Forcing managers to look ahead and state objectives for thefuture

”

1) .0/msohtmlclip1/01/clip_image001.gif””>Which of the following is NOT a benefit
ofbudgeting?
A)
Allowing managers to build in some budgetaryslack
B)
Forcing managers to look ahead and state objectives for thefuture
C)
Providing lead time to solve potentialproblems
D)
Providing motivation for employees to work towardobjectives
E)
Creating standards against which actual performance can bemeasured

2) .0/msohtmlclip1/01/clip_image001.gif””>Which of the following is NOT true
regarding the masterbudget?
A)
Information from the sales budget is used for budgeting cashreceipts
B)
Information from the selling and administrative budget is used for
budgeting cashpayments
C)
Information from the direct labor budget is used for the cost of goods
soldbudget
D)
A budgeted capital expenditure results in a cash outflow in the cashbudget
E) All of the above are truestatements

3) .0/msohtmlclip1/01/clip_image001.gif””>Actual sales for Beauty Beavis
Corporation in May were $200,000 (5,000 units sold). IfBeauty Beavis projects an increase in units sold of 10% per
month and it will raise the price per unit by
$2, what is the amount of budgeted sales revenue for the month ofJune?

$200,000

$215,500

$220,000

$226,000

$231,000

4) .0/msohtmlclip1/01/clip_image001.gif””>Meathead Corporation is preparing its
quarterly Raw Materials Purchases Budget. The
beginning Raw Materials balance is 55,000 units, and Meathead wants an
ending Raw Materials balance thatis
80% of the beginning amount. Historical data shows that 5% of Raw Materials
purchasesare returned to suppliers
due to defects. If Meathead Corporation
projects needing 600,000 unitsof
Raw Materials for production in the quarter, it should budget for gross
purchasesof:
A)
643,157units
B)
641,550units
C) 635,000units
D) 620,000units
E)
618,450units

5) .0/msohtmlclip1/01/clip_image001.gif””>Psycho Company budgets for production of
200,000 units in the upcoming quarter. Toproduce
one unit, it requires $10 of direct materials, 1.5 hours of direct labor, and
overhead is applied ata rate of
50% of direct labor. If manufacturing line workers are paid $20/hour, the
budgeteddirect labor cost for the
quarter shouldbe:

$300,000

$2,000,000

$6,000,000

$6,300,000

$9,000,000

6) .0/msohtmlclip1/01/clip_image002.gif””>Warhorse Enterprises breaks down its
selling and administrative expense budget as
follows:

Office SuppliesExpense

$ 1,000

Office WagesExpense

17,000

DepreciationExpense

4,000

MiscellaneousExpense

6,000

On the companys cash budget, the company
should budget for selling and administrative
expenses:
A)
A cash outflow of$18,000
B)
A cash outflow of$24,000
C)
A cash outflow of$28,000
D)
A cash outflow of$32,000
E)
A cash inflow of$28,000

7) .0/msohtmlclip1/01/clip_image003.gif””>Octomom recently
signed a contract to provide motivational speeches on how to be amodel citizen. The contract is for three
years. She will be paid $10,000 per year at the beginning ofeach year. However the funds will be
held in a trust, to which she will not have access until the end ofthe third year. If the trust expects to
earn 9% on those funds, how should Octomom calculatethe amount held by the trust on her behalf at the end of year3?
A)
Future Value of1
B)
Present Value of anAnnuity
C)
Present Value of an AnnuityDue
D)
Future Value of anAnnuity
E)
Future Value of an AnnuityDue

8) .0/msohtmlclip1/01/clip_image003.gif””>Settle the Score Contractors is in
negotiation to purchase equipment; it offers the seller a 4year note payable with a face value of
$70,000; the interest rate for similar notes is 8% and all principalis due in 4 years. If the seller accepts
the deal, the actual purchase price of the equipmentis:

