2024 – 1 Pecos Company is considering the purchase of new equipment that will cost 125 000 The equipment will save

1) Pecos Company is considering the purchase of new equipment that will cost $125,000. The equipment will save the company $42,000 per year in cash operating costs. The equipment has an estimated useful life of five years, annual depreciation expense of $25,000, and no expected salvage value. The company’s cost of capital is 12%.

Required:

1) Assuming the company is subject to a 40% tax rate, compute the net present value.
2) Compute the amount of the annual depreciation tax shield provided by the new equipment.
3) Should the equipment be purchased? Why or why not?

 

2) The manager of Devon Company’s Furniture Division is not satisfied with the level of return on investment that the division achieved this year. What can be done to improve return on investment?

3) Complete the following table to compare and contrast financial and managerial accounting.

 

4) Kotsay Company wants an ending inventory each month equal to 20% of the next month’s cost of goods sold. The company projects cost of goods sold for the first four months of 2012 as follows:

Required:

Prepare an inventory purchases budget for the first quarter of 2012, assuming that the inventory at the start of January was $30,000.

 

5) Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.

Stanton Company recognized $5,000 of depreciation expense.

 

6) Indicate whether each of the following statements about financial statement analysis is true or false.

1>Earnings per share is calculated for a company’s preferred stock

2>The book value per share measures the market value of a corporation’s stock

3>Both dividends and earnings performance are indicators of the value of a company’s stock

4>The most widely quoted measure of a company’s earnings performance is return on equity

5>Financial statement users need to understand that the value of a company’s earnings per share is affected by its choices of accounting principles and estimates