Accounting Final Exam Problems

Question 1     
 Evaluate the following Cash Flows using the criteria in parts a-f with a MARR of 15%.  Indicate for each part whether the proposal should be accepted or rejected.     
 MARR= 15%    
 Year 0 1 2 3 4
 Cash Flow ($50,000) $13,200  $14,300  $22,100  $25,000
      
a Present Worth (PW)     
b Future Worth (FW)     
c Annual Worth (AW)     
d Internal rate of Return (IRR)     
e Discounted Payback by end of year (EOY) 3     
f Discounted Payback by end of year (EOY) 4     

Question 2     Score 0 
3. Sheldon Stahl, CEO of Modern Medical Mechanics (M3), has convened his staff to select an investment for the coming year.  A subcommittee previous pared the list down to the following based on a strategic evaluation of each.  Now a decision has to be made as to which one should be approved.  M3 uses a MARR of 10%.  What should the choice when using only the IRR criterion?       
       
  Investment in Year 0 1 2 3  
 Security System Upgrades ($725,000) $280,000  $305,000  $360,000   
 X-ray machine controls ($950,000) $350,000  $400,000  $500,000   
 Pharmaceutical robots ($575,000) $225,000  $250,000  $275,000   
 Warehouse automation ($700,000) $275,000  $300,000  $350,000   

Question 3      
Solarium, LLC has analyzed their 2012 revenue and cost data and determined that the sales of 400,000 units worth $3,500,000 incurred $2,200,000 of variable costs and $800,000 if fixed costs. If the price per unit and variable cost per unit is constant for the coming year, and the fixed cost rises $100,000 to pay for an expanded marketing program:       
a What will the sales have to be to break even in the coming year?      
b What will the sales have to be in the coming year to earn the same amount of profit as last year?      
c What would the unit price have to be in the coming year to achieve a profit of $750,000 with the increased marketing and a sales volume of 500,000 units.      

Question 4     
Precision Products, Inc. has developed a new “Luxury” model that is expected to take sales away from the “Premium” model.  Forecasted sales of the Premium model, both with and without the introduction of the Luxury model, and the sales of the new Luxury model are shown below for years 2014-16.   The unit prices and COGS for the Premium and Luxury products  are also shown below.  Determine the Gross Margin only for each year that could  be used in preparation of the evaluation of the Luxury model proposal.      
 Sales Quantities 2014 2015 2016 2017 
 Premium w/o Luxury 800,000 815,000 820,000 825,000 
 Premium with Luxury 790,000 770000 750000 745000 
 Luxury 100000 120000 150000 150000 
      
  Premium Luxury   
 Sales price each $699  $980    
 COGS Each $526  $615    

Question 5     
A project proposal for a new product will require a buildup of $50,000 of inventory in year 0 before sales are started.  Associated with this, accounts payable will also increase by $20,000 in year 0.  Both of these will stay constant at these amounts in years 1-3 and beyond.  After sales start in year 1, accounts receivable is expected to increase to $30,000 in year 1, to $40,000 in year 2, and to $50,000 in year 3 and continue at $50,000 into the future.  Assume that no other working capital items are affected.      
a What will be the change in working capital for each year (0-3)?       
b What will be the change in cash flow from working capital in years 0-3?     

Question 6      
A pharmaceutical company is evaluating a proposal for a new product using a 4 year time span.  The product line is expected to be sold for $1,000,000 to another pharmaceutical company at the end of the four years.  The revenue COGS, Gross margin and S.G.& A. (does not include depreciation) is shown below.  The investment made in this product (assume it is all in year 0) was $500,000.  The working capital needed for each of the four years is $200,000 in year 0, $250,000 in year 1, $300,000 in year 2, $300,000 in year 3, and decline to zero by the end of year 4.  The MARR is 20%,  depreciation is to use 5-year MACRS, the income  tax rate is 25%,and the capital gains tax rate is 15%.   Complete the Income Statement, prepare a cash flow statement, and determine the present worth and internal rate of return.         
 Investment $500,000      
 Sale price at end of 4 years $1,000,000      
 Income Tax rate 25%     
 Capital Gains Tax rate 15%     
 ` 5 year 20.00% 32.00% 19.20% 11.52% 

Question 7     Score 0  
 A robotic assembly work center has been proposed.  It would cost $750,000 to purchase and $150,00 to install and train personnel.  It is expected to reduce cost by $200,000 annually, with no effect on revenues. If 5-year MACRS, a MARR of 15%, tax rates of 20% and a time span of 5 years is used, would the acquisition be justified using a five year time span.  Assume that the robot assembly center will be worth $400,000 at the end of 5 year, although it is expected to be kept in service beyond that.  No change on working capital or other expenses is expected.       
   1 2 3 4 5 
 MACRS 5 year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%

Question 8          
Maryland Technical  Acumen (MTA) is considering a new product line which will require an investment in production equipment and facilities in the current year.   Management needs information for setting the price and a  variable COGS that needs to be achieved.  Below is an Income and cash flow statements that management has approved.  (If there are errors or oversights, that is their problem, not yours).             
a Determine the sensitivity of the present worth to changes in the Variable Cost of Goods Sold from $10 through $14.          
b Determine the Unit Price that would achieve the MARR (PW = 0) when the variable cost of goods sold is $15.00 and the quantity sold is 50,000.  Explain how  you determined this.          
c If the variable COGS was $14.00 and the price was reduced to $47.99, how many units would have to be sold to achieve a net Income of $250,000 in year 1?  Explain how  you determined this.          
 Unit Price  $50.00  (price each) Fixed COGS $300,000       
 Quantity 50,000   Variable COGS $12.00  (cost each)     
 Income tax rate 35%  G.S.& A. $800,000  annual     
 Capital Gains Tax rate 0%  Depreciation MACRS 5 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%
 Working capital no change  salvage $0  in year 5     
 MARR 15%         
 Investment $1,800,000          

Question 9      
Due to the budget sequester, the bridge department had their  repair budget reduced for the coming year.  The cost of repair for several bridges needing repair are shown below.  Also shown is the average number of cars per day that travel over each bridge.   If the bridge department only has sufficient resources to repair one bridge per year, which one should be repaired first from a cost effectiveness perspective.       
       
 Bridge Repair Costs Average Cars per day    
 Washington $2,400,000  1500 $1,600    
 Adams $2,700,000  1400    
 Jefferson $2,300,000  1640    
 Madison $2,240,000  1550    
 Monroe $1,900,000  1300    
 Jackson $2,000,000  1440    

Question 10
Should different financial analyses be used in nonprofit and for-profit organizations? Justify your answer..  Answer below, or attach a Word Document   Limit your answer to 500 words or less.