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Homework

Homework.

1

Part 1
The Jarvis Company is contemplating the purchase of a helicopter for its executives to use in their businesstrips. This helicopter could be either purchsed or leased from the manufacturer.
The useful life of the helicopter is Four years. Data concerning these two alternatives follow:
Purchase price
Annual cash payments for servicing and licenses
Cash payments
end of second year
end of third year
salvage value
annual rental payment
if the helicopter is leased, it would be returned to the manufacturer in four years. Fernado’s
required rate of return is 22% . Answer the following question by selecting the correct answer.
1 The present value of all the cash outflows for rental payments, if the helicopter is leased.
would be
a -$647,250
b -$623,500
c -$716,000
d -$510,500
2 The present value of the cash outflows for repairs, assuming the helicopter is purcashed, would be
a -$14,000
b -$8,682
c -$2,000
d -$8,440
3 The present value of the salvage value of the helicopter, if the helicopter is purcashed. Would be
a $121,700
b $162,360
c 114,210
d 99900

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part ll
required: answer all the questions by selecting and circling the best answer.
1 the length of time required to recover the initial cash outlay for a project is determined by using the:
a discounted cash flow method.
b the payback method
c the net present value method
d the simple rate of return method
2 Taja Brown Corporation, a manufacturing company based in Kentucky, has a large number of potential investment opportunities that are acceptable. However, Brown Corp does not have enough
investment funds to invest in all of them. Which calculation would be the best one for Brown Corp to use to determine which projects to choose?
a payback period
b simple rate of return
c net present value
d project profitability index
3 The capital budgeting method that divides a project’s annual incremental net operating income by the initial investment is the:
a internal rate of return method
b the simple rate of return method
c the payback method
d the net present value method.
4 the total-cost approach and the incremental-cost approach to evaluating two competing investment opportunities
a are similar in that they will recommend the same alternative as the best
b are dissimilar in that one deals with net present value and the other deals with internal rate of return
c are dissimilar in that one uses the cost of capital as a discount rate and the other does not.
d are similar in that neither considers the time value of money.

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5 Jessica Nortey Corporation presented you the following data pertain to a proposed investment:
Cost of the investment $18,955
Life of the project 5 years
Annual cost savings $5,000
Estimated salvage value $1,000
discount rate 10%
The net present value of the proposed investment is:
a $3,355
b -$3,430
c $0
d $621
6 Anton Fletcher Corporation presented you four investment proposals below:
Proposa Investment net present value
1……… $50,000 30000
2……… 60000 24000
3……… 30000 15000
4……… 45000 9000
Rank the proposals in terms of preference according to the project profitability index:
a
b 3,4,1,2
c 1,3,2,4
d 2,1,4,3
7 ( Ignore income taxes in this problem.) The management of Rusell Corporation is considering
a project that would require an investment of $282,000 and would last for 6 years. The annual
net operating income from the project would be $107,000, which includes depreciation of
$43,000. The scrap value of the project’s assets at the end of the project would be $24,000. The
payback period of the project is closed to:
a 1.9 years
b 2.4 years
c 1.7 years
d 2.6 years

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10 One simple assumption built in Net Present Value (NPV) method is that all cash inflows/outflows
A at the beginning of the period
B at the end of the period
C in the middle of the period
D Non of the above
11 The fllowings are three activity sections of the statement of cash flows EXCEPT:
A Operationg activities
B Investing activities
C Financing activities
D Marketing activities
12 A company that had a $500 decrease in accounts receivable during a period would do which of the following of its statement of cash flows prepared using the indirect method?
A Add the $500 net income in order to arrive at net cash provided by operating activities
B Subtract the $500 from net income in order to arrive at net cash provided by operating activities
C Add the $500 to the net cash provided by investing activites
D Add the $500 to the net cash provided by financing activities
13 Which of the following would be considered a cash outflow in the investing activities section of the statement of cash flows?
A Dividends paid to the company’s own stockholders
B Payment of interest to a lender
C Purchase of equipment
D Retirement of bonds payable