$51,149

$51,450

$70,000

$95,235

$95,802

9) .0/msohtmlclip1/01/clip_image002.gif””>Average Joe won $120,000 in the local
lottery, which has several payment options. Assuminga time value of money rate of 3%, which option is worth themost?
A)
A one-time payment of $120,000, paid one year fromtoday
B)
An annuity payment of $30,000 each quarter (end of quarter) for the
nextyear
C)
An annuity payment of $30,000 each quarter (beginning of quarter) for
the nextyear
D)
An annuity payment of $10,000 each month (end of month) for the nextyear
E)
An annuity payment of $10,000, each month (beginning of month) for the
nextyear

10) .0/msohtmlclip1/01/clip_image003.gif””>Sardigna Natzione just received a
restricted contribution from a donor. The gift of$1,500,000 cash must be put in a mutual fund indexed to the
stock market for 40 years before it can be used.If Sardigna Natzione expects the fund to return 10% annually,
how much will be available at the endof
the 40 yearperiod?

$33,150

$1,500,000

$14,668,650

$16,597,223

$67,888,950

11) .0/msohtmlclip1/01/clip_image002.gif””>Johnson S.P.A. invested $100,000 in a
capital project; it has a 3 year life and a salvage valueof
$40,000.
If Johnson projects net income from the project to be $50,000 per year, the
accountingrate of return (ARR)
based on the average investmentis:
A) 47%
B) 50%
C) 71%
D) 83%
E) 167%

12) .0/msohtmlclip1/01/clip_image003.gif””>For which of the following capital
budgeting techniques is it necessary to know net income onthe accrual basis?
A)
PaybackPeriod
B)
Discounted PaybackPeriod
C)
Accounting Rate of Return(ARR)
D)
Net Present Value(NPV)
E)
Internal Rate of Return(IRR)

13) .0/msohtmlclip1/01/clip_image003.gif””>Bush Gardening Company is considering
purchasing a machine for $21,000. The machine
will generate net cash flows of $2,000 per year. Annual depreciation
expense would be $1,500. Whatis
the payback period for the newmachine?
A)
4 years
B)
6 years
C)
10.5years
D)
14years
E)
42years

14) .0/msohtmlclip1/01/clip_image003.gif””>Which of the following is a good
guideline regarding the Internal Rate of Return(IRR)?
A)
If the internal rate of return is greater than inflation, accept theproject
B)
If the internal rate of return is less than the cost of capital,
accept theproject
C)
If the internal rate of return is greater than the cost of capital,
decline theproject
D)
The internal rate of return can never be equal to the cost ofcapital
E)
None of the above are goodguidelines

15) .0/msohtmlclip1/01/clip_image003.gif””>A synonym for what
if analysisis:
A)
Differential analysis
B)
Sensitivityanalysis
C)
Alternativeanalysis
D)
Make or breakanalysis
E)
Prioritizationanalysis

BUDGETING AND PLANNING

Iron
Creatures Enterprises has budgeted thefollowing:

February

March

April

May

TotalSales

$100,000

$??????

MerchandisePurchases

$60,000

$90,000

$120,000

$70,000

Cash
sales account for one-fifth of total sales, while the remaining four-fifths are
on account. Iron Creaturesbudgets
for sales of 10,000 units in February. Unit sales projected for March, April,
and May are 12,000 (March),11,000
(April), and 14,000 units(May).

Past
experience indicates collections on account are asfollows:

40% will be collected in the month of
sale

45% will be collected in the followingmonth

10% will be collected in the 2nd month following thesale

5% are nevercollected

Purchases of merchandise
inventory are all on credit; 25% is paid in the month of purchase, 50% is paid
in the1st month after the purchase
and 25% in the 2nd month following thepurchase.

