Question 1 The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $9 million (the existing equipment has zero salvage value). The attraction of the new machinery is that it is expected to cut manufacturing costs from their current level of $8 a welt to $4. However, as the following table shows, there is some uncertainty both about future sales and about the performance of the new machinery: Calculate the annual cost savings of the expected scenario under the three states of nature. Assume a discount rate of 12%. RW does not pay taxes

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Question 1

The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $9 million (the existing equipment has zero salvage value). The attraction of the new machinery is that it is expected to cut manufacturing costs from their current level of $8 a welt to $4. However, as the following table shows, there is some uncertainty both about future sales and about the performance of the new machinery:

Calculate the annual cost savings of the expected scenario under the three states of nature. Assume a discount rate of 12%. RW does not pay taxes.

Question 2

You are the judge in a settlement case. You need to compute the value of a piece of land in Denver Co. The valuation is subject to the following conditions

The settlement will take place at the end of 2019
The current appraised value of the land on 1/1/2018 is $500.000
The piece of land has a building on it that is uninhabitable. It takes one year to bring the building down at a cost of $100,000. That money must be paid now.
The land can be rented in 2019 at a net proceeds of 40,000
While rented the land cost $20,000 in property taxes
Your real estate adviser notes that selling prices of comparable lands in Denver have declined, in real terms, at an average rate of 3% per year over the last 5 years.
The cost of capital is 10%
The sale of the land at the end of 2019 is subject to a 10 % commission.
What should someone pay today for this land if given the choice?

Develop a 700-word report including the following calculations and using the information to determine whether the new billing system has reduced the mean bill payment time:

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Develop a 700-word report including the following calculations and using the information to determine whether the new billing system has reduced the mean bill payment time:

Assuming the standard deviation of the payment times for all payments is 4.2 days, construct a 95% confidence interval estimate to determine whether the new billing system was effective. State the interpretation of 95% confidence interval and state whether or not the billing system was effective.
Using the 95% confidence interval, can we be 95% confident that µ ≤ 19.5 days?
Using the 99% confidence interval, can we be 99% confident that µ ≤ 19.5 days?
If the population mean payment time is 19.5 days, what is the probability of observing a sample mean payment time of 65 invoices less than or equal to 18.1077 days?
Format your assignment consistent with APA format.

Case Study – Payment Time Case Study
Major consulting firms such as Accenture, Ernst & Young Consulting, and Deloitte & Touche Consulting employ statistical analysis to assess the effectiveness of the systems they design for their customers. In this case, a consulting firm has developed an electronic billing system for a Stockton, CA, trucking company. The system sends invoices electronically to each customer’s computer and allows customers to easily check and correct errors. It is hoped the new billing system will substantially reduce the amount of time it takes customers to make payments. Typical payment times—measured from the date on an invoice to the date payment is received—using the trucking company’s old billing system had been 39 days or more. This exceeded the industry standard payment time of 30 days.

The new billing system does not automatically compute the payment time for each invoice because there is no continuing need for this information. The management consulting firm believes the new system will reduce the mean bill payment time by more than 50 percent. The mean payment time using the old billing system was approximately equal to, but no less than, 39 days. Therefore, if µ denotes the new mean payment time, the consulting firm believes that µ will be less than 19.5 days. Therefore, to assess the system’s effectiveness (whether µ < 19.5 days), the consulting firm selects a random sample of 65 invoices from the 7,823 invoices processed during the first three months of the new system’s operation. Whereas this is the first time the consulting company has installed an electronic billing system in a trucking company, the firm has installed electronic billing systems in other types of companies.

Analysis of results from these other companies show, although the population mean payment time varies from company to company, the population standard deviation of payment times is the same for different companies and equals 4.2 days. The payment times for the 65 sample invoices are manually determined and are given in the Excel® spreadsheet named “The Payment Time Case”. If this sample can be used to establish that new billing system substantially reduces payment times, the consulting firm plans to market the system to other trucking firms.

1. Calculate the annual compound growth rate of the house price since the house was sold to Mark and Ann Kington (since 2000) until the house was listed for sale at a reduced price in 2019. (Round the number of years to the whole number).

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1. Calculate the annual compound growth rate of the house price since the house was sold to Mark and Ann Kington (since 2000) until the house was listed for sale at a reduced price in 2019. (Round the number of years to the whole number). Please show your work.

2. Assume that the growth rate you calculated in question #1 remains the same for the next 30 years. Calculate the price of the house in 30 years after it was listed at a reduced price in 2019. Please show your work.

