## Jim D’Addario of the well-known guitar and bass string factory D’Addario

Jim D’Addario of the well-known guitar and bass string factory D’Addario Strings in Long Island, NY, is considering two new designs for more efficient and higher quality machines (the company has won many manufacturing and product patents in the field).

Assume machine A costs \$750,000 to make and is expected to return the following net earnings over five years, after which time it is retired: \$10 million, \$9 million, \$8 million, \$7 million, and \$6 million, respectively.

Assume machine B costs \$850,000 to make and is expected to return the following net earnings over five years, after which time it is also retired: \$10.1 million, \$9.1 million, \$8.1 million, \$7.1 million, and \$6.1 million, respectively.

All other things being equal, which design should Jim go with if he is using a discount rate of 7%?

Hint: Use NPV analysis.

Here’s the SOLUTION

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## The trial balance of CX Trading as at 31 December 20×5 showed

The trial balance of CX Trading as at 31 December 20×5 showed a difference which was posted to a suspense account. Drafted financial statements for the year ended 31 December 20×5 were prepared showing a net profit of \$23,120. The following errors were subsequently found:

1. The purchase of a new van for \$6,000 was included in the motor van expense account.

2. The debit side of the stationary account is undercast by \$250.

3. There is a debit in the rent account of \$400 but should be \$4,000.

4. The rates on the owner’s home of \$750 has been paid by the business and debited to the business’ rates account.

5. \$720 included in the wages account of the business was in fact paid to the house keeper of the owner.

6. Purchases of inventory costing \$500 paid by cheque had been totally missed out in the books.

7. Insurance paid by cheque of \$150 was credited to both accounts.

Required:

a) The journal entries to correct the errors of the above. Narratives not required.

b) A statement of correcting the profit as found in the drafted financial statements.

Here’s the SOLUTION

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## On January 1, 2016, Alpha Company purchased equipment for \$16,000

On January 1, 2016, Alpha Company purchased equipment for \$16,000 with an estimated 10-year life and no salvage value. It was determined that the straight-line method of depreciation would be used. Alpha has a December 31 fiscal year end. During 2020, Alpha determined that the useful life for this equipment should be only 7 years. Using this information, how much is: (Enter only whole dollar values.)

the 2020 depreciation expense
the accumulate depreciation after the fiscal year 2020 adjusting entry
the book value of the truck after the fiscal year 2020 adjusting entry

Here’s the SOLUTION

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## Bravo Company purchased a truck on October 1, 2016

Bravo Company purchased a truck on October 1, 2016. Bravo paid \$10,000 for the truck in addition to \$500 registration & sales taxes. The truck is expected to have a \$2,000 residual value and a 5-year life. Bravo has a December 31 fiscal year end. Using the double-declining balance method, how much is: (Enter only whole dollar values.)

the 2018 depreciation expense
the accumulate depreciation after the fiscal year 2018 adjusting entry
the book value of the truck after the fiscal year 2018 adjusting entry

Here’s the SOLUTION

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## Suppose MGM has a beta of 3.32 and AEP has a beta of 0.28

Suppose MGM has a beta of 3.32 and AEP has a beta of 0.28. If the risk-free interest rate = 4.0% and the market risk premium = 10%, according to the CAPM:

a. What is the expected return of MGM stock?

b. What is the expected return of AEP stock?

c. What is the beta of a portfolio that consists of 60% of MGM and 40% of AEP?

d. What is the expected return of that portfolio with the beta that you found in part c.?

e. What is the beta of a portfolio that consists of 40% of MGM and 60% of AEP?

Here’s the SOLUTION

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## WebTech Development of Nashville, Tennessee, is considering the possible

WebTech Development of Nashville, Tennessee, is considering the possible introduction of a new product proposed by its research and development staff. The firm’s marketing director estimates that the product can be marketed at a price of \$230. Total fixed cost is \$340,000, and average variable cost is calculated at \$56.

The firm’s CEO has suggested a target profit return of \$214,000 for the proposed product. How many units must be sold to both break even and achieve this target return?

Here’s the SOLUTION

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## Piano Man, Inc, has a 32 day average collection period

Piano Man, Inc, has a 32 day average collection period and wants to maintain a minimum cash balance of \$20 million, which is what the company currently has on hand. The company currently has a receivable balance of \$218 million and has developed the following sales and cash disbursement budgets in millions :

Q1 Q2. Q3 Q4

Sales \$378. \$468. \$570. \$522

total cash disbursement \$318. \$408. \$726. \$450

Complete the following cash budget for the company. What conclusiorns do you draw?

Q1 Q2 Q3

Beginning receivables

Sales

Cash collections

Ending receivables

Total cash collections

Total cash disbursement

Net cash inflow

Beginning cash balance

Net cash inflow

Ending cash balance

Minimum cash balance

Cumulative surplus (deficit)

Here’s the SOLUTION

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## Both Bond Sam and Bond Dave have 6 percent coupons

Both Bond Sam and Bond Dave have 6 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 4 years to maturity, whereas Bond Dave has 13 years to maturity. (Do not round your intermediate calculations.)

If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Sam?
If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Dave?
If rates were to suddenly fall by 4 percent instead, what would the percentage change in the price of Bond Sam be then?
If rates were to suddenly fall by 4 percent instead, what would the percentage change in the price of Bond Dave be then?

Bond J is a 5 percent coupon bond. Bond K is a 10 percent coupon bond. Both bonds have 10 years to maturity, make semiannual payments, and have a YTM of 8 percent.

If interest rates suddenly rise by 3 percent, what is the percentage price change of Bond J?
If interest rates suddenly rise by 3 percent, what is the percentage price change of Bond K?
If interest rates suddenly fall by 3 percent, what is the percentage price change of Bond J?
If interest rates suddenly fall by 3 percent, what is the percentage price change of Bond K?

Here’s the SOLUTION

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## SIFT company is contemplating the purchase of a large piece of machinery

SIFT company is contemplating the purchase of a large piece of machinery for \$80000. SIFT anticipates that the machine will have a six year life; have annual cash inflows of \$20000 and a salvage value (at end year six) 0f \$10000. SIFT assigns a cost of capital or minimum rate of return of12% for the project. Ignore income taxes.

a) What is the payback period?

b) What is the internal rate of return? (note: for part [b] ONLY, ignore salvage value)

c) What is the net present value? A table is provided below:

YEARS                       EVENT                 AMOUNT               PV FACTOR               PRESENT VALUE

_______________NET PRESENT VALUE________________

d) What is the present value index?

e) Based on your answers to [c] ands [d], should SIFT buy the machinery? Why or why not?

Here’s the SOLUTION

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## Mr. Smith bought a \$ 310000 house 6 years ago

Mr. Smith bought a \$ 310000 house 6 years ago. The house is now worth \$ 620000 . Originally, the house was financed by paying 30% down with the rest financed through a 20-year mortgage at 5% interest. After making 72 monthly house payments,Mr. Smith is now in need of cash, and would like to refinance the house. The finance company is willing to loan 85% of the current value of the house amortized over 15 years at 3% interest.

How much cash will the owner receive after paying the balance

of the original loan?

Amount of cash obtained = \$  ??

If he uses all of the available cash for something

other than investing in his home,

by how much will his monthly payment increase?

Increase in monthly payment = \$ ??

Here’s the SOLUTION

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