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Homework answers / question archive / 1 Brief Exercise 14-07 Francum Company has the following data: direct labor $248,000, direct materials used $197,000, total manufacturing overhead $223,000, and beginning work in process $28,000
1 Brief Exercise 14-07 Francum Company has the following data: direct labor $248,000, direct materials used $197,000, total manufacturing overhead $223,000, and beginning work in process $28,000. Compute total manufacturing costs. Total manufacturing costs $ LINK TO TEXT Compute total cost of work in process. Total cost of work in process Click If you would like to show Work for this question Open Show.
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Use the following to answer this and the next two questions The owner of the company you work for has presented you with data about a potential investment. Machine Original outlay (beginning of Year 1): $220 000 Expected net cash inflow: Year Amount 1 2 3 4 $45 000 $45 000 $55 000 $50 000 Salvage value (expected in year 4) $105 000 The owner of the company estimates the cost of capital to be 7%. The company has enough funds to meet all capital expenditure requirements. Required: Calculate the net present value for the investment and state (with a justification of your answer) whether it should be accepted (15 marks). Use the following present value table to help calculate your answer: Number of periods 7% 8% 9% $1 (1+k)" $1 (1+k)" (1+k}" 2 0.935 0.873 0.816 0.762 0.926 0.857 0.794 0.735 0.909 0.826 0.751 0.683 ? 4
1.
| Answer: | ||||
| a) | Total Mnufacturing cost | |||
| Particulars | Amount | |||
| Direct Labour | $ 2,48,000.00 | |||
| Direct Materials | $ 1,97,000.00 | |||
| Manufacturing OH | $ 2,23,000.00 | |||
| Total Mnufacturing cost | $ 6,68,000.00 | |||
| b) | Total cost of Work in Progress | |||
| Particulars | Amount | |||
| Total Manufacturing cost | $ 6,68,000.00 | |||
| Begining Work in Progress | $ 28,000.00 | |||
| Total cost of Work in Progress |
$ 6,96,000.00 |
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Present value is a concept which states that any amount received in the future is not worth the same value if the same amount is received today. The reason for this is that any amount received today will be invested today and interest will be received on that amount which will increase the amount’s worth in the future.
In the same way, any payment to be made in the future is not worth the same amount paid today. While taking a decision regarding investment on the basis of present value, the future inflows and outflows are discounted using the estimated cost of capital and the net present value of the inflows and outflows is calculated.
In the given question, the cost of capital of the company is 7.00%. Hence, the future inflows and outflows are discounted at 7.00% as shown in the below table:
As calculated in the table, the net present value of inflows and outflows is $24,350. If the present value of future cash flows for an investment is positive, it is advisable to go ahead with the investment. Hence, it is recommended to the company purely on the basis of present value to go ahead with the investment.
In practical situations, there are many other factors to be considered for decision making along with the present value factor.
