cost accounting ethics
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South Texas College *
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ACNT-230
Subject
Accounting
Date
Apr 26, 2024
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docx
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After 2 weeks, Steven returned with a proposal to reduce variable costs to 55% of revenues by reducing the costs Company A currently incurs for the
safe disposal of wasted plastic. Tony is concerned that this would expose the company to potential environmental liabilities. He tells Steven, “We would need to estimate some of these potential environmental costs and include them in our analysis.” “You cannot do that,” Steven replies. “We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future. However, if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they are. The market is very tough, and we are in danger of shutting down the company and costing all our jobs. Our competitors are only making money because they are doing exactly what I am proposing.”
Question: Given Steven Williams’ comment, what should Tony do?
Company A has a negative income of 140,000 because cost exceed revenue. According to Williams, no laws are being violated and they should go forward with reducing the cost of the plastic disposal. On one hand, if they don’t cut cost, the company will have no choice but to shut down. On the other hand, if they cut the cost of plastic disposal, it’s possible they might become liable for environmental cost in the future. Based on what is said, Tony should look further into the variable cost to see if there is anything else that could be cut to increase income. He should ask steven to allow him to look at other potential routes that could be taken and come up with his own proposal on what he sees would be the best alternative to prevent cutting the cost of safe disposal. Company A has a negative income of $140,000 because costs outweigh revenue. According to Williams, no laws are being broken, and they should move forward with lowering the cost of plastic disposal. if they do not reduce costs, the company will have no choice but to shut down. However, if they reduce the cost of plastic disposal, the company may be held accountable for future costs related to the environment. Based on what has been discussed, Tony should check into the variable costs to determine if there is anything else that may be cut to boost income.
Tony should ask Steven to allow him to look at other potential options and come up with his own proposal for what he believes would be the greatest alternative to prevent cutting the cost
of safe disposal. Tony could also include in his report an analysis of the environmental cost they
would incur. This will allow Tony to decide what the best course of action will be.
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Related Questions
Coast Corporation's research and development department has a a project to develop a
new product which is expected to be very profitable. However, this very expensive
product requires approval from the company's controller, J.Davis.
Since the corporate profits have been decreasing lately, Davis hesitates to approve a
project that will incur significant expenses that cannot be capitalized. To overcome this
problem, he's thinking about hiring a firm to develop this product and purchasing the
patent of the product from this firm.
w wwn wwwww
Required:
a. Why doesn't Davis prefer producing the product internally, and what are the ethical
issues in this situation.
b. What would you do if you were in Davis's place?
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A cost analyst showed the company president a graph that portrayed the firm’s utility cost as semivariable. The president criticized the graph by saying, “This fixed-cost component doesn’t look right to me. If we shut down the plant for six months, we wouldn’t incur half of these costs.” How should the cost analyst respond?
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You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.7 million for this report, and I am not sure their analysis makes sense. Before we
spend the $28.3 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
Project Year
Earnings Forecast
1
2
9
10
Sales Revenue
30.000
30.000
30.000
30.000
Cost of Goods Sold
18.000
18.000
18.000
18.000
-
= Gross Profit
12.000
12.000
12.000
12.000
- General, Sales and Administrative Expenses
- Depreciation
2.264
2.264
2.264
2.264
2.830
2.830
2.830
2.830
= Net Operating Income
6.906
6.906
6.906
6.906
- Income Tax
2.417
2.417
2.417
2.417
= Net Income
4.489
4.489
4.489
4.489
...
a. Given the available information, what are the free cash flows in years 0 through 10…
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You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.2 million for this report, and I am not sure their analysis makes sense. Before we spend the $19 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new equipment that will be purchased today (year 0), which is what the accounting department recommended. The report concludes that because the project will increase earnings by $6.864 million per year for ten years, the project is worth $68.64 million. You think back to your halcyon days in finance class and realize there is more work to be done!
