Martin Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows: (Ignore income taxes.) Purchase cost $ 195,000 Annual cost savings that will be provided by the equipment $ 38,600 Life of the equipment 13 years Required: 1a. Compute the payback period for the equipment. (Round your answer to 1 decimal place.) Payback period years 1b. If the company requires a payback period of 4 years or less, would the equipment be purchased? No 2a. Use straight-line depreciation based on the equipment's useful life. Compute the simple rate of return on the equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.) Simple rate of return % 2b. Would the equipment be purchased if the company's required rate of return is 11%? Yes Explanation: 1a. The payback period is: Payback period = Investment required Net annual cash inflow = $195,000 = 5.1 years $38,600 per year 1b. No, the equipment would not be purchased because the (5.1 years) payback period exceeds the company's maximum (4-years) payback period . 2a. The simple rate of return would be computed as follows: Annual cost savings $ 38,600 Less annual depreciation ($195,000 ÷ 13 years) 15,000 Annual incremental net operating income $ 23,600 Simple rate of return = Annual incremental net operating income Initial investment = $23,600 = 12.1% $195,000 b. The equipment would be purchased since its 12.1% rate of return is greater than the company's 11% required rate of return.

Martin Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows: (Ignore income taxes.)

Purchase cost	$	195,000
Annual cost savings that will be     provided by the equipment	$	38,600
Life of the equipment		13 years

   

Required:

1a.	Compute the payback period for the equipment. (Round your answer to 1 decimal place.)

Payback period

years

  

1b.	If the company requires a payback period of 4 years or less, would the equipment be purchased?
	No

2a.	Use straight-line depreciation based on the equipment's useful life. Compute the simple rate of return on the equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Simple rate of return

%

2b.	Would the equipment be purchased if the company's required rate of return is 11%?
	Yes

Explanation:

1a.

The payback period is:

Payback period	=	Investment required
		Net annual cash inflow
	=	$195,000	= 5.1 years
		$38,600 per year

1b.

No, the equipment would not be purchased because the (5.1 years) payback period exceeds the company's maximum (4-years) payback period .

2a.

The simple rate of return would be computed as follows:

   

Annual cost savings	$	38,600
Less annual depreciation ($195,000 ÷ 13 years)		15,000
Annual incremental net operating income	$	23,600

Simple rate of return	=	Annual incremental net operating income
		Initial investment
	=	$23,600	= 12.1%
		$195,000

b.

The equipment would be purchased since its 12.1% rate of return is greater than the company's 11% required rate of return.

Doughboy Bakery would like to buy a new machine for putting icing and other toppings on pastries. These are now put on by hand. The machine that the bakery is considering costs $92,000 new. It would last the bakery for ten years but would require a $8,500 overhaul at the end of the seventh year. After ten years, the machine could be sold for $7,500. The bakery estimates that it will cost $11,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $31,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 6,000 packages per year. The bakery realizes a contribution margin of $0.70 per package. The bakery requires a 13% return on all investments in equipment. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What are the annual net cash inflows that will be provided by the new machine? (Omit the "$" sign in your response.) Annual net cash inflows $ 2. Compute the new machine's net present value. Use the incremental cost approach. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.) Net present value $ Explanation: 1. The annual net cash inflows would be: Reduction in annual operating costs: Operating costs, present hand method $ 31,000 Operating costs, new machine 11,500 Annual savings in operating costs 19,500 Increased annual contribution margin: 6,000 packages × $0.70 per package 4,200 Total annual net cash inflows $ 23,700 2. Item Year(s) Amount of Cash Flows 13% Factor Present Value of Cash Flows Cost of the machine Now $ (92,000) 1.000 $ (92,000) Overhaul required 7 $ (8,500) 0.425 (3,613) Annual net cash inflows 1-10 $ 23,700 5.426 128,596 Salvage value 10 $ 7,500 0.295 2,212 Net present value $ 35,196

Doughboy Bakery would like to buy a new machine for putting icing and other toppings on pastries. These are now put on by hand. The machine that the bakery is considering costs $92,000 new. It would last the bakery for ten years but would require a $8,500 overhaul at the end of the seventh year. After ten years, the machine could be sold for $7,500.

The bakery estimates that it will cost $11,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $31,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 6,000 packages per year. The bakery realizes a contribution margin of $0.70 per package. The bakery requires a 13% return on all investments in equipment. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:
1.	What are the annual net cash inflows that will be provided by the new machine? (Omit the "$" sign in your response.)

Annual net cash inflows

$

2.	Compute the new machine's net present value. Use the incremental cost approach. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Net present value

$

Explanation: 1.