3. Assume that the growth rate you calculated in question #1 remains the same since Robert E. Lee’s father Henry rented the home in 1812. Calculate the price of the house in 1812. (Round the number of years to the whole number). Please show your work.

4. Assume the growth rate that you calculated in #1 prevailed since 1795. Calculate the price of the house in 1795. (TIP: To get the answer correctly you need to use the price of the house in your calculations in dollars with all zeros). Please show your work.

5. You were using the time value of money concept to answer question #4. Think about the time line for that problem. What is the time point 0 in that problem? Please explain your answer.

6. In April 2018, the listed price of the house was $8.5 million. Calculate the annual compound growth rate of the house price since the house was sold to Mark and Ann Kington (since 2000) until the house was listed for sale in 2018. Compare with your answer to the question #1.

7. Using the growth rate from question #6, calculate the price of the house in 1812. (Round the number of years to the whole number). Please show your work. Compare with your answer to the question #3.

1. Barr Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2007 is as follows:

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1. Barr Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2007 is as follows:

12/31/06 12/31/07

Employee advances $12,000 $ 18,000

Accrued salaries payable 65,000 ?

Salaries expense during the year 650,000

Salaries paid during the year (gross) 625,000

At December 31, 2007, what amount should Barr report for accrued salaries payable?

a. $90,000.

b. $84,000.

c. $72,000.

d. $25,000.

2. Dexter Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $480,000 at December 31, 2006 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $120,000 at December 31, 2006. Outstanding service contracts at December 31, 2006 expire as follows:

During 2007 During 2008 During 2009

$100,000 $160,000 $70,000

What amount should be reported as unearned service contract revenues in Dexter’s December 31, 2006 balance sheet?

a. $360,000.

b. $330,000.

c. $240,000.

d. $220,000.

3. Lett Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be

a. zero.

b. the maximum of the range.

c. the mean of the range.

d. the minimum of the range.

1. In March 2007, an explosion occurred at Howe Co.’s plant, causing damage to area properties. By May 2007, no claims had yet been asserted against Howe. However, Howe’s management and legal counsel concluded that it was reasonably possible that Howe would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Howe’s $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Howe’s December 31, 2006 financial statements, for which the auditor’s fieldwork was completed in April 2007, how should this casualty be reported?

a. As a note disclosing a possible liability of $4,000,000.

b. As an accrued liability of $400,000.

c. As a note disclosing a possible liability of $400,000.

d. No note disclosure of accrual is required for 2006 because the event occurred in 2007.

2. On December 31, 2008, Mendez, Inc. leased machinery with a fair value of $840,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $160,000 beginning December 31, 2008. The lease is appropriately accounted for by Mendez as a capital lease. Mendez’s incremental borrowing rate is 11%. Mendez knows the interest rate implicit in the lease payments is 10%.

The present value of an annuity due of 1 for 6 years at 10% is 4.7908.

The present value of an annuity due of 1 for 6 years at 11% is 4.6959.In its December 31, 2008 balance sheet, Mendez should report a lease liability of

a. $606,528.

b. $680,000.

c. $751,344.

d. $766,528.

3. In a lease that is recorded as a sales-type lease by the lessor, interest revenue

a. should be recognized in full as revenue at the lease’s inception.

b. should be recognized over the period of the lease using the straight-line method.

c. should be recognized over the period of the lease using the effective interest method.

d. does not arise.

. Bleeker Company issued 10,000 shares of its $5 par value common stock having a market value of $25 per share and 15,000 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $480,000. How much of the proceeds would be allocated to the common stock?

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2. Bleeker Company issued 10,000 shares of its $5 par value common stock having a market value of $25 per share and 15,000 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $480,000. How much of the proceeds would be allocated to the common stock?

a. $50,000

b. $218,182

c. $250,000

d. $255,000

3. Adler Corporation has 50,000 shares of $10 par common stock authorized. The following transactions took place during 2008, the first year of the corporation’s existence:

Sold 5,000 shares of common stock for $18 per share.

Issued 5,000 shares of common stock in exchange for a patent valued at $100,000.

At the end of the Adler’s first year, total paid-in capital amounted to

a. $40,000.

b. $90,000.

c. $100,000.

d. $190,000.

Part A (30 points)

Record the following transactions in the basic accounting equation:

a.Brian invests $10,000 cash to begin an accounting service.

b.The company buys office furniture for cash, $600.

c.The company buys additional office furniture on account, $300.

d.The company makes a payment on the office furniture, $200.