First,…
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Galveston Pump Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s operations manager, Frank Griswold, is opposed to the idea of a new JIT system because he is concerned that the new system (a) will be too costly to manage; (b) will result in too many stockouts; and (c) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Bonnie Barrett, is in favor of the new system because of its likely cost savings. Frank wants Bonnie to rework the numbers because he is concerned that top management will give more weight to financial factors and not give due consideration to nonfinancial factors such as employee…
arrow_forward
Galveston Pump Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s operations manager, Frank Griswold, is opposed to the idea of a new JIT system because he is concerned that the new system (a) will be too costly to manage; (b) will result in too many stockouts; and (c) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Bonnie Barrett, is in favor of the new system because of its likely cost savings. Frank wants Bonnie to rework the numbers because he is concerned that top management will give more weight to financial factors and not give due consideration to nonfinancial factors such as employee…
arrow_forward
Galveston Pump Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s operations manager, Frank Griswold, is opposed to the idea of a new JIT system because he is concerned that the new system (a) will be too costly to manage; (b) will result in too many stockouts; and (c) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Bonnie Barrett, is in favor of the new system because of its likely cost savings. Frank wants Bonnie to rework the numbers because he is concerned that top management will give more weight to financial factors and not give due consideration to nonfinancial factors such as employee…
arrow_forward
Galveston Pump Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s operations manager, Frank Griswold, is opposed to the idea of a new JIT system because he is concerned that the new system (a) will be too costly to manage; (b) will result in too many stockouts; and (c) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Bonnie Barrett, is in favor of the new system because of its likely cost savings. Frank wants Bonnie to rework the numbers because he is concerned that top management will give more weight to financial factors and not give due consideration to nonfinancial factors such as employee…
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You are a manager at Northem Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.3 million for this report,
and I am not sure their analysis makes sense. Before we spend the $24 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
2
10
Sales revenue
29.000
17.400
29.000
29.000
29.000
- Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
17.400
17.400
17.400
11.600
1.920
2.400
11.600
11.600
11.600
1.920
1.920
1.920
2.400
2.400
2.400
7.2800
7.2800
7.2800
7.2800
- Income tax
2.548
2.548
2.548
2.548
= Net income
4.732
4.732
4.732
4.732
All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new…
arrow_forward
You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops
a consultant's report on your desk, and complains, "We owe these consultants $1.0 million for this report, and I am not sure their analysis makes sense. Before we
spend the $25 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in
millions of dollars): (Click on the following icon in order to copy its contents into a spreadsheet.)
Project Year
Sales revenue
- Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
1
30.000
18.000
12.000
2.000
2.500
7.500
2
30.000
18.000
12.000
2.000
2.500
7.500
9
30.000
18.000
12.000
2.000
2.500
7.500
10
30.000
18.000
12.000
2.000
2.500
7.500
a. Given the available information, what are the free cash flows in years 0 through 10 that should be…
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Peterson Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s operations manager, John Leung, is opposed to the idea of a new JIT system. He is concerned that the new system (a) will be too costly to manage; (b) will result in too many stock outs; and (c) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Susan Chow, is in favour of the new system, due to the likely result in cost savings. John wants Susan to revise her cost saving estimation because he is concerned that top management will give more weight to financial factors and not give due consideration to nonfinancial factors such as employee…
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Emily Henson, controller of an oil exploration division, has just been approached by Tim Wilson, the divisional manager. Tim told Emily that the project quarterly profits were unacceptable and that expenses need to be reduced. He suggested that a clean and easy way to reduce expenses is to assign the exploration and drilling costs of four dry holes to those of two successful holes. By doing so, the costs could be capitalized and not expensed, reducing the costs that need to be recognized for the quarter. He further argued that the treatment is reasonable because the exploration and drilling all occurred in the same field; thus, the unsuccessful efforts really were the costs of identifying the successful holes. “Besides,” he argued, “even if the treatment is wrong, it can be corrected in the annual financial statements. Next quarter’s revenues will be more and can absorb any reversal without causing any severe damage to that quarter’s profits. It’s this quarter’s profit that need some…
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Jerry Prior, Beeler Corporation’s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him.
Prior knows that depreciation is a major expense for Beeler. The company currently uses the double-declining-balance method for both financial reporting and tax purposes, and he’s thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of $2,000,000 and a fair value of $2,180,000. The gain on the sale would be reported in the income statement. He doesn’t want to highlight this method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.”
Instructions
Answer…
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You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.9 million for
this report, and I am not sure their analysis makes sense. Before we spend the $18 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars): (Click on
the following icon in order to copy its contents into a spreadsheet.)
Sales revenue
- Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
- Income tax
1
34.000
20.400
13.600
1.440
1.800
10.360
2.072
Project Year
2
34.000
20.400
13.600
1.440
1.800
10.360
2.072
9
34.000
20.400
13.600
1.440
1.800
10.360
2.072
10
34.000
20.400
13.600
1.440
1.800
10.360
2.072
a. Given the available information, what are the free cash…
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You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk,
and complains, "We owe these consultants $1.2 million for this report, and I am not sure their analysis makes sense. Before we spend the $29 million on new equipment needed for this project, look
it over and give me your opinion." You open the report and find the following estimates (in millions of dollars): (Click on the following icon in order to copy its contents into a spreadsheet.)
