Brummel Limited bronzes accounting textbooks for students who want to cherish th

Question

Brummel Limited bronzes accounting textbooks for students who want to cherish those fond memories of studying accounting. At the present time, Brummel's operation is all done manually. Kane Manufacturing wants Brummel to automate its operation with one of Kane's bronzing machines. Selected information relating to the two proposals is as follows Proposal X Proposal Y Equipment cost $220,000$410,000 $280,000 132,000 380,000 182,000 Sales Variable cash operating costs Depreciation expense 2 37,000 73,000 79,000 60,000 Fixed cash operating costs Brummel suspects that bronzed accounting textbooks will only be popular for the next five years due to the burgeoning market for textbook apps. The company's required rate of return is 14%.

Explanation / Answer

Answer a -1. Cost of Proposal Y = $500,000 Payback Period = Intial Investment / Annual Cash Inflow Payback Period = $500,000 / $138,000 Payback Period = 3.62 Years (Approx.) Answer a -2. Simple Rate of Return = Avg. Annual Net Income / Avg. Investment Avg. Investment = $500,000 / 2 = $250,000 Simple Rate of Return = $59,000 / $250,000 Simple Rate of Return = 23.60% or. Some also calculate: Simple Rate of Return = Avg. Annual Net Income / Intial Investment Simple Rate of Return = $59,000 / $500,000 Simple Rate of Return = 11.80% Answer a-3 Calculation o NPV - Proposal Y Now Year 1 Year 2 Year 3 Year 4 Year 5 Cost of Equipment         (500,000) Yearly Net Cash Flows                       -                138,000               138,000          138,000          138,000          138,000 Total Cash Flows         (500,000)              138,000               138,000          138,000          138,000          138,000 Discount Factor - 14%           1.00000              0.87719               0.76947          0.67497          0.59208          0.51937 Present Value         (500,000)              121,052               106,187            93,146            81,707            71,673 Net Present Value           (26,235) Answer a-4 Year Project Y Intial Investment 0     (500,000.00) Expcted Net Cash inflow 1        138,000.00 2        138,000.00 3        138,000.00 4        138,000.00 5        138,000.00 Internal Rate of Return 11.79% Answer b-1. Proposal X requires additional Cash Operating expenses = $10,000 per annum Payback Period = Intial Investment / Annual Cash Inflow Payback Period = $220,000 / $65,000 Payback Period = 3.38 Years (Approx.) Answer b -2. Simple Rate of Return = Avg. Annual Net Income / Avg. Investment Avg. Investment = $220,000 / 2 = $110,000 Simple Rate of Return = $28,000 / $110,000 Simple Rate of Return = 25.45% or. Some also calculate: Simple Rate of Return = Avg. Annual Net Income / Intial Investment Simple Rate of Return = $28,000 / $220,000 Simple Rate of Return = 12.73% Answer b-3 Calculation o NPV - Proposal X Now Year 1 Year 2 Year 3 Year 4 Year 5 Cost of Equipment         (220,000) Yearly Net Cash Flows                       -                  65,000                  65,000            65,000            65,000            65,000 Total Cash Flows         (220,000)                65,000                  65,000            65,000            65,000            65,000 Discount Factor - 14%           1.00000              0.87719               0.76947          0.67497          0.59208          0.51937 Present Value         (220,000)                57,017                  50,016            43,873            38,485            33,759 Net Present Value                3,150 Answer b-4 Year Project Y Intial Investment 0     (220,000.00) Expcted Net Cash inflow 1          65,000.00 2          65,000.00 3          65,000.00 4          65,000.00 5          65,000.00 Internal Rate of Return 14.59% Answer c-1 Calculation o NPV - Proposal X Now Year 1 Year 2 Year 3 Year 4 Year 5 Cost of Equipment         (220,000) Yearly Net Cash Flows                       -                  75,000                  75,000            75,000            75,000            75,000 Total Cash Flows         (220,000)                75,000                  75,000            75,000            75,000            75,000 Discount Factor - 21%           1.00000              0.82645               0.68301          0.56447          0.46651          0.38554 Present Value         (220,000)                61,984                  51,226            42,335            34,988            28,916 Net Present Value                 (552) Calculation o NPV - Proposal Y Now Year 1 Year 2 Year 3 Year 4 Year 5 Cost of Equipment         (410,000) Yearly Net Cash Flows                       -                138,000               138,000          138,000          138,000          138,000 Total Cash Flows         (410,000)              138,000               138,000          138,000          138,000          138,000 Discount Factor - 21%           1.00000              0.82645               0.68301          0.56447          0.46651          0.38554 Present Value         (410,000)              114,050                  94,255            77,897            64,378            53,205 Net Present Value              (6,215) Answer c-2 Year Project X Project Y Intial Investment 0           (220,000)       (410,000.00) Expcted Net Cash inflow 1                75,000         138,000.00 2                75,000         138,000.00 3                75,000         138,000.00 4                75,000         138,000.00 5                75,000         138,000.00 Internal Rate of Return 20.88% 20.30%

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