Responsibility Centers and Financial Control

Essay by rebel1University, Bachelor'sA+, August 2007

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1.

Calculation of total initial outflowCost of lift = $2,000,000Cost of installation = $1,300,000Total initial outflow (Io) = $3,300,000Annual cash inflows and outflows before depreciation are the same each yearAnnual cash inflow = number of days x number of tickets x price per ticket= 40 x 300 x 55 = $660,000Annual cash outflow = number of days x cost per day= 200 x 500 = $100,000Net annual cash flow (Ia) = Annual cash inflow - Annual cash outflow = $560,000Present value of $1 at a discount rate of 14% for 0 years = PVo = 1.0000Present value of annuity of $1 at a discount rate of 14% for 20 years = PVa = 6.6231Cash flowIa/Io in $PVa/PVoPresent Value in $Net annual cash flow560,0006.6231 3,708,936Total initial outflow-3,300,0001.0000-3,300,000Net Present Value 408,936Since the before tax NPV is positive at the given discount rate of 14% adding the lift willBe a profitable investment.

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Net annual cash flow before tax (Ia)= Annual cash inflow - Annual cash outflow = $560,000Total initial outflow (Io) = $3,300,000Tax rate = 40%Annual cash effect of operations excluding depreciation = I1 = Ia*(1 – 0.4) = $336,000Cash effect of depreciation: saving of income taxes = I2 = Io*0.4 = $1,320,000Present value of annuity of $1 at a discount rate of 8% for 20 years = PV1 = 9.8181Present value of 10 year MARCS depreciation at a discount rate of 8% = PV2 = 0.7059Cash flowI in $PVPresent Value in $Annual cash effect of operations excluding depreciation336,0009.8181 3,298,882Cash effect of depreciation: saving of income taxes1,320,0000.7059 931,788Total after tax effect on cash 4,230,670Total initial outflow-3,300,0001.0000-3,300,000Net Present Value 930,670Since the after tax NPV is positive at the given discount rate of 8% adding the lift will be a profitable investment.

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The above analysis tells us that the investment in the...