Project Year
Sales revenue
Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
- Income tax
1
25.000
15.000
10.000
2.320
2.900
4.780
1.434
2
25.000
15.000
10.000
2.320
2.900
4.780
1.434
9
25.000
15.000
10.000
2.320
2.900
4.780
1.434
10
25.000
15.000
10.000
2.320
2.900
4.780
1.434
a. Given the available information, what are the free cash flows in…
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You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.3 million for this report, and I am not sure their analysis makes sense. Before we spend the $22 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new equipment that will be purchased today (year 0), which is what the accounting department recommended. The report concludes that because the project will increase earnings by $5.472 million per year for ten years, the project is worth $54.72 million. You think back to your halcyon days in finance class and realize there is more work to be done! First,…
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You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk,
and complains, "We owe these consultants $1.4 million for this report, and I am not sure their analysis makes sense. Before we spend the $28 million on new equipment needed for this project, look
it over and give me your opinion." You open the report and find the following estimates (in millions of dollars): (Click on the following icon in order to copy its contents into a spreadsheet.)
Project Year
Sales revenue
- Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
- Income tax
1
31.000
18.600
12.400
2.240
2.800
7.360
1.472
2
31.000
18.600
12.400
2.240
2.800
7.360
1.472
9
31.000
18.600
12.400
2.240
2.800
7.360
1.472
10
31.000
18.600
12.400
2.240
2.800
7.360
1.472
a. Given the available information, what are the free cash flows…
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You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $ 1.1 million for this report, and I am not sure their analysis makes sense. Before we spend the $ 29 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
Project Year
Earnings Forecast ($ million)
1
2
. . .
9
10
Sales revenue
28.00028.000
28.00028.000
28.00028.000
28.00028.000
minus−Cost
of goods sold
16.80016.800
16.80016.800
16.80016.800
16.80016.800
equals=Gross
profit
11.20011.200
11.20011.200
11.20011.200
11.20011.200
minus−Selling,
general, and administrative expenses
2.3202.320
2.3202.320
2.3202.320
2.3202.320…
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Cysco Corp has a budget of $1,200,000 in 2017 for prevention costs. If it decides to automate a
portion of its prevention activities, it will save $103,000 in variable costs. The new method will
require $51,000 in training costs and $148,000 in annual equipment costs. Management is willing to
adjust the budget for an amount up to the cost of the new equipment. The budgeted production level
is 207,000 units.
Appraisal costs for the year are budgeted at $508,000. The new prevention
procedures will save appraisal costs of $50,000. Internal failure costs average $34
per failed unit of finished goods. The internal failure rate is expected to be 5% of all
completed items. The proposed changes will cut the internal failure rate by one-half.
Internal failure units are destroyed. External failure costs average $52 per failed unit. The company's
average external failures average 4.5% of units sold. The new proposal will reduce this rate to 1%.
Assume all units produced are sold and there are no…
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You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on
your desk, and complains, "We owe these consultants $1.8 million for this report, and I am not sure their analysis makes sense. Before we spend the $19 million on new equipment needed for
this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
Sales revenue
- Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
- Income tax
= Net income
1
2
25.000 25.000
15.000 15.000
10.000
10.000
1.520
1.520
1.900
1.900
6.5800
2.303
4.277
6.5800
2.303
4.277
9
25.000
15.000
10.000
1.520
1.900
6.5800
2.303
4.277
10
25.000
15.000
10.000
1.520
1.900
6.5800
2.303
4.277
All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the…
arrow_forward
You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these
consultants $1.1 million for this report, and I am not sure their analysis makes sense. Before we spend the $23 million on new equipment needed for this project, look it over and give me your opinion. You open the report and find the
following estimates (in millions of dollars):
Sales revenue
-Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
-Income tax
= Net income
Show Transcribed Text
O
C
3
1
2
30.000 30.000
18.000 18.000
12.000 12.000
1.840 1.840
2.300 2.300
7.8600 7.8600
2.751
2.751
5.109
5.109
...
9
30.000
18.000
12.000
1.840
2.300
7.8600
2.751
5.109
10
30.000
18.000
12.000
1.840
2.300
7.8600
2.751
5.109
All of the estimates in the report seem correct. You note that the consultants used…
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You are a manager at Northern Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants
$1.5
million for this report, and I am not sure their analysis makes sense. Before we spend the
$29
million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
(Click on the Icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)
Project Year
Earnings Forecast ($000,000s)
1
2
. . .