Other
items budgeted include thefollowing:

A) Selling and Administrative
Expenses of $70,000 per year, including $10,000 of annual depreciationexpense
B) Equipment costing $45,000 will
be purchased for cash inApril
C) Fixed assets with a cost of
$30,000 and accumulated depreciation of $18,000 will be sold in May; a gainof
$5,000
is expected to berealized
D) The company will purchase
stock of various other companies in the month of April, paying $20,000cash
E) Interest on any line of credit
loan must be paidmonthly

Iron
Creatures wishes to maintain a minimum cash balance of $12,000 at the end of
each month. Thecompany borrows
money from the bank at 6% interest if necessary to maintain the minimum cash
balance. Borrowedmoney is repaid
in months when there is an excess cash balance.
The beginning cash balance on April 1 is projected tobe
$12,000. The beginning loan balance on April 1 is
projected to be$31,000.

1) Complete the supporting
schedules for cash collections from sales and cash payments for merchandise.

CASH
COLLECTIONS ON SALES

CollectionMonth

SaleMonth

Feb.

March

April

May

June

July

Never

CASHSALES

April
(TOTAL: )

May
(TOTAL: )

CREDITSALES

February(TOTAL: )

March
(TOTAL: )

April
(TOTAL: )

May
(TOTAL: )

TOTAL COLLECTION ONCREDIT

CASH PAYMENTS ON
MERCHANDISE PURCHASES

PaymentMonth

PurchaseMonth

Feb.

March

April

May

June

July

Never

CREDITSALES

February(TOTAL: )

March
(TOTAL: )

April
(TOTAL: )

May
(TOTAL: )

TOTAL PAYMENT ONMERCHANDISE

2)
Prepare a cash budget for Iron Creatures Enterprises for the months of
April and May. Be sure to indicatethe
ending cash balance and ending loan balance for each month.

APRIL MAY

Beginning of Month LoanBalance $ $
—————————————————————————————————————————————————–

Beginning of Month CashBalance $ $

Add: Collections fromCustomers

.0/msohtmlclip1/01/clip_image004.gif””>.0/msohtmlclip1/01/clip_image004.gif””>CashSales

.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>CreditSales

.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Add:

.0/msohtmlclip1/01/clip_image005.gif””>Less: Payment for
MerchandisePurchases

.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Less:

.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image006.gif””>Less:

.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Less:

.0/msohtmlclip1/01/clip_image005.gif””>Preliminary End of Month CashBalance

.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Add: LoanAdditions

.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Less: LoanPayments

End of Month CashBalance $ $
—————————————————————————————————————————————————–

End of Month LoanBalance $ $

TIME VALUE OF MONEY
SHOW ALL WORK ANDCALCULATIONS!!!!

1)
Rain Makers Corporation is negotiating a five year contract with its
new CEO, Earl Honeywood. Thecorporation
has proposed two contract options for the CEO, outlined asfollows:

OPTION1: A five year contract, starting January 1, Year 1, for
$6,000,000. Earl Honeywood wouldbepaid
$1,200,000 each year at the end of the year (December 31) for five consecutiveyears.
OPTION2: A five year contract, starting January 1, Year 1, for
$6,800,000. Earl Honeywood wouldbepaid
at the end of each year (December 31). He would receive $1,000,000 in Years 1through 3, and then $1,900,000 in Years 4
and5.

You have been hired as Earls investment
manager, and believe that Earl should consider the time value of moneyat12% before
making his decision. Calculate the
present value of the two contract options to aid Earl in hisdecision.

A)
Present Value of OPTION 1:

B)
Present Value of OPTION 2:

2) Your strange neighbor from
down the street heard that you were an aspiring accountant and asked youfor advice regarding his retirement
plan. Specifically, he wants to retire in 20 years and has never contributed toa retirement plan. Respond to the
followingquestions:

A) If he contributes $5,500 at
the endof each year for 20 years
and the return on his investment is 6% peryear,
how much money will be in his account when he is ready for retirement?

B) Using the same
information as A, what amount would be in his account after twenty years if
hecontributed the $5,500 at the beginning
of each year instead of the end?

