P 3. Sports, Inc., is a nationwide distributor of sporting equipment. The corporatepresident, Wesley Coldwell, is dissatisfied with corporate operating results,particularly those of the Spring Branch, and has asked the controller for moreinformation. The controller prepared the following segmented income statement(in thousands of dollars) for the Spring Branch:

Coldwell is considering adding a new product line, Kite Surfing. The controllerestimates that adding this line to the Spring Branch will increase sales by$300,000, variable costs by $150,000, and direct fixed costs by $20,000. Thenew product line will have no effect on common fixed costs.Required1. How will operating income be affected if the Baseball line is dropped?2. How will operating income be affected if the Baseball line is kept and a KiteSurfing line is added?

3. If the Baseball line is dropped and the Kite Surfing line is added, sales of the

Football line will decrease by 10 percent and sales of the Basketball line willdecrease by 5 percent. How will those changes affect operating income?4. What decision do you recommend? Explain.

P 1. Capital investment analysis is the main responsibility of Ginny Weiss, thespecial assistant to the controller of Nazzaro Manufacturing Company. Duringthe previous 12-month period, the company’s capital mix and the respective costswere as follows:

Percentage ofTotal Financing Cost of Capital

Debt financing 25% 7Preferred stock 15% 9Common stock 50% 12Retained earnings 10% 12

Plans for the current year call for a 10 percent shift in total financing from commonstock financing to debt financing. Also, the cost of debt financing is expected

to increase to 8 percent, although the cost of the other types of financing willremain the same.Weiss has already analyzed several proposed capital investments. Thoseprojects and their projected rates of return are as follows: Project M, 9.5 percent;Equipment Item N, 8.5 percent; Product Line O, 15.0 percent; Project P,6.9 percent; Product Line Q, 10.5 percent; Equipment Item R, 11.9 percent;and Project S, 11.0 percent.Required1. Using the expected adjustments to cost and capital mix, compute theweighted-average cost of capital for the current year.2. Identify the proposed capital investments that should be implemented basedon the cost of capital calculated in requirement 1.

P 2. Sonja and Sons, Inc., owns and operates a group of apartment buildings.Management wants to sell one of its older four-family buildings and buy a newbuilding. The old building, which was purchased 25 years ago for $100,000, hasa 40-year estimated life. The current market value is $80,000, and if it is sold,the cash inflow will be $67,675. Annual net cash inflows from the old buildingare expected to average $16,000 for the remainder of its estimated useful life.The new building will cost $300,000. It has an estimated useful life of25 years. Net cash inflows are expected to be $50,000 annually.

Assume that (1) all cash flows occur at year end, (2) the company uses straightlinedepreciation, (3) the buildings will have a residual value equal to 10 percentof their purchase price, and (4) the minimum rate of return is 14 percent. UseTables 1 and 2 in the appendix on present value tables.Required1. Compute the present value of future cash flows from the old building.2. What will the net present value of cash flows be if the company purchases thenew building?3. Should the company keep the old building or purchase the new one?

P 4. The Raab Company is expanding its production facilities to include a newproduct line, a sporty automotive tire rim. Tire rims can now be produced withlittle labor cost using new computerized machinery. The controller has advisedmanagement about two such machines. The details about each machine are asfollows:

XJS Machine HZT MachineCost of machine $500,000 $550,000Residual value 50,000 55,000Net income 34,965 40,670Annual net cash inflows 91,215 90,170

The company’s minimum rate of return is 12 percent. The maximum paybackperiod is six years. (Where necessary, round calculations.)

Required1. For each machine, compute the projected accounting rate of return.2. Compute the payback period for each machine.3. Based on the information from requirements 1 and 2, which machine shouldbe purchased? Why?