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14 Which of the following would be classified as a financing activity on the statement of cash flows?
A Interest paid to a lender
B Dividends paid to the company’s common stockholders
C Cash aid to acquire a long-term investment
D Cash received from a loan that was made to another company
15 Which the fllowing would be added to net income in the operating activities section of a statement of cash flowes prepared using the indirect method?
A an increase in accounts receivable
B an increase in accounts payable
C an increase in common stock
D an increase in bonds payable
16 Excerpts from Harris Corporation’s comparative balance sheet appear below:
Ending Balance Beginning Balance
Cash and cash equivalents 38000 26000
Accounts payable 18000 19000
Accrued liabilities 39000 35000
Which of the following is the correct treatment within the operating activities section of the statement of cash flows using the indirect method?
A The change in Accounts Payable added to net income; The change in Accrued Liabilities is subtracted from net income
B The change in Accounts Payable added to net income; The change in Accrued Liabilities isadded to net income
C The change in Accounts Payable subtracted from net income; The change in Accrued Liabilities is added to net income
D The change in Accounts Payable subtracted from net income; The change in Accrued Liabilities is subtracted to net income
17 Under the indirect method of determining net cash provided by operating activities on the statement of cash flows, which of the following would be subtracted from net income
A A decrease in accounts receivable
B An increase in accrued liabilities
C A decrease in accounts payable
D An increase in dividend payments to stockholders

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18 In a statement of Cash flows, which of the following would be classifed as an operating activity?
A The purchase of equipment
B Dividends paid to the company’s own common stockholders
C Tax payments to government bodies
D The cash paid to retire bonds payable
19 Which of the following should be classified as a financing activity on a statement of cash flows?
Interest Paid Dividends Paid
A) Yes Yes
B) No Yes
C) Yes No
D) No No
A Option A
B Option B
C Option C
D Option D
20 In a statement of cash flowes, all of the following would be classified as financing activities except:
A The collection of cash related to a loan made to another entity
B The payment of a cash dividend on the company’s own common stock
C The cash paid to retire bonds payable
D The sale of the company’s own common stock for cash

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8 Ignore income taxes in this problem.) Oriental Company has gathered the following data on a proposed investment project
Investment in depreciable equipment
Annual net cash flows
Life of the equipment
Salvage value
Discount rate
The company uses straight-line depreciation on all equipment.
The simple rate of return on the investment would be:
A 10%
B 35%
C 15%
D 25%
9 (Ignore income taxes in this problem.) Gull Inc. is considering the acquisition of equipment that costs $480000 and hasuseful life of 6 years with no salvage.
The incremental net cash flows that would be generated by the equipment are:
Incremental net cash flows
Year 1 139000
Year 2 186000
Year 3 140000
Year 4 157000
Year 5 147000
Year 6 126000
The payback period of this investment is closest to:
A 3.1 years
B 2.9 years
C 5.0 years
D 3.5 years

8

Statement of cash flows classification
Below are certain events or transactions that took place at Taja Brown’s Corporation last year.
Indicate how each of them would be classified on a statement of cash flows. Place and “X” in
The Operation, Investing, or Financing column as appropriate.
Activity
Item# Transaction Description Operating Investing Financing
A Paid bills to insurers and utility providers
B Purchased equipment with cash
C Paid wages and salaries to employees
D Paid taxes to the government
E Loaned money to another entity
F Sold common stock
G Paid cash dividend to stockholders
H Paid interest to lenders
I Repaid the principal amount
J Paid suppliers for inventory purchases
K Borrowed money from a creditor
L Paid cash to repurchase its own stock
M Collect cash from customers

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Capital Budgeting Decisions
Part A
Joshua Seheman Corporation has provided the following data concerning a proposed investment project:
Initial investment $480,000
Life of the project 7 Year
Working capital required $17,000
Annual net cash inflows $168,000
Salvage value $72,000
The Company uses a discount rate of 11% the working capital would be released at the end of the project.
Required
Compute the net persent value of the project. Show your work below to receive credits
Part B
The management of Jessica Corporation is considering the following three investment project;
Project B Project C Project D
Investment required $ 34,000 $ 60,000 $ 81,000
Present value of cash inflows $ 37,060 $ 61,800 $ 85,050
The only cash outflows are the initial investments required in the projects.
Required:
Rank the investment projects using the project profitability index. Show your Work

10

Preparation of the SCF
Roosevelt Corporation’s balance sheet appears below:
Comparative Balance Sheet
Ending Balance Beginning Balance
Assets:
Cash and cash equivalents $31 $26
Accounts receivable 60 71
Invontory 64 55
Property, plant and equipment 477 450
Less accumulated depreciation 334 280
Total assets $298 $322
Laibilities and stockholders’ equity:
Accounts payable $45 $42
Bonds payable 213 200
Common stock 84 80
Retained earnings -44 0
Total liabilities and stockholders’ equity $298 $322
Net income (loss) for the year was ($43). Cash dividends were $1.
the compnay did not dispose of any property, plant, and eqyipment, issue any bonds payable, or repurchase any of its own common stock during the year
Required:
Prepare a statement of cash flows in good form using the indirect method.

Homework

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