Question

MANAGERIAL ACCOUNTING HANDOUT PROBLEM 13 Score Name Section Problem (10 points). Bloomington Manufacturing Company is considering the purchase of equipment to expand its productive capacity. The equipment is expected to generate the following cash revenues and expenses over its useful life. BLOOMINGTON MANUFACTURING COMPANY DATA FOR CAPITAL BUDGETING ANALYSIS-EQUIPMENT Cash Revenues Cash Expenses Year 30,000 S 20,000 S 22,000 40,000 25,000 3 50,000 40,000 20,000 4 20,000 30,000 5 The cost of the equipment is $60,000 and the equipment is expected to have a salvage value of $6,000. The company uses 200 % ( double ) declining balance depreciation for all cquipment. The company requires a minimum rate of return after tax of 11% and a maximum payback period of 4 years on its capital investment purchases. The company has a marginal tax rate of 30 % . What is the after tax accounting rate of return on this equipment? Round your answer to four decimal places. What is the after tax payback period on this equipment? Round your answer REQUIRED: (1) (2) to two decimal places. What is the after tax net present value of this equipment? Round your answer to the nearest whole dollar. Should the company purchase the equipment? Explain. (3) (4)

Answer 1

Basic Data Computation of net income and net cash inflows Depreciation As per Year Cash Revnue Cash Expens Working note 1 Profit before tax DEA-B-C 30000 20000 12000 40000 22000 12000 50000 25000 12000 40000 20000 12000 30000 20000 12000 Working note 1 Depreciation as per double declining balance method Straight-line depreciation percent= Salvage value Asset Value 6000 60000 10 % Profit after [email protected]% E=D*0.70 -2000 6000 13000 8000 -2000 Cash inflows F=C+E - 14001 10600 4200 16200 9100 21100 5600 17600 -1400 10600 2*Book value at the beigining of the year= 60000*2 120000 Depreciation= 120000*10% 12000

Amount Accounting rate of return Sno Particulars Average annual net savings(Profit after tax) Working note 2 2 Initial investment Accounting rate of return % (3220/60000*100) 3220 60000 5.367 Average annual net savings(Profit after tax) Working note 2 Year Cash Inflows -1400 4200 9100 5600 -1400 Total 16100 Average(Total/5) 3220 w

Payback Period Year Cash Inflows 10600 16200 21100 17600 10600 Amount invested 60000 Year 1 to 3 inflow 47900 Balance to be recovered (60000-47900) in year 4= 12100 Period=3+12100/17600 Period=3+0.69 Payback Period= 3.69 years

Net Present value( n=5 Years & i=11%) Year Cash Flows PV Factor@11% Present Value A*B - 60000 10600 16200 21100 17600 10600 Net Present value 0.901 0.812 0.731 0.659 0.593 -60000 9550 13148 15428 11594 6291 -3990

As Net Present value is negative thus purchase of machinery is not feasible