Chapter 26
Special Business Decisions
and Capital Budgeting
Excel Application Exercise
Solution
1. Payback period: 3.75 years
2. Accounting rate of return: 13.33%
3. Net present value: – $2,324
4. Should Amazon purchase the machine? With a
payback period of 3.75 years (less than its useful
life of 5 years) and an accounting rate of return
of 13.33%, the machine looks attractive. But the
negative net present value indicates that the
machine is not worth purchasing.
, Quick Check
Answers:
1. b 3. d 5. a 7. a 9. b
2. c 4. d 6. d 8. c 10. a
Explanations:
5. Make Buy
a
Incremental costs to make:
Ingredients $0.50
Direct labor 1.00
Incremental cost to buy $1.75
Incremental cost per loaf $1.50 $1.75
7. a $7,500 = $30,
9. b Present value of annuity of $120,000 for
5 years @12% = $120,000 3.605 $432,600
Cost of investment (500,000)
Net present value $ (67,400)
, Starters
(5 min.) S 26-1
a. The price of the new printer is relevant.
b. The price you paid for the old printer is irrelevant because
it is a past (sunk) cost that cannot be changed, regardless
of your decision.
c. The trade-in value of the old printer is relevant.
d. Paper costs are irrelevant because these costs will be the
same with either the old printer or the new printer.
e. The difference between the ink cartridges’ cost for the old
printer and ink cartridges’ cost for the new printer is
relevant.
, (5 min.) S 26-2
ACDelco
Incremental Analysis of Special Sales Order
Expected increase in revenues
(20,000 filters $1.75) $ 35,000
Expected increase in expenses:
Variable manufacturing costs
(20,000 filters $1.35) $27,000
Fixed manufacturing cost
(special equipment) 9,000
Total expected increase in expenses (36,000)
Expected decrease in operating income $ (1,000)
ACDelco should not accept the special sales order because it
will reduce operating income.
Special Business Decisions
and Capital Budgeting
Excel Application Exercise
Solution
1. Payback period: 3.75 years
2. Accounting rate of return: 13.33%
3. Net present value: – $2,324
4. Should Amazon purchase the machine? With a
payback period of 3.75 years (less than its useful
life of 5 years) and an accounting rate of return
of 13.33%, the machine looks attractive. But the
negative net present value indicates that the
machine is not worth purchasing.
, Quick Check
Answers:
1. b 3. d 5. a 7. a 9. b
2. c 4. d 6. d 8. c 10. a
Explanations:
5. Make Buy
a
Incremental costs to make:
Ingredients $0.50
Direct labor 1.00
Incremental cost to buy $1.75
Incremental cost per loaf $1.50 $1.75
7. a $7,500 = $30,
9. b Present value of annuity of $120,000 for
5 years @12% = $120,000 3.605 $432,600
Cost of investment (500,000)
Net present value $ (67,400)
, Starters
(5 min.) S 26-1
a. The price of the new printer is relevant.
b. The price you paid for the old printer is irrelevant because
it is a past (sunk) cost that cannot be changed, regardless
of your decision.
c. The trade-in value of the old printer is relevant.
d. Paper costs are irrelevant because these costs will be the
same with either the old printer or the new printer.
e. The difference between the ink cartridges’ cost for the old
printer and ink cartridges’ cost for the new printer is
relevant.
, (5 min.) S 26-2
ACDelco
Incremental Analysis of Special Sales Order
Expected increase in revenues
(20,000 filters $1.75) $ 35,000
Expected increase in expenses:
Variable manufacturing costs
(20,000 filters $1.35) $27,000
Fixed manufacturing cost
(special equipment) 9,000
Total expected increase in expenses (36,000)
Expected decrease in operating income $ (1,000)
ACDelco should not accept the special sales order because it
will reduce operating income.