C) If your strange neighbor
wanted to have $600,000 in his account when he retires and wanted to invest atthe
endof each year, how much would he have to invest per year assuming a
rate of return of 8%?

3) You are in business
negotiations with Mr. Mohammed Ezekiel Abedube, a Nigerian prince who you met
onthe Internet after he sent you an
unsolicited e-mail. In exchange for your assistance, he promises youquarterly payments of $200,000 (at the
end of each quarter) for 2 years and then an annual payment of $1,000,000 (atthe end of each year) for years 3 through
10. If you consider the time value of money to be 8% and assuming thathemakes
good on his promise, what are his future payments worth to you today?

CAPITAL BUDGETINGSHOW
ALL WORK ANDCALCULATIONS!!!!

1) Grimason
Organization is considering the purchase of a machine that costs $100,000. It
calculates thatthe purchase would contribute
$30,000 in before-tax income to the company. The company pays tax at anaverage 35% rate. The machines
estimated useful life is 10 years with a salvage value of $20,000. Thecompany depreciates all fixed assets
using the straight-line method. The Grimason Organizations desired rate of
returnis 12%; the present value of
an annuity of 1 at 12% for ten periods is 5.65.
The present value of 1 due inten periods at 12% is0.322.

A) What is the payback
period? NOTE: Just calculate regular payback period, notdiscounted!

B) What the accounting rate of
return based on the average investment?

2) The following is information
regarding two alternative investments being considered by Bob-Fruit Company.The company requires a 10% return on
investments. The equipment for Project A has no salvage value;the equipment for Project B has a salvage
value of $25,000 (not included in the net cash flows indicatedbelow).

PROJECTA

PROJECTB

InitialInvestment

($175,000)

($145,000)

Expected net cash flows inyear:

40,000

32,000

56,000

50,000

80,295

66,000

90,400

72,000

55,000

29,000

A)
Calculate the payback period for PROJECT A.

B) Calculate the net present
value and the profitability index for PROJECT
A.

C) Calculate the payback period
for PROJECT B).

