You are evaluating two different silicon wafer milling machines. The Techron I costs $222,000, has a three-year life, and has pretax operating costs of $57,000 per year. The Techron II costs $390,000, has a five-year life, and has pretax operating costs of $30,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $34,000. If your tax rate is 35 percent and your discount rate is 9 percent, compute the EAC for both machines.

You are evaluating two different silicon wafer milling machines. The Techron I costs $222,000, has a three-year life, and has pretax operating costs of $57,000 per year. The Techron II costs $390,000, has a five-year life, and has pretax operating costs of $30,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $34,000. If your tax rate is 35 percent and your discount rate is 9 percent, compute the EAC for both machines. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

	EAC
Techron I	$
Techron II	$

Which do you prefer?

Techron II

Explanation:

We will need the aftertax salvage value of the equipment to compute the EAC. Even though the equipment for each product has a different initial cost, both have the same salvage value. The aftertax salvage value for both is:

Aftertax salvage value = $34,000(1 − 0.35) = $22,100

To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I is:

OCF = −$57,000(1 − 0.35) + 0.35($222,000/3) = −$11,150

NPV = −$222,000 − $11,150(PVIFA9%,3) + ($22,100/1.093) = −$233,158.68

EAC = −$233,158.68 / (PVIFA9%,3) = −$92,110.45

And the OCF and NPV for Techron II is:

OCF = −$30,000(1 − 0.35) + 0.35($390,000/5) = $7,800

NPV = −$390,000 + $7,800(PVIFA9%,5) + ($22,100/1.095) = −$345,297.24

EAC = −$345,297.24 / (PVIFA9%,5) = −$88,773.31

The two milling machines have unequal lives, so they can only be compared by expressing both on an equivalent annual basis, which is what the EAC method does. Thus, you prefer the Techron II because it has the lower (less negative) annual cost.

A proposed new investment has projected sales of $680,000. Variable costs are 65 percent of sales, and fixed costs are $157,000; depreciation is $58,000. Prepare a pro forma income statement assuming a tax rate of 34 percent. What is the projected net income? (Input all amounts as positive values.)

A proposed new investment has projected sales of $680,000. Variable costs are 65 percent of sales, and fixed costs are $157,000; depreciation is $58,000. Prepare a pro forma income statement assuming a tax rate of 34 percent. What is the projected net income? (Input all amounts as positive values.)

Sales	$
Variable costs
Fixed costs
Depreciation
EBT	$
Taxes
Net income	$

Explanation:

Taxes (34%) = $7,820

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

Draiman, Inc., has sales of $604,000, costs of $254,000, depreciation expense of $61,500, interest expense of $28,500, and a tax rate of 35 percent. The firm paid out $45,500 in cash dividends. (Enter your answer as directed, but do not round intermediate calculations.) Required: What is the addition to retained earnings? Addition to retained earnings $ Explanation: The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get: Income statement Sales $ 604,000 Costs 254,000 Depreciation 61,500 EBIT $ 288,500 Interest 28,500 Taxable income $ 260,000 Taxes (35%) 91,000 Net income $ 169,000 The dividends paid plus the addition to retained earnings must equal net income, so: Net income = Dividends + Addition to retained earnings Addition to retained earnings = $169,000 – 45,500 Addition to retained earnings = $123,500

Draiman, Inc., has sales of $604,000, costs of $254,000, depreciation expense of $61,500, interest expense of $28,500, and a tax rate of 35 percent. The firm paid out $45,500 in cash dividends. (Enter your answer as directed, but do not round intermediate calculations.)

Required:

What is the addition to retained earnings?