9
10
Sales revenue
25.000
25.000
25.000
25.000
−Cost
of goods sold
15.000
15.000
15.000
15.000
=Gross
profit
10.000
10.000
10.000
10.000
−Selling,
general, and…
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You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk,
and complains, "We owe these consultants $1.6 million for this report, and I am not sure their analysis makes sense. Before we spend the $29 million on new equipment needed for this project,
look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
Sales revenue
- Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
Income tax
= Net income
1
2
34.000 34.000
20.400 20.400
13.600 13.600
2.320
2.320
2.900
2.900
8.380 8.380
2.933 2.933
5.447 5.447
9
34.000
20.400
13.600
2.320
2.900
8.380
2.933
5.447
10
34.000
20.400
13.600
2.320
2.900
8.380
2.933
5.447
arrow_forward
You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk,
and complains, "We owe these consultants $1.6 million for this report, and I am not sure their analysis makes sense. Before we spend the $29 million on new equipment needed for this project, look
it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
Sales revenue
-Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
-Depreciation
= Net operating income
-Income tax
= Net income
1
2
32.000 32.000
19.200 19.200
12.800 12.800
2.320
2.900
2.320
2.900
7.580
7.580
2.653 2.653
4.927
4.927
...
9
32.000
19.200
12.800
2.320
2.900
7.580
2.653
4.927
10
32.000
19.200
12.800
2.320
2.900
7.580
2.653
4.927
a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate the…
arrow_forward
You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.3
million for this report, and I am not sure their analysis makes sense. Before we spend the $24 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in
millions of dollars):
1
2
9
10
...
Sales revenue
29.000
29.000
29.000
29.000
- Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
- Income tax
17.400
17.400
17.400
17.400
11.600
11.600
11.600
11.600
1.920
1.920
1.920
1.920
2.400
2.400
2.400
2.400
7.2800
7.2800
7.2800
7.2800
2.548
2.548
2.548
2.548
= Net income
4.732
4.732
4.732
4.732
...
b. If the cost of capital for this project is 8%, what is your estimate of the value of the new project?
Value…
arrow_forward
You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and
complains, "We owe these consultants $1.3 million for this report, and I am not sure their analysis makes sense. Before we spend the $18 million on new equipment needed for this project, look it
over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
Sales revenue
- Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
- Income tax
= Net income
1
2
35.000 35.000
21.000 21.000
14.000
14.000
1.440
1.440
1.800
1.800
10.760
10.760
3.766
3.766
6.994
6.994
9
35.000
21.000
14.000
1.440
1.800
10.760
3.766
6.994
10
35.000
21.000
14.000
1.440
1.800
10.760
3.766
6.994
All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the…
arrow_forward
You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk,
and complains, "We owe these consultants $1.1 million for this report, and I am not sure their analysis makes sense. Before we spend the $20 million on new equipment needed for this project, look
it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
Sales revenue
- Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
Income tax
= Net income
1
26.000
15.600
2
26.000
15.600
10.400
10.400
1.600 1.600
2.000
2.000
6.800
2.38
4.420
6.800
2.38
4.420
...
9
26.000
15.600
10.400
1.600
2.000
6.800
2.38
4.420
10
26.000
15.600
10.400
1.600
2.000
6.800
2.38
4.420
All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new…
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You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss
comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.4 million for
this report, and I am not sure their analysis makes sense. Before we spend the $29 million on new equipment needed for this project,
look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
Sales revenue
Cost of goods sold
Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
- Income tax
=
1
33.000
19.800
13.200
2.320
2.900
7.980
2.793
2
33.000
19.800
13.200
2.320
2.900
7.980
2.793
9
33.000
19.800
13.200
2.320
2.900
7.980
2.793
10
33.000
19.800
13.200
2.320
2.900
7.980
2.793
a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate the
proposed project?
The free cash flow for…
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You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.6 million for this report, and I am not
sure their analysis makes sense. Before we spend the $26 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
Sales revenue
- Cost of goods sold
= Gross profit
- General, sales, and administrative expenses
- Depreciation
= Net operating income
-Income tax
= Net income
2
1
29.000 29.000
17.400 17.400
11.600 11.600
2.080 2.080
2.600 2.600
6.920 6.920
2.422 2.422
4.498 4.498
10
9
29.000 29.000
17.400 17.400
11.600 11.600
2.080
2.080
2.600
2.600
6.920
2.422
4.498
6.920
2.422
4.498
All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new…
arrow_forward
You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.1 million for this report, and I am not
sure their analysis makes sense. Before we spend the $26 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
Sales revenue
Cost of goods sold
= Gross profit
General, sales, and administrative expenses
- Depreciation
= Net operating income
- Income tax
= Net income
2
1
25.000 25.000
15.000 15.000
10.000 10.000
2.080 2.080
2.600
5.3200
1.862
2.600
5.3200
1.862
3.458
3.458
9
25.000
15.000
10.000
2.080
2.600
5.3200
1.862
3.458
10
25.000
15.000
10.000
2.080
2.600
5.3200
1.862
3.458
All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new…
arrow_forward
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