المحاسب الإداري المعتمد الجزء 2 E. Investment Decisions

Fernhollow Cider: A Cider House or a Canning Line

Fernhollow Cider Company

Question of 7 Fernhollow Cider: A Cider House or a Canning Line

Fernhollow Cider: A Cider House or a Canning Line Case-based question

الحالة

Fernhollow Cider Company presses and ferments apples from its own orchards in the Tamsin Valley and sells most of its cider to pubs and restaurants. Three years ago, when a neighboring farm was broken up for sale, Fernhollow bought the farm's stone barn for $1,150,000. Last year it spent a further $240,000 on a new roof and rewiring, and the barn now stands empty. Fernhollow depreciates the barn, including that work, by $34,750 a year, and this charge will continue unchanged however the barn is used, including if it is rented out.

Two proposals would each need the whole barn, so Fernhollow can adopt at most one of them.

Cider House: fit out the barn as a tasting room and shop for visitors to the valley, at a cost of $175,000. Visitors already buy Fernhollow cider at a small farm-gate stall. If the cider house opens, the stall will close and those visitors will buy at the cider house instead.

Canning Line: install a canning line in the barn at a total installed cost of $264,000. Fernhollow would then stop paying a mobile contractor to can its cider.

If neither proposal goes ahead, a local brewery will rent the barn as a warehouse for ten years at $96,000 a year, net of all owner costs. Fernhollow's controller will evaluate both proposals at the company's 11% required return.

الافتراضات

Year 0 is the decision date. Unless a question states otherwise, cash flows arise at the end of each year, starting in Year 1.
Fernhollow's income tax rate is 24% in every year, and Fernhollow has enough taxable income to use every deduction in the year it arises.
Tax depreciation is straight-line over the stated recovery period to zero residual value, with a full deduction in each year starting in Year 1.
Amounts described as net receipts are the incremental cash inflows, including cash costs saved, minus the related cash operating costs, before depreciation and income tax.
The 11% required return is a nominal rate and applies to both proposals, which are judged to carry the same risk. Expected inflation is 2.5% a year.
Use full precision in intermediate steps and round only the final answer as each question instructs.

Fernhollow's capital policy lists six steps without numbering them. Its rules are: funding is arranged only for a proposal that has already been approved; the post-completion audit uses at least one full year of operating results; approval must be based on forecast incremental cash flows; results are tracked every month from the first month of operation; and no contract may be signed until funding is in place. Put the six steps in the order in which each one begins under this policy, first to last.

إعادة الترتيب بالسحب أو بأزرار الأسهم.

Put the money in place for the approved proposal, for example by agreeing a term loan with Fernhollow's bank.
Hold a formal post-completion audit comparing actual results with the approved forecast.
Estimate, year by year, how each proposal would change Fernhollow's after-tax cash flows compared with not going ahead.
Track operating results against the approved forecast each month and act on significant variances.
Decide which proposal, if either, to approve, based on the forecasts and the 11% required return.
Sign the contracts and carry out the approved proposal.

جارٍ الحفظ…

When the controller evaluates the Cider House proposal, how should the amounts connected with the barn be handled?

الإجابة Charge the $1,390,000 already spent on the barn to the Cider House as a Year 0 outflow, since the cider house would occupy it. Exclude the $1,390,000 already spent; include the $175,000 fit-out and the after-tax rent Fernhollow would give up. Include only the $175,000 fit-out; Fernhollow already owns the barn, so putting it to use costs Fernhollow nothing. Exclude the $1,390,000, but charge the barn's $34,750 annual depreciation, since the cider house would wear out the building.

The canning line costs $264,000 in total, including installation, and would be depreciated for tax straight-line over three years to zero. In Year 1 it is expected to generate incremental net receipts of $105,000 before depreciation and tax (the contractor's canning fees saved, less the line's own running costs). What is the canning line's after-tax operating cash flow for Year 1? Leave out the brewery's rent offer, which the controller enters as a separate line in the proposal's NPV. Enter whole US dollars; no rounding is needed.

الإجابة USD USD

رقم صحيح.

For the Cider House, the controller has specified both paths for the net receipts from valley visitors. All amounts in this question are stated in nominal dollars. Without the cider house, visitors keep buying at the farm-gate stall, which generates net receipts of $150,000 a year, level in perpetuity (the amount stays at $150,000 every year). With the cider house, the stall closes (so its $150,000 is lost) and total net receipts from visitors are $420,000 in Year 1, growing at 4% a year in perpetuity. Using the 11% required return, what is the Year 0 present value of the incremental after-tax net receipts that the Cider House creates? This is not the proposal's NPV: ignore the fit-out, the rent offer and all other investment flows. Enter whole US dollars, rounded to the nearest dollar.

الإجابة USD USD

رقم صحيح.

The mobile canning contractor has quoted its fee for Year 3 at $186,000, stated in Year 3 (nominal) dollars; the Canning Line would save this fee. Expected inflation is 2.5% a year. What is the Year 3 fee saving worth in Year 0 purchasing power (real terms)? This asks for the inflation adjustment only, not a present value at the required return. Enter whole US dollars, rounded to the nearest dollar.

الإجابة USD USD

رقم صحيح.

Complete the controller's briefing note. For a proposal with conventional cash flows (outflows first, then only inflows), an NPV of exactly zero at 11% means that the proposal Meaning of a zero NPV . A proposal of this kind with a positive NPV at 11% has an IRR that IRR of a positive-NPV proposal 11%. If a proposal's cash flows change sign more than once, for example because a major refit is needed partway through its life, Effect of more than one sign change . The Cider House and the Canning Line differ in size and in the timing of their inflows, so NPV and IRR could rank them differently even though each has conventional cash flows; in that case Fernhollow should choose the proposal with Rule for ranking mutually exclusive proposals .

Fernhollow's board has decided that each approved capital project will receive a post-completion audit. Select the TWO statements that correctly describe these audits and the benefits Fernhollow can expect from them.

اختيار إجابتين. المحدد 0 / 2

الإجابة Their main purpose is to recompute each project's original NPV so that the figure can be reported in the annual financial statements. They reveal where earlier forecasts went wrong, such as persistently optimistic visitor numbers, so later proposals can correct for it. They should cover only projects that missed their forecasts, since a project that met its forecast has nothing to teach. Managers should be penalized for any shortfall against forecast, since the threat of penalties is what makes proposers forecast accurately. Staff who expect their forecasts to be checked against actual results have less reason to inflate them when proposing projects. They can be held only after an asset has been retired, since results cannot be judged while the asset is still in use.

تظهر الدرجات والإجابات الصحيحة والشروح فور تسليم الإجابات. ولا يحصل السؤال غير المُجاب على أي درجة.

جارٍ الفحص…

حالات تدريبية أصلية من إعداد صرح. ليست أسئلة من امتحانات IMA، ويخضع تصحيحها لسياسة صرح الخاصة، وهي تختلف عن سياسة الامتحان الرسمي.