[jeff]

Welcome to the Q1 2016 CPA Exam Study Group for BEC.

Some BLITZ videos to help your exams: https://www.another71.com/ninja-blitz

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[payaza2000]

Can someone explain this answer (B): Did I mention I hate IRR

Yipann Corporation is reviewing an investment proposal; the data for each year are presented as follows. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal to its net book value, and there will be no salvage value at the end of the investment's life.

Investment Proposal
Initial Cost Annual Net Annual Present Value of Present Value of
and After-tax Net $1 Received at Annuity of $1
Book Value Cash Flows Income End of Period (End of Each Period)
————- ———– —— ————– ——————–
Year
0 $105,000 $ 0 $ 0 0 0
1 70,000 50,000 15,000 0.8065 0.8065
2 42,000 45,000 17,000 0.6504 1.4568
3 21,000 40,000 19,000 0.5245 1.9813
4 7,000 35,000 21,000 0.4230 2.4043
5 0 30,000 23,000 0.3411 2.7454
Yipann uses a 24% after-tax target rate of return for new investment proposals. The average annual cash inflow where Yipann would be indifferent to the investment (rounded to the nearest dollar) is:

A.
$30,000.

B.
$38,246.

C.
$35,816.

D.
$50,000.

FAR 5/6/2015- 84
REG 8/3/2015 - 87
AUD 10/25/2015- 69 1/20/2016 -75
BEC 2/26/2016- 80

Thank you God

[monikernc]

I think i'm having a nightmare. I fell asleep and when i awoke and checked my phone payaza had posted an IRR question.
Is the answer B. 105,000/ 2.7454 = 38,246. If not, i am going back to bed convinced it was a dream.

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[monikernc]

Farwars, is the answer c, acctg rate of return?

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[FAR_WARS]

(a) The requirement is to identify the technique that would allow management to justify an investment based on considerations other than expected cash flows. Answer (a) is correct because the real options technique views an investment as purchasing an option. This may allow management to justify investments that do not currently have positive cash flows. Answers (b), (c), and (d) are all techniques that require expected return to exceed the initial investment.

FAR- 80
BEC- 75
AUD- 78
REG- ?

[monikernc]

I know what options are but what are real options?

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[monikernc]

Payaza, think of it this way, the IRR is the rate of return where the PVA factor*(future cash flows) = initial investment. We usually have cash flows and initial investment and need to solve for the IRR. This one they give us the IRR because they want 24% return from the initial investment. The question wants the average annual cash flow in each of 5 years which means it is the same amount every year making it an annuity. 2.7454*future cash flows = 105,000. 105,000/2.7454 = cash flow in each of the 5 years or 38,246

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[payaza2000]

@monikernc

So IRR where the PV of the Future Cash flows = the Cost of the Investment. Since in this question they gave us the IRR, we work back with the 24% knowing that the project has a benefit of five years.

Thanks. Time fore me to go to bed. Four days of being a neurotic, nervous wreck.

FAR 5/6/2015- 84
REG 8/3/2015 - 87
AUD 10/25/2015- 69 1/20/2016 -75
BEC 2/26/2016- 80

Thank you God

[monikernc]

i ran through my trouble questions over the weekend and got through those ok. very eye opening. just did them again and there were fewer but too many graphs. if i get a bunch of graph questions, i'm screwed.

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[SaveBandit]

In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, Year 1. The following information is being considered by Gunning Industries.

•The new machine would be purchased for $160,000 in cash. Shipping, installation, and testing would cost an additional $30,000.

•The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and total fixed costs of $40,000 per year.

•The investment in the new machine will require an immediate increase in working capital of $35,000.

•Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of five years and zero salvage value.

•Gunning is subject to a 40 percent corporate income tax rate.

Gunning uses the net present value method to analyze investments and will employ the following factors and rates.

Period

Present Value of
$1 at 10%

Present Value of an
Ordinary Annuity of
$1 at 10%

1 .909

2 .826

3 .751

4 .683

5 .621

The overall discounted cash flow impact of Gunning Industries' working capital investment for the life of the new production machine would be:

b. (13,265)

My question is: why don't we factor in tax rates into this? Why isn't it 35,000 x (1 – .4) x .621 instead of just $35,000 x .621?

4 for 4

FAR 85
AUD 94
BEC 86
REG 90

[NYaccountingstudent]

Boyle, Inc., makes two products, X and Y, that require allocation of indirect manufacturing costs. The fol­lowing data was compiled by the accountant before making any allocations:

Product X Product Y
——— ———
Quantity produced 10,000 20,000
Direct manufacturing labor hours 15,000 5,000
Setup hours 500 1,500

The total cost of setting up manufacturing processes and equipment is $400,000. The company uses a job-costing system with a single indirect cost rate. Under this system, allocated costs were $300,000 and $100,000 for X and Y, respectively. If an activity-based system is used, what would be the allocated costs for each product?
Correct A.

Product X, $100,000; Product Y, $300,000
B.

Product X, $150,000; Product Y, $250,000
C.

Product X, $200,000; Product Y, $200,000
D.

Product X, $250,000; Product Y, $150,000

[NYaccountingstudent]

Boyle, Inc., makes two products, X and Y, that require allocation of indirect manufacturing costs. The fol­lowing data was compiled by the accountant before making any allocations:

Product X Product Y
——— ———
Quantity produced 10,000 20,000
Direct manufacturing labor hours 15,000 5,000
Setup hours 500 1,500

The total cost of setting up manufacturing processes and equipment is $400,000. The company uses a job-costing system with a single indirect cost rate. Under this system, allocated costs were $300,000 and $100,000 for X and Y, respectively. If an activity-based system is used, what would be the allocated costs for each product?
Correct A.

Product X, $100,000; Product Y, $300,000
B.

Product X, $150,000; Product Y, $250,000
C.

Product X, $200,000; Product Y, $200,000
D.

Product X, $250,000; Product Y, $150,000

[NYaccountingstudent]

Why do i assume the cost driver is setup hours instead of labor hours?

[FAR_WARS]

@save- this is what I think:

“The investment in the new machine will require an immediate increase in working capital of $35,000.”

This part has no effect on net income. That is why we don't include taxes in the calculation, like we do when considering depreciation, which has a non-cash effect on net income.

FAR- 80
BEC- 75
AUD- 78
REG- ?

[FAR_WARS]

@NYaccountingstudent:

bc setup costs would be more like a fixed cost (setup once, and we can make as many units as we want).

DL hours would be more of a variable cost. (more hours for each unit produced)

EDIT- after rereading, i can see where the question slightly indicates we are talking about setup costs only.

400 * 500/2000 = 100 Product X
400 * 1500/2000 = 300 Product Y

FAR- 80
BEC- 75
AUD- 78
REG- ?

[Anonymous]

A few days ago I saw people discussing calculation of beta for CAPM pricing. I believe the consensus was that it would be provided to us. (And I am pretty sure my Becker book also said that.) I just took Becker practice exam #2 (which was brutal) and there was a problem where we had to calculate the beta. For that problem, the beta = change in stock value/change in market value.

Hope this helps someone! I was stumped.

[Author]

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