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23-08-2018

Product code: Accounts-AW404

Assignment 4: Management Accounting Case: Cayuga Cookies, Inc.

The specific course learning outcomes associated with this assignment are:

Determine how capital budgeting is used in long-term financial decisions.

 Apply management accounting concepts to identify and process relevant financial information for decision-making purposes.

 Use technology and information resources to research issues in financial reporting and analysis.

Write clearly and concisely about financial reporting and analysis using proper writing mechanics.

 

Assignment:

Sophie Morgan, President of Cayuga Cookies, Inc. (CCI), was trying to decide whether to expand the company by adding a new product line. The proposal seemed likely to be profitable and adequate funds to finance it could be obtained from outside investors.

CCI had long been regarded as a well-managed company. It had succeeded in keeping its present product lines up to date and had maintained a small but profitable position in a highly competitive industry.

 

The amount of capital presently employed by the company was approximately $4,000,000, and was expected to remain at this level whether the proposal for the new product line was accepted or rejected. Net income from existing operations amounted to about $400,000 a year, and Morgan’s best forecast was that this would continue to be the income from present operations.

 

Introduction of the new product line would require an immediate investment of $400,000 in equipment and $250,000 in additional working capital. A further $100,000 in working capital would be required a year later.

 

Sales of the new product line would be relatively low during the first year, but would increase steadily until the sixth year. After that, changing tastes and increased competition would probably begin to reduce annual sales. After eight years, the product line would probably be withdrawn from the market. At that time, the company would dispose of the equipment and liquidate the working capital. The cash value of steps to close the product line at that time would be about $350,000.

 

The low initial sales volume, combined with heavy promotional outlays, would lead to heavy losses in the first two years, and no net income would be reported until the fourth year. The profit forecasts for the new product line are summarized in Exhibit 1.

MorganwasconcernedabouttheeffectthisprojectwouldhaveonCCI'soverallreportedprofitabilityoverthenextthreeyears.Ontheotherhand,"eyeballing"thefiguresinExhibit1ledMorgantoguessthatiftheproposalwereanalyzedusingafter-taxcashflowsdiscountedat10percent,itmightwellshowapositivenetpresentvalue,andhence couldbeaworthwhileinvestmentopportunity.

IncomeForecastforNewProductLine

 

Year

ForecastedIncrementalCashFlowfromOperations1(1)

 

DepreciationExpenseonNewEquipment2(2)

 

ForecastedIncrementalIncomeBeforeTax(3)=(1+2)

 

IncomeTax3at40%

(4)

 

ForecastedIncrementalNetIncomeAfterTax4(5)=(3+4)

1

(350,000)

(50,000)

(400,000)

160,000

(240,000)

2

(100,000)

(50,000)

(150,000)

60,000

(90,000)

3

0

(50,000)

(50,000)

20,000

(30,000)

4

200,000

(50,000)

150,000

(60,000)

90,000

5

500,000

(50,000)

450,000

(180,000)

270,000

6

1,000,000

(50,000)

950,000

(380,000)

570,000

7

900,000

(50,000)

850,000

(340,000)

510,000

8

650,000

(50,000)

600,000

(240,000)

360,000

 

Notes:

 

  1. Inthiscolumn,numbersinparenthesesindicatecash outflow.
  2. Inthiscolumn,numbersinparenthesesindicateanexpense(i.e.,somethingthatreducesprofits).Forthepurposeofthisanalysis,wemayusethesedepreciationfiguresforthedeterminationofbothNetIncomeandIncomeTaxthatwillbepaidtothegovernment.
  3. Whenforecastedincrementalincomebeforetaxesisnegative,thefirmisentitledtoataxrebateat40%,eitherfromtaxespaidinpreviousyears orfromtaxescurrentlydueonothercompanyoperations.Therefore,inthiscolumn,numbersinparenthesesindicatetaxespaidtothegovernmentandnumbersnotinparenthesesindicatestaxrebatesreceivedfromthegovernment.
  4. Inthiscolumn,numbersinparenthesesindicateanetlossproducedbythenewproductlineandnumbersnotinparenthesesindicateanetprofitmadebythisnewproductline.

 

Required:

 

  1. Calculatethenominalanddiscountedpaybackperiodsforthisproposedproject.

 

  1. Calculatethenetpresentvalueandinternalrateofreturnoftheproposedproject.

 

  1. Referringtoyouranalysisinparts(1)and(2),whatisyourrecommendationregardingtheproposedprojectunderthefollowingthreescenarios(note:commentonanysimilaritiesordifferencesinyourrecommendationsacrossthesethreescenarios):

 

  1. IfCCIwasaprivatecompany,ownedentiretybySophieMorgan?
  2. IfCCIwasapubliclyownedcompany,withsharesownedbyalargenumberofsmallinvestors,andMorganpurelyasalariedadministrator?
  3. IfCCIwasawhollyownedsubsidiaryofamuchlargercompanyandMorganexpectedtobeacandidatetosucceedoneoftheparentcompany'stopexecutiveswhowillretirefromthecompanyinabouttwoyearsfromnow?

 

 

 

 

 

 

Gradingforthisassignmentwillbebasedonanswerquality,logic/organizationofthepaper,andlanguageandwritingskills,usingthefollowingrubric:

 

 

Required:

Calculate the nominal and discounted pay back periods for this proposed project. Thorough  lyzed the nominal and discounted pay back periods for

 

Calculatethenetpresentvalueandinternalrateofreturnof theproposedproject.Thoroughly analyzed the net present value and internal rate of return of the proposed project  worth50%

 

Usingthemetrics calculatedinParts (1)and(2),offer a detailedrecommendationonwhetherornotCCI shouldpursuethisproposedproject underthreedifferentorganizationalscenarios(asdescribedintherequirements).

 

ThoroughlyanalyzedwhetherornottheproposedprojectshouldbepursuedunderthreeorganizationalClarity, writingmechanics,andformattingrequirements.

 

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Product code: Accounts-AW404

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