Homework.
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| Part 1 | |
| The Jarvis Company is contemplating the purchase of a helicopter for its executives to use in their businesstrips. This helicopter could be either purchsed or leased from the manufacturer. | |
| The useful life of the helicopter is Four years. Data concerning these two alternatives follow: | |
| Purchase price | |
| Annual cash payments for servicing and licenses | |
| Cash payments | |
| end of second year | |
| end of third year | |
| salvage value | |
| annual rental payment | |
| if the helicopter is leased, it would be returned to the manufacturer in four years. Fernado’s | |
| required rate of return is 22% . Answer the following question by selecting the correct answer. | |
| 1 | The present value of all the cash outflows for rental payments, if the helicopter is leased. |
| would be | |
| a | -$647,250 |
| b | -$623,500 |
| c | -$716,000 |
| d | -$510,500 |
| 2 | The present value of the cash outflows for repairs, assuming the helicopter is purcashed, would be |
| a | -$14,000 |
| b | -$8,682 |
| c | -$2,000 |
| d | -$8,440 |
| 3 | The present value of the salvage value of the helicopter, if the helicopter is purcashed. Would be |
| a | $121,700 |
| b | $162,360 |
| c | 114,210 |
| d | 99900 |
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| part ll | |
| required: answer all the questions by selecting and circling the best answer. | |
| 1 | the length of time required to recover the initial cash outlay for a project is determined by using the: |
| a | discounted cash flow method. |
| b | the payback method |
| c | the net present value method |
| d | the simple rate of return method |
| 2 | Taja Brown Corporation, a manufacturing company based in Kentucky, has a large number of potential investment opportunities that are acceptable. However, Brown Corp does not have enough |
| investment funds to invest in all of them. Which calculation would be the best one for Brown Corp to use to determine which projects to choose? | |
| a | payback period |
| b | simple rate of return |
| c | net present value |
| d | project profitability index |
| 3 | The capital budgeting method that divides a project’s annual incremental net operating income by the initial investment is the: |
| a | internal rate of return method |
| b | the simple rate of return method |
| c | the payback method |
| d | the net present value method. |
| 4 | the total-cost approach and the incremental-cost approach to evaluating two competing investment opportunities |
| a | are similar in that they will recommend the same alternative as the best |
| b | are dissimilar in that one deals with net present value and the other deals with internal rate of return |
| c | are dissimilar in that one uses the cost of capital as a discount rate and the other does not. |
| d | are similar in that neither considers the time value of money. |
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| 5 | Jessica Nortey Corporation presented you the following data pertain to a proposed investment: | |
| Cost of the investment | $18,955 | |
| Life of the project | 5 | years |
| Annual cost savings | $5,000 | |
| Estimated salvage value | $1,000 | |
| discount rate | 10% | |
| The net present value of the proposed investment is: | ||
| a | $3,355 | |
| b | -$3,430 | |
| c | $0 | |
| d | $621 | |
| 6 | Anton Fletcher Corporation presented you four investment proposals below: | |
| Proposa | Investment | net present value |
| 1……… | $50,000 | 30000 |
| 2……… | 60000 | 24000 |
| 3……… | 30000 | 15000 |
| 4……… | 45000 | 9000 |
| Rank the proposals in terms of preference according to the project profitability index: | ||
| a | ||
| b | 3,4,1,2 | |
| c | 1,3,2,4 | |
| d | 2,1,4,3 | |
| 7 | ( Ignore income taxes in this problem.) The management of Rusell Corporation is considering | |
| a project that would require an investment of $282,000 and would last for 6 years. The annual | ||
| net operating income from the project would be $107,000, which includes depreciation of | ||
| $43,000. The scrap value of the project’s assets at the end of the project would be $24,000. The | ||
| payback period of the project is closed to: | ||
| a | 1.9 years | |
| b | 2.4 years | |
| c | 1.7 years | |
| d | 2.6 years |
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| 10 | One simple assumption built in Net Present Value (NPV) method is that all cash inflows/outflows |
| A | at the beginning of the period |
| B | at the end of the period |
| C | in the middle of the period |
| D | Non of the above |
| 11 | The fllowings are three activity sections of the statement of cash flows EXCEPT: |
| A | Operationg activities |
| B | Investing activities |
| C | Financing activities |
| D | Marketing activities |
| 12 | A company that had a $500 decrease in accounts receivable during a period would do which of the following of its statement of cash flows prepared using the indirect method? |
| A | Add the $500 net income in order to arrive at net cash provided by operating activities |
| B | Subtract the $500 from net income in order to arrive at net cash provided by operating activities |
| C | Add the $500 to the net cash provided by investing activites |
| D | Add the $500 to the net cash provided by financing activities |
| 13 | Which of the following would be considered a cash outflow in the investing activities section of the statement of cash flows? |
| A | Dividends paid to the company’s own stockholders |
| B | Payment of interest to a lender |
| C | Purchase of equipment |
| D | Retirement of bonds payable |
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| 14 | Which of the following would be classified as a financing activity on the statement of cash flows? | |
| A | Interest paid to a lender | |
| B | Dividends paid to the company’s common stockholders | |
| C | Cash aid to acquire a long-term investment | |
| D | Cash received from a loan that was made to another company | |
| 15 | Which the fllowing would be added to net income in the operating activities section of a statement of cash flowes prepared using the indirect method? | |
| A | an increase in accounts receivable | |
| B | an increase in accounts payable | |
| C | an increase in common stock | |
| D | an increase in bonds payable | |
| 16 | Excerpts from Harris Corporation’s comparative balance sheet appear below: | |