The annual net cash inflows would be:

Reduction in annual operating costs:
Operating costs, present hand method	$ 31,000
Operating costs, new machine	11,500
Annual savings in operating costs	19,500
Increased annual contribution margin:
6,000 packages × $0.70 per package	4,200
Total annual net cash inflows	$ 23,700

2.

Item	Year(s)	Amount of Cash Flows		13% Factor	Present Value of Cash Flows
Cost of the machine	Now	$	(92,000)	1.000	$ (92,000)
Overhaul required	7	$	(8,500)	0.425	(3,613)
Annual net cash inflows	1-10	$	23,700	5.426	128,596
Salvage value	10	$	7,500	0.295	2,212
Net present value					$ 35,196

Martin Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows: (Ignore income taxes.) Purchase cost $ 231,000 Annual cost savings that will be provided by the equipment $ 37,400 Life of the equipment 11 years Required: 1a. Compute the payback period for the equipment. (Round your answer to 1 decimal place.) Payback period 6.2 correct years 1b. If the company requires a payback period of 5 years or less, would the equipment be purchased? No correct 2a. Use straight-line depreciation based on the equipment's useful life. Compute the simple rate of return on the equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.) Simple rate of return 7.1 correct % 2b. Would the equipment be purchased if the company's required rate of return is 8%? No correct

Martin Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows: (Ignore income taxes.)

Purchase cost	$	231,000
Annual cost savings that will be     provided by the equipment	$	37,400
Life of the equipment		11 years

   

Required:

1a.	Compute the payback period for the equipment. (Round your answer to 1 decimal place.)

Payback period

6.2  years

  

1b.	If the company requires a payback period of 5 years or less, would the equipment be purchased?
	No

2a.	Use straight-line depreciation based on the equipment's useful life. Compute the simple rate of return on the equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Simple rate of return

7.1  %

2b.	Would the equipment be purchased if the company's required rate of return is 8%?
	No

Rightway Products had a current ratio of 2 on June 30 of the current year. On that date, the company’s assets were as follows:

Rightway Products had a current ratio of 2 on June 30 of the current year. On that date, the company’s assets were as follows:

Cash	$	75,000
Accounts receivable, net		420,000
Inventory		670,000
Prepaid expenses		9,000
Plant and equipment, net		1,810,000
Total assets	$	2,984,000

Required:

1.	What was the company’s working capital on June 30? (Omit the "$" sign in your response.)

Working capital

$

2.	What was the company’s acid-test ratio on June 30? (Round your answer to 2 decimal places.)

Acid-test ratio

3.	The company paid an account payable of $60,000 immediately after June 30.

a.	What effect did this transaction have on working capital?
	Working capital would not be affected.

b.	What effect did this transaction have on the current ratio?
	Current ratio would increase.

Explanation:

1.

Current assets    ($75,000 + $420,000 + $670,000 + $9,000)	$	1,174,000
Current liabilities ($1,174,000 ÷ 2)		587,000
Working capital	$	587,000

2.

Acid-test radio	=	Cash + Marketable securities + Accounts receivable + Short-term notes
		Current liabilities
	=	$75,000 + $0 + $420,000 + $0	= 0.84 (rounded)
		$587,000

3.

a.

Working capital would not be affected by a $60,000 payment on accounts payable:

Current assets ($1,174,000 – $60,000)	$	1,114,000
Current liabilities ($587,000 – $60,000)		527,000
Working capital	$	587,000

b.

The current ratio would increase if the company makes a $60,000 payment on accounts payable:

Current ratio	=	Current assets
		Current liabilities
	=	$1,114,000	= 2.1 (rounded)
		$527,000

Selected financial data from the September 30 year-end statements of Kosanka Company are given below:

Selected financial data from the September 30 year-end statements of Kosanka Company are given below:

Total assets	$	5,500,000
Long-term debt (11% interest rate)		600,000
Preferred stock, $100 par, 8%		600,000
Total stockholders’ equity		2,800,000
Interest paid on long-term debt		66,000
Net income	$	420,000

Total assets at the beginning of the year were $5,300,000; total stockholders’ equity was $2,600,000. There has been no change in preferred stock during the year. The company’s tax rate is 35%.

Required:

1.	Compute the return on total assets. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Return on total assets

%

2.	Compute the return on common stockholders’ equity. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Return on common stockholders’ equity

%

3.	Is the company’s financial leverage positive or negative?
	Positive

Explanation:

1.

Return on total assets:

Return on total assets	=	Net income + [Interest expense × (1 − Tax rate)]
		Average total assets
	=	$420,000 + [$66,000 × (1 − 0.35)]
		($5,500,000 + $5,300,000) / 2

	=	$462,900	= 8.6% (rounded)
		$5,400,000

2.

