Problem 1:
Martinez Company has money available for investment and is considering two projects each costing $70,000. Each project has a useful life of 3 years and no salvage value. The investment cash flows follow:
Project A Project B
Year 1 $ 8,000 $28,000
Year 2 24,000 28,000
Year 3 52,000 28,000
Instructions
If 8% is an acceptable earnings rate, which project should be selected? Justify your response.
Problem 2: Guong Co. has three product lines in its retail stores: books, videos, and music. Results of the fourth quarter are presented below:
Books Music Videos Total
Units sold 1,000 2,000 2,000 5,000
Revenue $22,000 $40,000 $23,000 $85,000
Variable departmental costs 17,000 22,000 12,000 51,000
Direct fixed costs 1,000 3,000 2,000 6,000
Allocated fixed costs 7,000 7,000 7,000 21,000
Net income (loss) $ (3,000) $ 8,000 $ 2,000 $ 7,000
The allocated fixed costs are unavoidable. Demand of individual products are not affected by changes in other product lines.
Instructions:
What will happen to profits if Guong Co. discontinues the Books product line?