D) Calculate the net present
value (5 points) and the
profitability index (3 points) for
PROJECTB.1) .0/msohtmlclip1/01/clip_image001.gif””>Which of the following is NOT a benefit
ofbudgeting?A)
Allowing managers to build in some budgetaryslackB)
Forcing managers to look ahead and state objectives for thefutureC)
Providing lead time to solve potentialproblemsD)
Providing motivation for employees to work towardobjectivesE)
Creating standards against which actual performance can bemeasured2) .0/msohtmlclip1/01/clip_image001.gif””>Which of the following is NOT true
regarding the masterbudget?A)
Information from the sales budget is used for budgeting cashreceiptsB)
Information from the selling and administrative budget is used for
budgeting cashpaymentsC)
Information from the direct labor budget is used for the cost of goods
soldbudgetD)
A budgeted capital expenditure results in a cash outflow in the cashbudgetE) All of the above are truestatements3) .0/msohtmlclip1/01/clip_image001.gif””>Actual sales for Beauty Beavis
Corporation in May were $200,000 (5,000 units sold). IfBeauty Beavis projects an increase in units sold of 10% per
month and it will raise the price per unit by
$2, what is the amount of budgeted sales revenue for the month ofJune?A)$200,000B)$215,500C)$220,000D)$226,000E)$231,0004) .0/msohtmlclip1/01/clip_image001.gif””>Meathead Corporation is preparing its
quarterly Raw Materials Purchases Budget. The
beginning Raw Materials balance is 55,000 units, and Meathead wants an
ending Raw Materials balance thatis
80% of the beginning amount. Historical data shows that 5% of Raw Materials
purchasesare returned to suppliers
due to defects. If Meathead Corporation
projects needing 600,000 unitsof
Raw Materials for production in the quarter, it should budget for gross
purchasesof:A)
643,157unitsB)
641,550unitsC) 635,000unitsD) 620,000unitsE)
618,450units5) .0/msohtmlclip1/01/clip_image001.gif””>Psycho Company budgets for production of
200,000 units in the upcoming quarter. Toproduce
one unit, it requires $10 of direct materials, 1.5 hours of direct labor, and
overhead is applied ata rate of
50% of direct labor. If manufacturing line workers are paid $20/hour, the
budgeteddirect labor cost for the
quarter shouldbe:A)$300,000B)$2,000,000C)$6,000,000D)$6,300,000E)$9,000,0006) .0/msohtmlclip1/01/clip_image002.gif””>Warhorse Enterprises breaks down its
selling and administrative expense budget as
follows:Office SuppliesExpense$ 1,000Office WagesExpense17,000DepreciationExpense4,000MiscellaneousExpense6,000On the companys cash budget, the company
should budget for selling and administrative
expenses:A)
A cash outflow of$18,000B)
A cash outflow of$24,000C)
A cash outflow of$28,000D)
A cash outflow of$32,000E)
A cash inflow of$28,0007) .0/msohtmlclip1/01/clip_image003.gif””>Octomom recently
signed a contract to provide motivational speeches on how to be amodel citizen. The contract is for three
years. She will be paid $10,000 per year at the beginning ofeach year. However the funds will be
held in a trust, to which she will not have access until the end ofthe third year. If the trust expects to
earn 9% on those funds, how should Octomom calculatethe amount held by the trust on her behalf at the end of year3?A)
Future Value of1B)
Present Value of anAnnuityC)
Present Value of an AnnuityDueD)
Future Value of anAnnuityE)
Future Value of an AnnuityDue8) .0/msohtmlclip1/01/clip_image003.gif””>Settle the Score Contractors is in
negotiation to purchase equipment; it offers the seller a 4year note payable with a face value of
$70,000; the interest rate for similar notes is 8% and all principalis due in 4 years. If the seller accepts
the deal, the actual purchase price of the equipmentis:A)$51,149B)$51,450C)$70,000D)$95,235E)$95,8029) .0/msohtmlclip1/01/clip_image002.gif””>Average Joe won $120,000 in the local
lottery, which has several payment options. Assuminga time value of money rate of 3%, which option is worth themost?A)
A one-time payment of $120,000, paid one year fromtodayB)
An annuity payment of $30,000 each quarter (end of quarter) for the
nextyearC)
An annuity payment of $30,000 each quarter (beginning of quarter) for
the nextyearD)
An annuity payment of $10,000 each month (end of month) for the nextyearE)
An annuity payment of $10,000, each month (beginning of month) for the
nextyear10) .0/msohtmlclip1/01/clip_image003.gif””>Sardigna Natzione just received a
restricted contribution from a donor. The gift of$1,500,000 cash must be put in a mutual fund indexed to the
