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Responsibility Centers And Financial Control Essay

543 words - 3 pages

1.Calculation of total initial outflowCost of lift = $2,000,000Cost of installation = $1,300,000Total initial outflow (Io) = $3,300,000Annual cash inflows and outflows before depreciation are the same each yearAnnual cash inflow = number of days x number of tickets x price per ticket= 40 x 300 x 55 = $660,000Annual cash outflow = number of days x cost per day= 200 x 500 = $100,000Net annual cash flow (Ia) = Annual cash inflow - Annual cash outflow = $560,000Present value of $1 at a discount rate of 14% for 0 years = PVo = 1.0000Present value of annuity of $1 at a discount rate of 14% for 20 years = PVa = 6.6231Cash flowIa/Io in $PVa/PVoPresent Value in $Net annual ...view middle of the document...

4) = $336,000Cash effect of depreciation: saving of income taxes = I2 = Io*0.4 = $1,320,000Present value of annuity of $1 at a discount rate of 8% for 20 years = PV1 = 9.8181Present value of 10 year MARCS depreciation at a discount rate of 8% = PV2 = 0.7059Cash flowI in $PVPresent Value in $Annual cash effect of operations excluding depreciation336,0009.8181 3,298,882Cash effect of depreciation: saving of income taxes1,320,0000.7059 931,788Total after tax effect on cash 4,230,670Total initial outflow-3,300,0001.0000-3,300,000Net Present Value 930,670Since the after tax NPV is positive at the given discount rate of 8% adding the lift will be a profitable investment.3.The above analysis tells us that the investment in the lift is viable. However, no alternative use for the funds has been examined. It is possible that some other use of the funds is more profitable. Hence, other possible avenues where funds can be utilized need to be considered.The above analysis assumes certain parameters. Crucial are the additional demand of 300 tickets for 40 days and the 14% before tax and 8% after tax discount rates. These have been arrived at subjectively. Any changes in these would effect the investment decision.The investment decision is one that binds the company for 20 years. It is possible that there could be a better opportunity that is expected to materialize in the next year or so and may be worth waiting for.Reference:Horngren, C.T., Sundem, G.L., & Stratton, W.O. (2005). Introduction to management accounting 13th edition. Upper Saddle River: Pearson Prentice Hall.

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