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Accounting 211

Thursday, April 22nd, 1999
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Lecture notes:

Example:

The Nittany Kitten division reports the following results for 1998:

CM

125,000

Fixed costs

Avoidable

95,000

Unavoidable

50,000

Net loss

20,000


Cost to manufacture part X:

Direct materials

17.00

Direct labor

8.75

Variable overhead

3.45

Fixed overhead

Avoidable

3.15

Unavoidable

4.85

Cost to buy part X = $31.50
Relevant costs to manufacturer = $32.35
Buy part externally


Example:

How much needs to be invested today in order to have $25,000 at the end of 5 years?
Interest rate = 14%:

25,000 x P14/5 = 25,000 x .519 = $12,975


Interest rate = 16 %:

25,000 x P16/5 = 25,000 x .476 = $11,900

Interest rate = 12%:

25,000 x P12/5 = 25,000 x .567 = $14,175


Example:

How much needs to be invested today in order to be able to withdraw $10,000 a year from the investment?
Interest rate = 10%

10,000 x PA10/10 = 10,000 x 6.145 = $61,450


Example:

Purchase price = $18,000
Down payment = $2,000
Interest rate = 12%
# monthly payments = 50


Calculation of payments

16,000 = x PA1/50
16,000 = x 39.196
x = $408.21


Exercise 10, Page AP-34

1)

1,200 x PA6/7 = 1,200 x 5.582 = $6,698

2)

1,200 x PA6/14 = 1,200 x 9.295 = $11,154

3)

1,200 x PA8/7 = 1,200 x 5.206 = $6,247

4)

1,200 x PA8/14 = 1,200 x 8.244 = $9,893

 

Page 1065, Exercise 6

1)

30,000 x PA16/5

2)

25,000 x P12/10

3)

21,000 x P10/2 + 15,000 x (P10/4 + P10/5 + P10/6)

4)

22,500 x PA14/12

5)

25,000 x P10/1 + 20,000 x P10/2 + 30,000 x P10/3 + 40,000 x P10/4 + 50,000 x P10/5

6)

60,000 x P14/6

 

Example:

Investment cost = $50,000
Desired rate of return = 8%

Estimated cash flows from the investment

Years 1-10 = 8,000
Year 11 = 6,000
Year 12 = 2,000

Calculate the present value of the future cash flows

8,000 x PA8/10 = 8,000 x 6.71 =

53,680

6,000 x P8/11 = 6,000 x .429 =

2,574

2,000 x P8/12 = 6,000 x .397 =

794

$57,048


Net present value

Present value of future cash flows

57,048

Less initial cost

- 50,000

$7,048

 

Chapter 24 Illustration

Machine cost = 150,000
Estimated life = 5 years
Estimated salvage value = 10,000
Annual cash flows increase = 40,000
Discount rate = 12%
Tax rate = 30%

Annual income

Increased cash flows

40,000

- depreciation expense

- 28,000

12,000

- taxes

- 3,600

Net income

8,400


Accounting rate of return

8,400 / 80,000 = 10.5%

Payback period

150,000 / 36,400 = 4.12 years

Net present value

Initial cost

- 150,000

36,400 x PA12/5

131.22

10,000 x P12/5

5,670

Net present value

- 13,108


 
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