stock market for 40 years before it can be used.If Sardigna Natzione expects the fund to return 10% annually,
how much will be available at the endof
the 40 yearperiod?A)$33,150B)$1,500,000C)$14,668,650D)$16,597,223E)$67,888,95011) .0/msohtmlclip1/01/clip_image002.gif””>Johnson S.P.A. invested $100,000 in a
capital project; it has a 3 year life and a salvage valueof$40,000.
If Johnson projects net income from the project to be $50,000 per year, the
accountingrate of return (ARR)
based on the average investmentis:A) 47%B) 50%C) 71%D) 83%E) 167%12) .0/msohtmlclip1/01/clip_image003.gif””>For which of the following capital
budgeting techniques is it necessary to know net income onthe accrual basis?A)
PaybackPeriodB)
Discounted PaybackPeriodC)
Accounting Rate of Return(ARR)D)
Net Present Value(NPV)E)
Internal Rate of Return(IRR)13) .0/msohtmlclip1/01/clip_image003.gif””>Bush Gardening Company is considering
purchasing a machine for $21,000. The machine
will generate net cash flows of $2,000 per year. Annual depreciation
expense would be $1,500. Whatis
the payback period for the newmachine?A)
4 yearsB)
6 yearsC)
10.5yearsD)
14yearsE)
42years14) .0/msohtmlclip1/01/clip_image003.gif””>Which of the following is a good
guideline regarding the Internal Rate of Return(IRR)?A)
If the internal rate of return is greater than inflation, accept theprojectB)
If the internal rate of return is less than the cost of capital,
accept theprojectC)
If the internal rate of return is greater than the cost of capital,
decline theprojectD)
The internal rate of return can never be equal to the cost ofcapitalE)
None of the above are goodguidelines15) .0/msohtmlclip1/01/clip_image003.gif””>A synonym for what
if analysisis:A)
Differential analysisB)
SensitivityanalysisC)
AlternativeanalysisD)
Make or breakanalysisE)
PrioritizationanalysisIron
Creatures Enterprises has budgeted thefollowing:FebruaryMarchAprilMayTotalSales$100,000$??????$??????$??????MerchandisePurchases$60,000$90,000$120,000$70,000Cash
sales account for one-fifth of total sales, while the remaining four-fifths are
on account. Iron Creaturesbudgets
for sales of 10,000 units in February. Unit sales projected for March, April,
and May are 12,000 (March),11,000
(April), and 14,000 units(May).Past
experience indicates collections on account are asfollows:
40% will be collected in the month of
sale
45% will be collected in the followingmonth
10% will be collected in the 2nd month following thesale
5% are nevercollectedPurchases of merchandise
inventory are all on credit; 25% is paid in the month of purchase, 50% is paid
in the1st month after the purchase
and 25% in the 2nd month following thepurchase.Other
items budgeted include thefollowing:A) Selling and Administrative
Expenses of $70,000 per year, including $10,000 of annual depreciationexpenseB) Equipment costing $45,000 will
be purchased for cash inAprilC) Fixed assets with a cost of
$30,000 and accumulated depreciation of $18,000 will be sold in May; a gainof$5,000
is expected to berealizedD) The company will purchase
stock of various other companies in the month of April, paying $20,000cashE) Interest on any line of credit
loan must be paidmonthlyIron
Creatures wishes to maintain a minimum cash balance of $12,000 at the end of
each month. Thecompany borrows
money from the bank at 6% interest if necessary to maintain the minimum cash
balance. Borrowedmoney is repaid
in months when there is an excess cash balance.
The beginning cash balance on April 1 is projected tobe$12,000. The beginning loan balance on April 1 is
projected to be$31,000.1) Complete the supporting
schedules for cash collections from sales and cash payments for merchandise.CollectionMonthSaleMonthFeb.MarchAprilMayJuneJulyNeverCASHSALESApril
(TOTAL: )May
(TOTAL: )CREDITSALESFebruary(TOTAL: )March
(TOTAL: )April
(TOTAL: )May
(TOTAL: )TOTAL COLLECTION ONCREDITCASH PAYMENTS ON
MERCHANDISE PURCHASESPaymentMonthPurchaseMonthFeb.MarchAprilMayJuneJulyNeverCREDITSALESFebruary(TOTAL: )March
(TOTAL: )April
(TOTAL: )May
(TOTAL: )TOTAL PAYMENT ONMERCHANDISE2)
Prepare a cash budget for Iron Creatures Enterprises for the months of
April and May. Be sure to indicatethe
ending cash balance and ending loan balance for each month.Beginning of Month LoanBalance $ $ —————————————————————————————————————————————————–Beginning of Month CashBalance $ $ Add: Collections fromCustomers.0/msohtmlclip1/01/clip_image004.gif””>.0/msohtmlclip1/01/clip_image004.gif””>CashSales.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>CreditSales.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Add: .0/msohtmlclip1/01/clip_image005.gif””>Less: Payment for
