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$ (70,000)
(200,000)
(29,840)
(39,600)
(100,000)
10,000
$(429,440)
$ (28,000)
40,000
(12,000)
64,000
$ 64,000
=
=
Find 6.710 in the 10-year row of Table IV of Appendix A. It falls in the 8 percent
column, so the internal rate of return on the runway project is 8 percent.
Conclusion: From a purely economic perspective, the longer runway should not be
approved, since its internal rate of return (8 percent) is lower than the hurdle rate (12
percent). Qualitative considerations, such as convenience for the countys residents,
should also be considered.
$ (28,000)
40,000
(12,000)
64,000
$ 64,000
5.650
$361,600
(70,000)
(200,000)
(29,840)
(39,600)
(100,000)
10,000
$ (67,840)
From a purely economic perspective, the board should not approve the runway, since its
net present value is negative. Qualitative considerations, such as the convenience of the
countys residents, should also be taken into consideration by the board.
Data that are likely to be most uncertain include the following:
Each of these data covers a lengthy time horizon. Moreover, they depend on
unpredictable factors, such as the level of economic activity in the county, the
inflation rate, and the rate of deterioration of the runway (which depends on the
weather).
The least uncertain data would likely include the following:
These data all refer to the present or near future. Acquisition costs can be determined
by direct inquiry, and construction costs can be determined by obtaining estimates or
bids from contractors.
3.
Annuity discount factor associated
with the internal rate of return
For the internal rate of return to be 12 percent, the annuity discount factor must be 5.650 (Table
IV in Appendix A: r = .12, n = 10). Therefore:
5.650
5.650
$429,440*
annual incremental benefit
$429,440
= $76,007 (rounded)
5.650
$ 76,007
$20,000
28,000
12,000
60,000
$136,007
(40,000)
$ 96,007
Conclusion: In order for the longer runway to be economically justifiable, the $20,000 annual
promotional campaign must result in an increase in tax revenue of $96,007 per year.
Note: Some students got $32,007 (96,007-64,000), which is also acceptable. It depends on the
understanding of the word incremental in the problem, i.e., total incremental tax revenue or the
amount incremental to the original estimate.
PROBLEM 2
1.
$ (1,600,000)
(800,000)
$ (2,400,000)
6.145
$(14,748,000)
$ (1,200,000)
(440,000)
$ (1,640,000)
6.145
$(10,077,800)
(800,000)
(2,000,000)
480,000
(80,000)
$(12,477,800)
$ (2,270,200)
Cash flow
10% factor
PV
Incremental staff
compensation
1-10
(400,000)
6.145
(2,458,000)
1-10
(360,000)
6.145
(2,212,200)
Construction costs
now
800,000
1.000
800,000
Acquisition of equipment
now
2,000,000
1.000
2,000,000
now
(480,000)
1.000
(480,000)
now
80,000
1.000
80,000
NPV
3.
(2,270,200)
Qualitative factors to be considered: effectiveness of fighting the fires, public safety,
aesthetic considerations, etc. For example, public safety might be greater with eight firecontrol stations dispersed throughout the state forest.
PROBLEM 3
1. Computation of the annual net cost savings:
Savings in labor costs (25,000 hours $16 per hour) .............................
Savings in inventory carrying costs.........................................................
Total .........................................................................................................
Less increased power and maintenance cost
($2,500 per month 12 months) .........................................................
Annual net cost savings ...........................................................................
2.
Cost of the robot ........................
Installation and software............
Cash released from inventory ....
Annual net cost savings .............
Salvage value .............................
Net present value .......................
Year(s)
Now
Now
1
1-10
10
$400,000
210,000
610,000
30,000
$580,000
Amount of Cash
20%
Present Value of
Flows
Factor
Cash Flows
$(1,800,000)
1.000
$(1,800,000)
$(900,000)
1.000
(900,000)
$400,000
0.833
333,200
$580,000
4.192
2,431,360
$70,000
0.162
11,340
$ 75,900
Yes, the robot should be purchased. It has a positive net present value at a 20% discount rate.
3.
$360,000
210,000
570,000
30,000
$540,000
Amount of Cash
20%
Present Value of
Flows
Factor
Cash Flows
$(1,800,000)
1.000
$(1,800,000)
$(975,000)
1.000
(975,000)
$400,000
$540,000
$70,000
0.833
4.192
0.162
333,200
2,263,680
11,340
$ (166,780)
It appears that the company did not make a wise investment because the rate of return that
will be earned by the new equipment is less than 20%.
$166,780
= $39,785
4.192
Thus, the intangible benefits in (a) would have to generate a cash inflow of $39,785 per
year in order for the robot to yield a 20% rate of return.
PROBLEM 4
1. Rachel Arnetts revision of her first proposal can be considered a violation of the IMAs
Statement of Ethical Professional Practice. She discarded her reasonable projections and
estimates after she was questioned by William Earle. She used figures that had a remote
chance of occurring. By doing this, she violated the requirements to Communicate
information fairly and objectively and disclose all relevant information that could
reasonably be expected to influence an intended users understanding of the reports, analyses,
or recommendations. By altering her analysis, she also violated the Integrity standard. She
engaged in an activity that would prejudice her ability to carry out her duties ethically. In
addition, she violated the Competence standardProvide decision support information and
recommendations that are accurate, clear, concise, and timely.
2. The internal controls Fore Corporation could implement to prevent unethical behavior
include:
requiring the internal audit staff to review all capital expenditure proposals or
contracting external auditors to review the proposal if the corporation lacks manpower.
etc.