Return on common stockholders’ equity:

Average stockholders’ equity      ($2,800,000 + $2,600,000) / 2	$	2,700,000
Average preferred stock ($600,000 + $600,000) / 2		600,000
Average common stockholders' equity	$	2,100,000

Preferred Dividends = 8% × $600,000 = $48,000

Return on common stockholders' equity	=	Net income − Preferred dividends
		Average common stockholders' equity

	=	$420,000 − $48,000	= 17.7% (rounded)
		$2,100,000

3.

Leverage is positive because the return on common stockholders’ equity (17.7%) is greater than the return on total assets (8.6%).

Clarion Contractors completed the following transactions and events involving the purchase and operation of equipment in its business. 2010 Jan. 1 Paid $310,000 cash plus $12,400 in sales tax and $1,900 in transportation (FOB shipping point) for a new loader. The loader is estimated to have a four-year life and a $31,000 salvage value. Loader costs are recorded in the Equipment account. Jan. 3 Paid $7,000 to enclose the cab and install air conditioning in the loader to enable operations under harsher conditions. This increased the estimated salvage value of the loader by another $2,100. Dec. 31 Recorded annual straight-line depreciation on the loader. 2011 Jan. 1 Paid $4,700 to overhaul the loader’s engine, which increased the loader’s estimated useful life by two years. Feb. 17 Paid $1,175 to repair the loader after the operator backed it into a tree. Dec. 31 Recorded annual straight-line depreciation on the loader. Required: Prepare journal entries to record these transactions and events. (Round your intermediate calculations and final answers to the nearest dollar amount.)

Clarion Contractors completed the following transactions and events involving the purchase and operation of equipment in its business.

  

2010
Jan.	1	Paid $310,000 cash plus $12,400 in sales tax and $1,900 in transportation (FOB shipping point) for a new loader. The loader is estimated to have a four-year life and a $31,000 salvage value. Loader costs are recorded in the Equipment account.
Jan.	3	Paid $7,000 to enclose the cab and install air conditioning in the loader to enable operations under harsher conditions. This increased the estimated salvage value of the loader by another $2,100.
Dec.	31	Recorded annual straight-line depreciation on the loader.

  

2011
Jan.	1	Paid $4,700 to overhaul the loader’s engine, which increased the loader’s estimated useful life by two years.
Feb.	17	Paid $1,175 to repair the loader after the operator backed it into a tree.
Dec.	31	Recorded annual straight-line depreciation on the loader.

  

Required:

Prepare journal entries to record these transactions and events. (Round your intermediate calculations and final answers to the nearest dollar amount.)   Explanation: Jan. 1, 2010: To record loader costs ($310,000 +$12,400 +$1,900) = $324,300    Dec. 31, 2010:   2010 depreciation after January 3rd betterment   Total original cost $ 324,300     Plus cost of betterment   7,000       Revised cost of equipment   331,300     Less revised salvage ($31,000 + $2,100)   33,100       Cost to be depreciated   298,200       Annual depreciation ($298,200 / 4 years) (rounded) $ 74,550        Dec. 31, 2011:   2011 depreciation after January 1st extraordinary repair   Total cost ($331,300 + $4,700) $ 336,000       Less accumulated depreciation   74,550           Book value   261,450       Less salvage   33,100           Remaining cost to be depreciated $ 228,350           Revised remaining useful life (Original 4 years – 1yr. + 2yrs.)   5.0   yrs.       Revised annual depreciation ($228,350 / 5 yrs) (rounded) $ 45,670

Xavier Construction negotiates a lump-sum purchase of several assets from a company that is going out of business. The purchase is completed on January 1, 2011, at a total cash price of $820,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $481,950; land, $255,150; land improvements, $37,800; and four vehicles, $170,100. The company’s fiscal year ends on December 31. Required: 1.1 Prepare a table to allocate the lump-sum purchase price to the separate assets purchased.

Xavier Construction negotiates a lump-sum purchase of several assets from a company that is going out of business. The purchase is completed on January 1, 2011, at a total cash price of $820,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $481,950; land, $255,150; land improvements, $37,800; and four vehicles, $170,100. The company’s fiscal year ends on December 31.

  

Required:

1.1

Prepare a table to allocate the lump-sum purchase price to the separate assets purchased.   1.2 Prepare the journal entry to record the purchase.   2. Compute the depreciation expense for year 2011 on the building using the straight-line method,  assuming a 15-year life and a $31,000 salvage value. 3. Compute the depreciation expense for year 2011 on the land improvements assuming a five-year life and double-declining-balance depreciation.   Explanation: 2. Year 2011 straight-line depreciation on building       [($418,200 – $31,000) / 15 years]  = $25,813 3. Year 2011 double-declining-balance depreciation on land improvements  (100% / 5 years) × 2 = 40% rate       $32,800 × 40% = $13,120