MBA560 Financial and Managerial Accounting: Module 8 Test (2 Problems)

MBA560 Financial and Managerial Accounting
Module 8 Test

Problem 1.
Creighton Company's balance sheet and income statement are provided below
Creighton Company
Balance Sheet
December 31, 2012
Cash 21,000
Accounts receivable 24,000
Inventory 15,000
Plant and equipment, net of depreciation 144,000
Land held for future plant expansion 36,000
Total Assets 240,000

Liabilities and Stockholders' Equity
Accounts payable 18,000
Notes payable 30,000
Capital stock, no par 120,000
Retained earnings 72,000
Total Liabilities and stockholders' equity 240,000

Creighton Company
Balance Sheet
December 31, 2012
Sales 159,000
Less: variable costs
Manufacturing 31,000
Selling and administrative 25,000
Contribution margin 103,000
Less: Fixed costs
Manufacturing 31,000
Selling and administrative 22,500
Operating income 49,500

1) Compute the margin, turnover, and return on investment for Creighton Company
2) What is the advantage of expanding the ROI formula to measure margin and turnover separately?

Problem 2.
Delta Company is evaluating two different capital investments, Project X and Y. Either X or Y would cost $100,000, and the company cannot afford to do both.
The company expects that Project X would provide net cash inflows of $30,000 per year for 5 years.
For Project Y, the net cash inflows are expected to be as follows:
Year Cash inflows
Year 1 22,000
Year 2 24,000
Year 3 30,000
Year 4 38,000
Year 5 40,000
Delta's cost of capital is 12%.

1) Calculate the present value index for Project X and for Project Y.
2) Indicate whether each of the projects is an acceptable investment.
3) Which of the two projects should Delta implement?
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