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Acc108 Exercise

Cluck Farms produces chickens at a total cost of $66,000 and can sell them for $1 each or slaughter them and sell the meat for $2.25 each. It costs $55,000 more to slaughter the chickens. Slaughtering the chickens would result in $20,000 incremental profit. Cluck Farms should slaughter the chickens to maximize profit.

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210 views2 pages

Acc108 Exercise

Cluck Farms produces chickens at a total cost of $66,000 and can sell them for $1 each or slaughter them and sell the meat for $2.25 each. It costs $55,000 more to slaughter the chickens. Slaughtering the chickens would result in $20,000 incremental profit. Cluck Farms should slaughter the chickens to maximize profit.

Uploaded by

Dada X
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MAS 009

Exercise 13
Cluck Farms, Inc. produces a crop of chickens at a total cost of $66,000. The
production generates 60,000 chickens which can be sold for $1 each to a
slaughtering company, or the chickens can be slaughtered in house and then sold
for $2.25 each. It costs $55,000 more to turn the annual chicken crop into chicken
meat. If Cluck Farms slaughters the chickens, how much is incremental profit or
loss? What should Cluck Farms do?

Solution Brief Exercise 13


Incremental revenues: ($2.25 - $1.00) x 60,000 chickens = $75,000
Incremental costs: given as $55,000
Incremental profits: $75,000 - $55,000 = $20,000 profit

Cluck Farms should slaughter.

MAS 010

Ex. 10
Savanna Company is considering two capital investment proposals. Relevant data
on each project are as follows:
Project Red Project Blue
Capital investment $400,000 $560,000
Annual net income 30,000 50,000
Estimated useful life 8 years 8 years

Depreciation is computed by the straight-line method with no salvage value.


Savanna requires an 8% rate of return on all new investments. The present value of
1 for 8 periods at 8% is .540 and the present value of an annuity of 1 for 8 periods
is 5.747.

Instructions
(a) Compute the cash payback period for each project.
(b) Compute the net present value for each project.
(c) Compute the annual rate of return for each project.
(d) Which project should Savanna select?
Solution 158
(a) Project Red Project Blue
Annual net income $ 30,000 $ 50,000
Annual depreciation 50,000* 70,000**
Annual cash inflow $ 80,000 $120,000

*($400,000 ÷ 8 = 50,000)
**($560,000 ÷ 8 = 70,000)

Cash payback period: Project Red Project Blue


$400,000 $560,000
$ 80,000 $120,000

= 5 years = 4.7 years

(b) Project Red Project Blue


Present value of cash inflows: $459,760* $689,640**
Capital investment 400,000 560,000
Net present value $ 59,760 $129,640

*($80,000 × 5.747 = 459,760)


**($120,000 × 5.747 = 689,640)

(c) Annual rate of return: Project Red Project Blue


$30,000 $50,000
($400,000 + $0) ÷ 2 ($560,000 + $0) ÷ 2

= 15% = 17.86%

(d) Which project should Savanna select?


Savanna should select Project Blue because it has a larger positive net
present value and a higher annual rate of return. In addition, Project Blue has
a slightly shorter cash payback period.

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