Addition to retained earnings

$

Explanation:

The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:

Income statement
Sales	$	604,000
Costs		254,000
Depreciation		61,500
EBIT	$	288,500
Interest		28,500
Taxable income	$	260,000
Taxes (35%)		91,000
Net income	$	169,000

The dividends paid plus the addition to retained earnings must equal net income, so:

Net income = Dividends + Addition to retained earnings

Addition to retained earnings = $169,000 – 45,500

Addition to retained earnings = $123,500

Draiman, Inc., has sales of $598,000, costs of $260,000, depreciation expense of $64,500, interest expense of $31,500, and a tax rate of 40 percent. The firm paid out $42,500 in cash dividends and has 53,000 shares of common stock outstanding. (Enter your answer as directed, but do not round intermediate calculations.) Requirement 1: What is the earnings per share figure? (Round your answer to 2 decimal places (e.g., 32.16).) Earnings per share $ Requirement 2: What is the dividends per share figure? (Round your answer to 2 decimal places (e.g., 32.16).) Dividends per share $ Explanation: The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get: Income statement Sales $ 598,000 Costs 260,000 Depreciation 64,500 EBIT $ 273,500 Interest 31,500 Taxable income $ 242,000 Taxes (40%) 96,800 Net income $ 145,200 Earnings per share is the net income divided by the shares outstanding, so: EPS = Net income / Shares outstanding EPS = $145,200 / 53,000 EPS = $2.74 per share And dividends per share are the total dividends paid divided by the shares outstanding, so: DPS = Dividends / Shares outstanding DPS = $42,500 / 53,000 DPS = $0.80 per share

Draiman, Inc., has sales of $598,000, costs of $260,000, depreciation expense of $64,500, interest expense of $31,500, and a tax rate of 40 percent. The firm paid out $42,500 in cash dividends and has 53,000 shares of common stock outstanding. (Enter your answer as directed, but do not round intermediate calculations.)

Requirement 1:

What is the earnings per share figure? (Round your answer to 2 decimal places (e.g., 32.16).)

Earnings per share

$

Requirement 2:

What is the dividends per share figure? (Round your answer to 2 decimal places (e.g., 32.16).)

Dividends per share

$

Explanation:

The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:

Income statement
Sales	$	598,000
Costs		260,000
Depreciation		64,500
EBIT	$	273,500
Interest		31,500
Taxable income	$	242,000
Taxes (40%)		96,800
Net income	$	145,200

Earnings per share is the net income divided by the shares outstanding, so:

EPS = Net income / Shares outstanding

EPS = $145,200 / 53,000

EPS = $2.74 per share

And dividends per share are the total dividends paid divided by the shares outstanding, so:

DPS = Dividends / Shares outstanding

DPS = $42,500 / 53,000

DPS = $0.80 per share

During the year, Belyk Paving Co. had sales of $2,398,000. Cost of goods sold, administrative and selling

During the year, Belyk Paving Co. had sales of $2,398,000. Cost of goods sold, administrative and selling expenses, and depreciation expense were $1,427,000, $435,200, and $490,200, respectively. In addition, the company had an interest expense of $215,200 and a tax rate of 30 percent. (Ignore any tax loss carryback or carryforward provisions.) (Enter your answer as directed, but do not round intermediate calculations.)

Required:
(a)	What is Belyk’s net income? (Negative amount should be indicated by a minus sign.)

Net income

$

(b)	What is Belyk’s operating cash flow?

Operating cash flow

$

Explanation: (a)

The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:

Income Statement
Sales	$	2,398,000
Cost of goods sold		1,427,000
Other expenses		435,200
Depreciation		490,200
EBIT	$	45,600
Interest		215,200
Taxable income	–$	169,600
Taxes (30%)		0
Net income	–$	169,600

The taxes are zero since we are ignoring any carryback or carryforward provisions.

(b)

The operating cash flow for the year was:

OCF = EBIT + Depreciation – Taxes

OCF = $45,600 + 490,200 – 0

OCF = $535,800

Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing, not an operating, expense.

Graffiti Advertising, Inc., reported the following financial statements for the last two years.

Graffiti Advertising, Inc., reported the following financial statements for the last two years. (Enter your answer as directed, but do not round intermediate calculations.)

