The president of your firm, Lesky and Lesky, has little background in accounting. Today, he walked into your office and said, “A year ago we bought a piece of land for $100,000. This year, inflation has driven prices up by 6%, and an appraiser just told us we could easily resell the land for $115,000. Yet our balance sheet still shows it at $100,000. It should be valued at $115,000. That’s what it’s worth. Or, at a minimum, at $106,000.” Respond to this statement with specific reference to the accounting principles applicable in this situation.
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The president of your firm, Lesky and Lesky, has little background in accounting. Today, he walked into your office and said, “A year ago we bought a piece of land for $100,000. This year, inflation has driven prices up by 6%, and an appraiser just told us we could easily resell the land for $115,000. Yet our balance sheet still shows it at $100,000. It should be valued at $115,000. That’s what it’s worth. Or, at a minimum, at $106,000.” Respond to this statement with specific reference to the accounting principles applicable in this situation.
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- You purchased a small company for $50,000 (in year zero). Unfortunately, things did not go well and your company lost $2,500 each year for the first three years. To alleviate the situation, during the third year, you decided to invest an additional $12,000 in the company. This smart decision resulted in a profit of $11,000 each year from the fourth year through the 16th year. At the end of 16 years the company can be sold for $40,000.Calculate the internal rate of return (IRR) as well as the NPV if MARR = 12%. Neglect depreciation or taxes in this problem.You have been hired as a consultant PUTZ inc, manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.9 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $2.2 million on an after-tax basis. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $275,000. An excerpt of the marketing report is as follows: The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 5,200, 5,900, 6,500, and 4,800 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $435 can be charged…An officer for a large construction company is feeling nervous. The anxietyis caused by a new excavator just released onto the market. The newexcavator makes the one purchased by the company a year ago obsolete.As a result, the market value for the company’s excavator has droppedsignificantly, from $600,000 a year ago to $50,000 now. In ten years, itwould be worth only $3,000. The new excavator costs only $950,000 andwould increase operating revenues by $90,000 annually. The newequipment has a ten-year life and expected salvage value of $175,000. Thetax rate is 35%, the CCA rate, 25% for both excavators, and the requiredrate of return for the company is 14%. What is the NPV of the newexcavator? (Negative answer should be indicated by a minus sign. Do notround your intermediate calculations. Round the final answer to 2decimal places. Omit $ sign in your response.)NPV $
- An officer for a large construction company is feeling nervous. The anxiety is caused by a new excavator just released onto the market. The new excavator makes the one purchased by the company a year ago obsolete. As a result, the market value for the company’s excavator has dropped significantly, from $600,000 a year ago to $50,000 now. In ten years, it would be worth only $3,000. The new excavator costs only $950,000 and would increase operating revenues by $90,000 annually. The new equipment has a ten-year life and expected salvage value of $175,000. The tax rate is 35%, the CCA rate, 25% for both excavators, and the required rate of return for the company is 14%. What is the NPV of the new excavator?Tyrell Corp. is considering replacing a machine. The old one is currently being depreciated at $70,000 per year (straight-line), and is scheduled to end in five years with no remaining book value. If you don’t replace it, you will be lucky to get it removed for the amount you could salvage it for, so you don’t expect any profit in five years. If you replace the old machine now, you believe you can salvage it for $375,000 and buy a new machine for $850,000, plus $25,000 shipping fee and another $25,000 for installation. The new machine will not change the revenue or NOWC, but it will reduce the operating costs of the company by $145,000 per year. The new machine will be depreciated using the three-year MACRS schedule (the table is provided on the Moodle for your convenience). The useful life of this machine is five years, and it is expected that the machine can be sold at $20,000 at the end of the five years. Assume a tax rate of 25% and the cost of capital for the company is 8%.…You are an accountant for the Davanzo Company. The president of the company calls you into her office and says, "I want to ask you about two issues. First, we need to sell one of our investments to raise $1 million because I think I have found a better investment. We could sell the shares of Company X, which are currently worth $1 million even though they have an amortized cost basis $950,000. But I don't want to sell them, because I like the steady stream of cash flow we get related to interest. Or we could sell the bonds in that dog, Company Z. These bonds are also worth $1 million, but they cost us $1.2 million. I hate to admit we made such a big mistake, and if they can somehow avoid bankruptcy, we may actually recover our investment. And then there's that loss. I don't want to report that. Second, I am going to use the $1 million to buy about 20% of the shares of Company M, but I seem to remember that there is some accounting rule that might affect how much we buy. I was also…