Brian’s Accounting Service

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash + Office Furniture = Accounts Payable + Brian’s Capital

Part B (40 points)
The following is a list of accounts and their balances for Benson Company for the month ended June 30, 20xx. Prepare a trial balance in good form.

Cash $1,370
Accounts Payable 770
Office Equipment 900
Benson, Capital 1,500
Benson, Withdrawals 500
Accounts Receivable 1,600
Service Fees 2,730
Salaries Expense 630

Part C (30 points)
The following transactions occurred during June for Campus Cycle Shop. Record the transactions below in the T accounts. Place the letter of the transaction next to the entry. Foot and calculate the ending balances of the T accounts where appropriate.
a. Tyler invested $6,500 in the bike service from his personal savings account.
b. Bought office equipment for cash, $900.
c. Performed bike service for a customer on account, $1,000.
d. Company cell phone bill received, but not paid, $80.
e. Collected $500 from customer in transaction c.
f. Tyler withdrew $300 for personal use.

1. Which of the following is a current liability?

a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund

b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue

c. A long-term debt maturing currently, which is to be converted into common stock

d. None of these

2. Which of the following is not true about the discount on short-term notes payable?

a. The Discount on Notes Payable account has a debit balance.

b. The Discount on Notes Payable account should be reported as an asset on the balance sheet.

c. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.

d. All of these are true.

3. On September 1, 2006, Looper Co. issued a note payable to National Bank in the amount of $1,200,000, bearing interest at 12%, and payable in three equal annual principal payments of $400,000. On this date, the bank’s prime rate was 11%. The first payment for interest and principal was made on September 1, 2007. At December 31, 2007, Looper should record accrued interest payable of

a. $48,000.

b. $44,000.

c. $32,000.

d.$29,334

You can earn $40 in interest on a $1,000 deposit for 8 months. If the EAR is the same regardless of the length of the investment, how much interest will you earn on a $1,000 deposit for:

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You can earn $40 in interest on a $1,000 deposit for 8 months. If the EAR is the same regardless of the length of the investment, how much interest will you earn on a

$1,000 deposit for:

a. 2 months.

b. 1 year.

c. 1.5 years.

a. 2-months.

For a 2-month, $1,000 deposit you will earn

$[removed]. (Round to the nearest cent).

b. 1-year.

For a 1-year, $1,000 deposit you will earn

$[removed]. (Round to the nearest cent).

c. 1.5-years.

For a 1.5-year, $1,000 deposit you will earn

$[removed]. (Round to the nearest cent).

Question 2.

You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $3,053 and you have made every payment on time. The original term of the mortgage was 30 years, and the mortgage is exactly four years and eight months old. You have just made your monthly payment. The mortgage interest rate is 5.798% (APR). How much do you owe on the mortgage today?

The amount you owe today is

$[removed]. (Round to the nearest dollar.)

Question 3.

Consider a project that requires an initial investment of $100,000 and will produce a single cash flow of

$150,000 in 5 years.

a. What is the NPV of this project if the 5-year interest rate is 5.0% (EAR)?

b. What is the NPV of this project if the 5-year interest rate is 10.0% (EAR)?

c. What is the highest 5-year interest rate such that this project is still profitable?

a. What is the NPV of this project if the 5-year interest rate is 5.0% (EAR)?

The NPV in this case (EAR equals 5.0 %) is $[removed]. (Round to the nearest dollar.)

b. What is the NPV of this project if the 5-year interest rate is 10.0% (EAR)?

The NPV in this case (EAR equals 10.0 %) is $[removed]. (Round to the nearest dollar.)

c. What is the highest 5-year interest rate such that this project is still profitable?

The highest EAR such that this project is still profitable is [removed]% (Round to two decimal places.)

Question 4.

In the summer of 2008, at Heathrow airport in London, Bestofthebest (BB), a private company, offered a lottery to win a Ferrari or 87,000 British pounds, equivalent at the time to about $174,000. Both the Ferrari and themoney, in 100 pound notes, were on display. If the U.K. interest rate was 4% per year, and the dollar interest rate was 2% per year (EARs), how much did it cost the company in dollars each month to keep the cash on display? That is, what was the opportunity cost of keeping it on display rather than in a bank account? (Ignore taxes.)Hint: Make sure to round all intermediate calculations to at least five decimal places.

The opportunity cost of keeping it on display rather than in a bank account is £[removed] per month.  (Round to two decimal places).

