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1.Assume that Monsanto Corporation is considering the replacement of some of its older and outdated carpet-manufacturing equipment. Its objective is to improve the efficiency of operations in terms of both speed and reduction in the number of defects. The company’s finance department has compiled pertinent data that will allow it to conduct a marginal cost–benefit analysis for the proposed equipment replacement. The cash outlay for new equipment would be approximately $600,000. The net book value of the old equipment and its potential net selling price add up to $250,000. The total benefits from the new equipment (measured in today’s dollars) would be $900,000. The benefits of the old equipment over a similar period of time (measured in today’s dollars) would be $300,000

TO DO Create a spreadsheet to conduct a marginal cost–benefit analysis for Monsanto Corporation, and determine the following:

a. The marginal (added) benefits of the proposed new equipment.

b. The marginal (added) cost of the proposed new equipment.

c. The net benefit of the proposed new equipment.

d. What would you recommend that the firm do? Why?

2.Briefly describe what is the fair value option. Is this option more useful than the historical cost for certain types of assets and liabilities?

2) As you mentioned " Fair value is useful than historical cost when it comes to assets whose value can appreciate over time."' and you are correct. But to add, what about the flip side. Lets keep in mind that fair value fluctuates... that asset that has a fair value of $3 M dollars this year may have a fair value of $2 M dollars next year. This means that the company has to write the asset down and recognize a loss on its books of $ 1m . This may not be pleasing to stockholders. QUESTION : Should a company be allowed to write- up and write-down assets resulting in paper gains and losses to recognize fair value accounting

3) Fair value is a market-based value. Meaning, it is the price of a sold asset or the payment of a transfer to a liability at the present date. This is also called the fair value principle. Fair value is used by companies for certain types of assets and liabilities because it provides more relevant information about future cash flows. The historical cost has the advantage of being verifiable. This principle is mostly used by companies that compute their net income every month because it provides a verifiable benchmark that can be used to place a sales value each time they want to determine their income. But fair value is considered more useful than historical cost because it reflects the equivalent value on financial tools. what is your opinion ?

3.Which of the following statements is FALSE? To compensate for the risk that they will receive less than promised if the firm defaults, investors demand a higher interest rate than the rate on U.S. Treasuries. Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows. O For loans to borrowers other than the U.S. Treasury, the stated interest rate is the minimum amount that investors will receive. The effective annual rate indicates the amount of interest that will be earned at the end of one year. O Interest rates vary with the investment horizon.