- Tyrell Corp. is considering replacing a machine. The old one is currently being depreciated at $70,000 per year (straight-line), and is scheduled to end in five years with no remaining book value. If you don't replace it, you will be lucky to get it removed for the amount you could salvage it for, so you don't expect any profit in five years. If you replace the old machine now, you believe you can salvage it for $375,000 and buy a new machine for $850,000, plus $25,000 shipping fee and another $25,000 for installation. The new machine will not change the revenue or NOWC, but it will reduce the operating costs of the company by $145,000 per year. The new machine will be depreciated using the three-year MACRS schedule (the table is provided on the Moodle for your convenience). The useful life of this machine is five years, and it is expected that the machine can be sold at $20,000 at the end of the five years. Assume a tax rate of 25% and the cost of capital for the company is 8%.…You were recently hired to work in the controller's office of the Balboa Lumber Company. Your boss, Alfred Eagleton, took you to lunch during your first week and asked a favor. "Things have been a little slow lately, and we need to borrow a little cash to tide us over. Our inventory has been building up and the CFO wants to pledge the inventory as collateral for a short-term loan. But I have a better idea." Mr. Eagleton went on to describe his plan. "On July 1, 2021, the first day of the company's third quarter, we will sell $100,000 of inventory to the Harbaugh Corporation for $160,000. Harbaugh will pay us immediately and then we will agree to repurchase the merchandise in two months for $164,000. The $4,000 is Harbaugh's fee for holding the inventory and for providing financing. I already checked with Harbaugh's controller and he has agreed to the arrangement. Not only will we obtain the financing we need, but the third quarter's before-tax profits will be increased by $56,000, the…One division of your company restores old antique vehicles. For example, the company just bought an old car for $23,000 and guesses that they can sell the car for $46,000 in 3 years after a few repairs and after they take the vehicle to some car shows etc. They think the cost of fixing the car will be about $2,000 each year for the next 3 years. One employee, Roger, thinks that there is no use in claiming CCA (depreciation) over the next 3 years as the selling price will be higher than the purchase price. Harpeet, however, says that even though CCA recapture and or capital gains will likely have to be paid, it will still be worth claiming CCA on this antique vehicle each year. Who is correct, and why? (hint: develop a very simple income statement/cash flow statement for each scenario). Make sure to justify your answer with detailed calculations. MARR is 10%, and the tax rate is 40%. The CCA rate is 30%.
- Your mining company is considering an expansion of operations into iron ore. Your engineers surveyed a particular piece of land three weeks ago (the survey cost $25,000) and concluded the following: • You can extract 1,000 tons of iron ore per year. • There are 4,000 tons of iron ore underneath this land. Once all the ore has been extracted, the project will cease to produce any revenues. • The price of ore will remain constant for the next 4 years. Currently ore sells for $100 per ton. • The operating cost to extract the ore will be $60 per ton for the next 4 years. . • We will need to invest in the equipment for this project right now for $100,000. . mention The equipment will be depreciated over a period of four years using the straight-line method, with an assumed salvage value of zero for tax purposes. At the end of year 4, we can sell the equipment involved in the project for $20,000. The expansion requires additional working capital (NWC) of $10,000 from the start (at time t=0)…Lou Lewis, the president of Lewisville Company has asked you to give him an analysis of the best use of a warehouse the company owns. The company has a 40% effective tax rate. a. Lewisville Company is currently leasing the warehouse to another company for $5,000 per month on a year-to-year basis. b. The warehouse's estimated sales value is $200,000. A commercial realtor believes that the price is likely to remain unchanged in the near future. The building originally cost $60,000 and is being depreciated at $1,500 annually. Its current net book value (NBV) is $7,500. 1. Show how you would handle the individual items in determining whether the company should continue to lease the space or convert it to a factory outlet. Use PV function in Excel, VDB function in Excel to calculate annual depreciation charges. Use NPV function to calculate depreciation tax savings. (complete questions is attached.) Thank you!!!You are the newly hired risk analyst for Smith Inc,, a food distribution company based in Nashville, Tennessee. Currently, Smith pays $1,000,000 annually in premium for workers' compensation coverage. There is no deductible. The company's broker thinks she can save a sizeable amount of money if you purchase a large deductible program with a $250,000 per occurrence deductible. Smith has 1000 employees and expects 20% losses for the coming year. The expected value of each loss is $7,500. Should Smith Company switch from its current program which costs $1,000,000 per year to the large deductible one recommended by the broker?