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# 9.

## The capital investment committee of Hopewell Company is currently considering two

projects. The estimated income from operations and net cash flows expected from each
project are as follows:-
Project A Project B

Year Income from Net cash flow Income from Net cash flow
operation operation
1 \$12000 \$ 44,000 \$ 26,000 \$ 58,000
2 18,000 50,000 20,000 52,000
3 20,000 52,000 16,000 48,000
4 16,000 48,000 16,000 48,000
5 22,000 54,000 6,000 38,000

Each project requires an investment of \$ 160,000. Straight-line depreciation will be used, and no
residual value is expected. The committee has selected a rate of 15% for purposes of the net
present value analysis.

Instruction:
(1) Compute the following
(a) The average rate of return for each project.
(b) The net present value for each project. Use the present value of \$ 1 table attached.

Present Value of 1

## Period 2% 4% 5% 6% 8% 10% 12% 14% … 15%. 16%

1 0.9804 0.9615 0.9524 0.9434 0.9259 0.9091 0.8929 0.8772 0.870 0.8621

2 0.9612 0.9246 0.9070 0.8900 0.8573 0.8264 0.7972 0.7695 0.756 0.7432

3 0.9423 0.8890 0.8638 0.8396 0.7938 0.7513 0.7118 0.6750 0.658 0.6407

4 0.9238 0.8548 0.8227 0.7921 0.7350 0.6830 0.6355 0.5921 0.572 0.5523

5 0.9057 0.8219 0.7835 0.7473 0.6806 0.6209 0.5674 0.5194 0.497 0.4761

6 0.8880 0.7903 0.7462 0.7050 0.6302 0.5645 0.5066 0.4556 0.432 0.4104

7 0.8706 0.7599 0.7107 0.6651 0.5835 0.5132 0.4523 0.3996 0.376 0.3538

8 0.8535 0.7307 0.6768 0.6274 0.5403 0.4665 0.4039 0.3506 0.327 0.3050

9 0.8368 0.7026 0.6446 0.5919 0.5002 0.4241 0.3606 0.3075 0.284 0.2630

10 0.8203 0.6756 0.6139 0.5584 0.4632 0.3855 0.3220 0.2697 0.247 0.2267
(2) Why is the net present value of project B greater then project A even though its
average rate of return is less.
(3 ) Prepare a summary for the capital investment committee, advising it on the relative merits of
the two projects.

6. At the beginning of the 2006 school year, Hakim Davis decided to prepare a
Cash budget for the months of September, October, November and December. The
Budget must plan for enough cash on December 31 to pay the spring semester tuition.
The following information relates to the budget:

## Cash balance, September 1 (from a summer job) \$6,000

Purchase season football tickets in September 180
Additional entertainment for each month 250
Pay fall semester tuition on September 3 3250
Pay rent at the beginning of the each month 400
Pay for food each month 320
Pay apartment deposit on September 2 (to be returned Dec. 15) 500
Part time job earnings each month (net of taxes) 1,000

## a.Prepare a cash budget for September, October, November and December.

b. What are the budget implications for Hakim Davis?

4 .ABC Company expects to maintain the same inventories at the end of the year as at the
beginning of the year. The estimated fixed costs for the year are \$288,000, and the estimated
variable costs per unit are \$14. It is expected that 60,000 units will be sold at a price of \$20 per
unit. Maximum sales within the relevant range are 70,000 units.

Instructions:-
1. What is (a) the contribution margin ratio [30%]and (b) the unit contribution margin? [6]
2. Determine the break-even point in units.[ 48000 units]
3. Construct a cost –volume-profit chart, indicating the break-even point.
4. Construct a profit-volume chart, indicating the break-even point.
5. What is the margin of safety? [20%]
6. The comparative balance sheet of Dowling Company for December 31, 2007 & 2006 is
as follows:

Dowling Company
Comparative Balance sheet for December 31, 2007 & 2006
Assets 2007 2006
Cash \$ 140350 \$ 95900
Accounts receivable (net) \$ 95300 \$ 102300
Inventories \$ 165200 \$ 157900
Prepaid expenses
Liabilities & Stock Holders’ Equity \$ 6240
2007 \$ 5860
2006
Investments (Long term)
Accounts payable ( Merchandise creditors) \$ 35700
\$ 43500 \$ 84700
\$ 46700
Land
Accrued expenses (operating expenses) \$\$14000
75000 \$\$12500
90000
Buildings
Income Tax payable \$ 375000
7900 \$ 260000
\$ 8400
Accumulated Depreciation – Buildings
Dividends payable (\$ 71300)
\$ 14000 \$(\$10000
58300)
Machinery & Equipment
Mortgage note payable, due 2017 428300
\$ 40000 \$\$ 0428300
Accumulated
Bonds payableDepreciation – Machinery & Equipment \$ 150000
(\$ (\$ 138000)
\$ 250000
Common stock, \$ 30 par \$148500)
450000 \$ 375000
Patents
Excess of issue price over par – Common stock \$ 58000
\$ 66250 \$\$41250
65000
Total Assets
Retained earnings \$\$1159290
373640 \$ 1093660
349810
Total Liabilities & Stock Holders’ equity \$ \$ 1093660
1159290

Dowling Company
Income Statement for the year ended Dec 31, 2007

Sales \$1,100,000
Cost of merchandise sold \$ 710,000
Gross profit \$ 390,000
Operating expenses:
Depreciation expenses \$ 23,500
Patent amortization \$ 7,000
Other operating expenses \$
196,000
Total operating expenses \$226,500
Income from operation
Other Income:
Gain on sale of investments \$ 11,000
Other expenses:
Interest expense \$ 26,000 (\$15,000)
Income before income tax \$ 148,500
Income tax expense \$50,000
Net income \$ 98,500

## An examination of the accounting records revealed the following additional information

applicable to 2007.

## a. Land costing \$ 15,000 was sold for \$ 15,000.

b. A mortgage note was issued for \$ 40,000.
c. A building costing \$115,000 was constructed.
d. 2,500 shares of common stock were issued at 40 in exchange for the bonds payable.
e. Cash dividends declared were \$74,670.