2014 Income Statement
Sales	$	567,200
Costs of goods sold		274,005
Selling & administrative		124,729
Depreciation		54,572
EBIT	$	113,894
Interest		19,384
EBT	$	94,510
Taxes		37,804
Net income	$	56,706
Dividends	$	10,000
Addition to retained earnings	$	46,706

GRAFFITI ADVERTISING, INC. Balance Sheet as of December 31, 2013
Cash	$	13,360	Accounts payable	$	9,500
Accounts receivable		18,990	Notes payable		14,504
Inventory		13,798
			Current liabilities	$	24,004
Current assets	$	46,148	Long-term debt	$	136,480
Net fixed assets	$	344,546	Owner's equity	$	230,210
Total assets	$	390,694	Total liabilities and owners’ equity	$	390,694

GRAFFITI ADVERTISING, INC. Balance Sheet as of December 31, 2014
Cash	$	14,346	Accounts payable	$	10,516
Accounts receivable		21,095	Notes payable		16,470
Inventory		22,758
			Current liabilities	$	26,986
Current assets	$	58,199	Long-term debt	$	152,400
Net fixed assets	$	406,307	Owner's equity	$	285,120
Total assets	$	464,506	Total liabilities and owners’ equity	$	464,506

Requirement 1:

Calculate the operating cash flow.

Operating cash flow

$

Requirement 2:

Calculate the change in net working capital.

Change in net working capital

$

Requirement 3:

Calculate the net capital spending.

Net capital spending

$

Requirement 4:

Calculate the cash flow from assets. (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign.)

Cash flow from assets

$

Requirement 5:

Calculate the cash flow to creditors.

Cash flow to creditors

$

Requirement 6:

Calculate the cash flow to stockholders. (Negative amount should be indicated by a minus sign.)

Cash flow to stockholders

$

Explanation: 1:

OCF = EBIT + Depreciation – Taxes

OCF = $113,894 + 54,572 – 37,804

OCF = $130,662

2:

Next, we will calculate the change in net working capital which is:

Change in NWC = NWCend – NWCbeg

Change in NWC = (CAend – CLend) – (CAbeg – CLbeg)

Change in NWC = ($58,199 – 26,986) – ($46,148 – 24,004)

Change in NWC = $9,069

3:

Now, we can calculate the capital spending. The capital spending is:

Net capital spending = NFAend – NFAbeg + Depreciation

Net capital spending = $406,307 – 344,546 + 54,572

Net capital spending = $116,333

4:

Now, we have the cash flow from assets, which is:

Cash flow from assets = OCF – Change in NWC – Net capital spending

Cash flow from assets = $130,662 – 9,069 – 116,333

Cash flow from assets = $5,260

The company spent $5,260 on its assets. The cash flow from operations was $130,662, and the company spent $9,069 on net working capital and $116,333 on fixed assets.

5:

The cash flow to creditors is:

Cash flow to creditors = Interest paid – New long-term debt

Cash flow to creditors = Interest paid – (Long-term debtend – Long-term debtbeg)

Cash flow to creditors = $19,384 – ($152,400 – 136,480)

Cash flow to creditors = $3,464

The cash flow to stockholders is a little trickier in this problem. First, we need to calculate the new equity sold. The equity balance increased during the year. The only way to increase the equity balance is to add to retained earnings or sell equity. To calculate the new equity sold, we can use the following equation:

New equity = Ending equity – Beginning equity – Addition to retained earnings

New equity = $285,120 – 230,210 – 46,706

New equity = $8,204

What happened was the equity account increased by $54,910. Of this increase, $46,706 came from addition to retained earnings, so the remainder must have been the sale of new equity. Now we can calculate the cash flow to stockholders as:

6:

Cash flow to stockholders = Dividends paid – Net new equity

Cash flow to stockholders = $10,000 – 8,204

Cash flow to stockholders = $1,796

The company paid $3,464 to creditors and raised $1,796 from stockholders.

Finally, the cash flow identity is:

Cash flow from assets	=	Cash flow to creditors	+	Cash flow to stockholders
$5,260	=	$3,464	+	$1,796

The cash flow identity balances, which is what we expect.