| Ending Balance | Beginning Balance | |
| Cash and cash equivalents | 38000 | 26000 |
| Accounts payable | 18000 | 19000 |
| Accrued liabilities | 39000 | 35000 |
| Which of the following is the correct treatment within the operating activities section of the statement of cash flows using the indirect method? | ||
| A | The change in Accounts Payable added to net income; The change in Accrued Liabilities is subtracted from net income | |
| B | The change in Accounts Payable added to net income; The change in Accrued Liabilities isadded to net income | |
| C | The change in Accounts Payable subtracted from net income; The change in Accrued Liabilities is added to net income | |
| D | The change in Accounts Payable subtracted from net income; The change in Accrued Liabilities is subtracted to net income | |
| 17 | Under the indirect method of determining net cash provided by operating activities on the statement of cash flows, which of the following would be subtracted from net income | |
| A | A decrease in accounts receivable | |
| B | An increase in accrued liabilities | |
| C | A decrease in accounts payable | |
| D | An increase in dividend payments to stockholders |
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| 18 | In a statement of Cash flows, which of the following would be classifed as an operating activity? | |
| A | The purchase of equipment | |
| B | Dividends paid to the company’s own common stockholders | |
| C | Tax payments to government bodies | |
| D | The cash paid to retire bonds payable | |
| 19 | Which of the following should be classified as a financing activity on a statement of cash flows? | |
| Interest Paid | Dividends Paid | |
| A) | Yes | Yes |
| B) | No | Yes |
| C) | Yes | No |
| D) | No | No |
| A | Option A | |
| B | Option B | |
| C | Option C | |
| D | Option D | |
| 20 | In a statement of cash flowes, all of the following would be classified as financing activities except: | |
| A | The collection of cash related to a loan made to another entity | |
| B | The payment of a cash dividend on the company’s own common stock | |
| C | The cash paid to retire bonds payable | |
| D | The sale of the company’s own common stock for cash |
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| 8 | Ignore income taxes in this problem.) Oriental Company has gathered the following data on a proposed investment project |
| Investment in depreciable equipment | |
| Annual net cash flows | |
| Life of the equipment | |
| Salvage value | |
| Discount rate | |
| The company uses straight-line depreciation on all equipment. | |
| The simple rate of return on the investment would be: | |
| A | 10% |
| B | 35% |
| C | 15% |
| D | 25% |
| 9 | (Ignore income taxes in this problem.) Gull Inc. is considering the acquisition of equipment that costs $480000 and hasuseful life of 6 years with no salvage. |
| The incremental net cash flows that would be generated by the equipment are: | |
| Incremental net cash flows | |
| Year 1 | 139000 |
| Year 2 | 186000 |
| Year 3 | 140000 |
| Year 4 | 157000 |
| Year 5 | 147000 |
| Year 6 | 126000 |
| The payback period of this investment is closest to: | |
| A | 3.1 years |
| B | 2.9 years |
| C | 5.0 years |
| D | 3.5 years |
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| Statement of cash flows classification | ||||
| Below are certain events or transactions that took place at Taja Brown’s Corporation last year. | ||||
| Indicate how each of them would be classified on a statement of cash flows. Place and “X” in | ||||
| The Operation, Investing, or Financing column as appropriate. | ||||
| Activity | ||||
| Item# | Transaction Description | Operating | Investing | Financing |
| A | Paid bills to insurers and utility providers | |||
| B | Purchased equipment with cash | |||
| C | Paid wages and salaries to employees | |||
| D | Paid taxes to the government | |||
| E | Loaned money to another entity | |||
| F | Sold common stock | |||
| G | Paid cash dividend to stockholders | |||
| H | Paid interest to lenders | |||
| I | Repaid the principal amount | |||
| J | Paid suppliers for inventory purchases | |||
| K | Borrowed money from a creditor | |||
| L | Paid cash to repurchase its own stock | |||
| M | Collect cash from customers |
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| Capital Budgeting Decisions | |||
| Part A | |||
| Joshua Seheman Corporation has provided the following data concerning a proposed investment project: | |||
| Initial investment | $480,000 | ||
| Life of the project | 7 Year | ||
| Working capital required | $17,000 | ||
| Annual net cash inflows | $168,000 | ||
| Salvage value | $72,000 | ||
| The Company uses a discount rate of 11% the working capital would be released at the end of the project. | |||
| Required | |||
| Compute the net persent value of the project. | Show your work below to receive credits | ||
| Part B | |||
| The management of Jessica Corporation is considering the following three investment project; | |||
| Project B | Project C | Project D | |
| Investment required | $ 34,000 | $ 60,000 | $ 81,000 |
| Present value of cash inflows | $ 37,060 | $ 61,800 | $ 85,050 |
| The only cash outflows are the initial investments required in the projects. | |||
| Required: | |||
| Rank the investment projects using the project profitability index. | Show your Work |
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| Preparation of the SCF | ||
| Roosevelt Corporation’s balance sheet appears below: | ||
| Comparative Balance Sheet | ||
| Ending Balance | Beginning Balance | |
| Assets: | ||
| Cash and cash equivalents | $31 | $26 |
| Accounts receivable | 60 | 71 |
| Invontory | 64 | 55 |
| Property, plant and equipment | 477 | 450 |
| Less accumulated depreciation | 334 | 280 |
| Total assets | $298 | $322 |
| Laibilities and stockholders’ equity: | ||
| Accounts payable | $45 | $42 |
| Bonds payable | 213 | 200 |
| Common stock | 84 | 80 |
| Retained earnings | -44 | 0 |
| Total liabilities and stockholders’ equity | $298 | $322 |
| Net income (loss) for the year was ($43). Cash dividends were $1. | ||
| the compnay did not dispose of any property, plant, and eqyipment, issue any bonds payable, or repurchase any of its own common stock during the year | ||
| Required: | ||
| Prepare a statement of cash flows in good form using the indirect method. |
