Assume the appropriate discount rate is 10 percent. What is the present value of the abnormal financial net income?
5. In this instance, is accounting useful?
Explanation / Answer
CALCULATION OF CASH BALANCE:
CASH RECEIVED FROM STOCK ISSUED =$10,000
LESS:EQUIMENT PURCHASED IN YEAR 1 =$8,000
LESS:INVENTORY PURCHASED IN YEAR 1=$2,000
ADD:INVENTORY SOLD IN YEAR 1 =$8,000
LESS:INVENTORY PURCHASD IN YEAR 2 =$2,000
ADD:INVENTORY SOLD IN YEAR 2 =$8,000
NET CASH PAID AS DIVIDEND =$14,000
1)CALCULATION OF PRESENT VALUE OF THE PROJECT FROM THE POINT OF VIEW OF THE PERSON WHO PURCHASED THE STOCK
DISCOUNT RATE =10%
PROJECT LIFE=2 YEARS
INITIAL OUTLAY=$10,000
DIVIDEND RECEIVED IN YEAR 2 =$14,000
NET PRESENT VALUE=$14,000PVIF(10%,2)-$10,000
=$14,000*0.826-$10,000
=$1,564
2)CALCULATION OF FINANCE INCOME ALPHA WILL REPORT EACH YEAR
EQUIPMENT COST=$8,000
LIFE =2 YEARS
DEPRECIATION=$8,000/2=$4,000
FINANCIAL INCOME EARNED EACH YEAR:
INVENTORY SOLD =$8,000
LESS:INVENTORY PURCHASED =$2,000
INCOME =$6,000
LESS:DEPRECIATION =$4,000
FINANCE INCOME =$2,000
3)PRESENT VALUE OF FINANCIAL NET INCOME =$2,000PVIFA(10%,2)
=$2,000*1.736
=$3,472
4)PRESENT VALUE OF THE ABNORMAL FINANCIAL NET INCOME =$3,472
5)YES ACCOUNTING IS USEFUL
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