MerchandisePurchases .0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Less: .0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image006.gif””>Less: .0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Less: .0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Less: .0/msohtmlclip1/01/clip_image005.gif””>Preliminary End of Month CashBalance
.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Add: LoanAdditions.0/msohtmlclip1/01/clip_image005.gif””>.0/msohtmlclip1/01/clip_image005.gif””>Less: LoanPaymentsEnd of Month CashBalance $ $ —————————————————————————————————————————————————–End of Month LoanBalance $ $ TIME VALUE OF MONEY
SHOW ALL WORK ANDCALCULATIONS!!!!1)
Rain Makers Corporation is negotiating a five year contract with its
new CEO, Earl Honeywood. Thecorporation
has proposed two contract options for the CEO, outlined asfollows:OPTION1: A five year contract, starting January 1, Year 1, for
$6,000,000. Earl Honeywood wouldbepaid
$1,200,000 each year at the end of the year (December 31) for five consecutiveyears.OPTION2: A five year contract, starting January 1, Year 1, for
$6,800,000. Earl Honeywood wouldbepaid
at the end of each year (December 31). He would receive $1,000,000 in Years 1through 3, and then $1,900,000 in Years 4
and5.You have been hired as Earls investment
manager, and believe that Earl should consider the time value of moneyat12% before
making his decision. Calculate the
present value of the two contract options to aid Earl in hisdecision.A)
Present Value of OPTION 1:B)
Present Value of OPTION 2:2) Your strange neighbor from
down the street heard that you were an aspiring accountant and asked youfor advice regarding his retirement
plan. Specifically, he wants to retire in 20 years and has never contributed toa retirement plan. Respond to the
followingquestions:A) If he contributes $5,500 at
the endof each year for 20 years
and the return on his investment is 6% peryear,
how much money will be in his account when he is ready for retirement?B) Using the same
information as A, what amount would be in his account after twenty years if
hecontributed the $5,500 at the beginning
of each year instead of the end? C) If your strange neighbor
wanted to have $600,000 in his account when he retires and wanted to invest attheendof each year, how much would he have to invest per year assuming a
rate of return of 8%? 3) You are in business
negotiations with Mr. Mohammed Ezekiel Abedube, a Nigerian prince who you met
onthe Internet after he sent you an
unsolicited e-mail. In exchange for your assistance, he promises youquarterly payments of $200,000 (at the
end of each quarter) for 2 years and then an annual payment of $1,000,000 (atthe end of each year) for years 3 through
10. If you consider the time value of money to be 8% and assuming thathemakes
good on his promise, what are his future payments worth to you today?1) Grimason
Organization is considering the purchase of a machine that costs $100,000. It
calculates thatthe purchase would contribute
$30,000 in before-tax income to the company. The company pays tax at anaverage 35% rate. The machines
estimated useful life is 10 years with a salvage value of $20,000. Thecompany depreciates all fixed assets
using the straight-line method. The Grimason Organizations desired rate of
returnis 12%; the present value of
an annuity of 1 at 12% for ten periods is 5.65.
The present value of 1 due inten periods at 12% is0.322.A) What is the payback
period? NOTE: Just calculate regular payback period, notdiscounted!B) What the accounting rate of
return based on the average investment?2) The following is information
regarding two alternative investments being considered by Bob-Fruit Company.The company requires a 10% return on
investments. The equipment for Project A has no salvage value;the equipment for Project B has a salvage
value of $25,000 (not included in the net cash flows indicatedbelow).PROJECTAPROJECTBInitialInvestment($175,000)($145,000)Expected net cash flows inyear:140,00032,000256,00050,000380,29566,000490,40072,000555,00029,000A)
Calculate the payback period for PROJECT A.B) Calculate the net present
value and the profitability index for PROJECT
A.C) Calculate the payback period
for PROJECT B).D) Calculate the net present
value (5 points) and the
profitability index (3 points) for
PROJECTB.”

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