Question 5.

A 30-year bond with a face value of $1,000 has a coupon rate of 5.50%, with semiannual payments.  

a. What is the coupon payment for this bond?

b. Enter the cash flows for the bond on a timeline

a. What is the coupon payment for this bond?

The coupon payment for this bond is $[removed]. (Round to the nearest cent.)

b. Enter the cash flows for the bond on a timeline.

Cash Flow

CF1

CF2

CF59

CF60

Amount (Round to the nearestcent.)

$[removed]

$[removed]

$[removed]

$[removed]

Question 6.

Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,750 in a year. If the cost of capital of this investment opportunity is 8%, what is its NPV? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

If the cost of capital of this investment opportunity is 8%, what is its NPV?

The NPV of the investment is $[removed]. (Round to the nearest cent.)

Should you undertake the investment opportunity?

Since the NPV is [removed]you should [removed]the deal! (Select from the drop-down menus.)

Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

The IRR is [removed]%. (Round to two decimal places.)

The maximum deviation allowable in the cost of capital is [removed]%. (Round to two decimal places.)

Question 7.

You are considering an investment in a clothes distributer. The company needs $100,000

today and expects to repay you $120,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 10%. What does the IRR rule say about whether you should invest?

What is the IRR of this investment opportunity?  

The IRR of this investment opportunity is [removed]%. (Round to one decimal place.)

Given the riskiness of the investment opportunity, your cost of capital is 10%. What does the IRR rule say about whether you should invest?

The IRR rule says that you

[removed]

should not invest

should not invest

should invest

should be indifferent

.

(Select from the drop-down menu.)

QUESTION 8.

You are considering making a movie. The movie is expected to cost $10.5 million upfront and take a year to make. After that, it is expected to make $4.6 million in the first year it is released (end of year 2) and $1.7 million for the following four years (end of years 3 through 6) . What is the payback period of this investment? If you require a payback period of two years, will you make the movie? What is the NPV of the movie if the cost of capital is 10.3%? According to the NPV rule, should you make this movie?

What is the payback period of this investment?

The payback period is [removed] years.  (Round up to nearest integer.)

Based on the payback period requirement, would you make this movie? [removed]

▼

What is the NPV of the movie if the cost of capital is 10.3%?

The NPV is $[removed] million. (Round to three decimal places.)

According to the NPV rule, should you make this movie?

According to the NPV rule you should

[removed]

▼

make

not make

the movie.  (Select from the drop-down menu.)

QUESTION 9.

Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5.45 million on TV, radio, and print advertising this year for the campaign. The ads are expected to boost sales of the Mini Mochi Munch by $8.96 million this year and $6.96 million next year. In addition, the company expects that new consumers who try the Mini Mochi Munch will be more likely to try Kokomochi’s other products. As a result, sales of other products are expected to rise by $3.03 million each year. Kokomochi’s gross profit margin for the Mini Mochi Munch is 33%, and its gross profit margin averages 25% for all other products. The company’s marginal corporate tax rate is 30% both this year and next year. What are the incremental earnings associated with the advertising campaign?

Note: Assume that the company has adequate positive income to take advantage of the tax benefits provided by any net losses associated with this campaign.

Calculate the incremental earnings for year 1below:  (Round to three decimalplaces.)

Year 1

Incremental Earnings Forecast ($ million)

Sales of Mini Mochi Munch

$

__________

Other Sales

$

__________

Cost of Goods Sold

$

Gross Profit

$

__________

Selling, General, and Administrative

$

__________

Depreciation

$

EBIT

$

___________

Income Tax at 30%

$

Incremental Earnings

$

Calculate the incremental earnings for year 2 below: (Round to three decimal places.)

Year 2

Incremental Earnings Forecast ($ million)

Sales of Mini Mochi Munch

$

__________

Other Sales

$

__________

Cost of Goods Sold

$

Gross Profit

$

__________

Selling, General, and Administrative

$

__________

Depreciation

$

EBIT

$

__________

Income Tax at 30%

$

Incremental Earnings

$

QUESTION 10.

Cellular Access Inc., is a cellular telephone service provider that reported net operating profit after tax (NOPAT) of $250 million for the most recent fiscal year. The firm had depreciation expenses of $100 million, capital expenditures of $200 million, and no interest expenses. Working capital increased by $10

million. Calculate the free cash flow for Cellular Access for the most recent fiscal year.

The free cash flow is $[removed] million. (Round to the nearest integer.)