a. What would pretax profit be in 1961?
Booker Jones increased production by 20,000 barrels. If the cost of barrels is $31.50, then these 20,000 barrels would cost $630,000. This will be added to inventory account and hence will generate pretax profit of $630,000 – 407,000 = $223,000.
b. If the change were made retroactively as of July 1, 1959 (by adding the cost of barrels to all whiskey in inventory), what would be the effect on
i. The balance sheet at the end of 1960?
Compared to 1959, balance sheet in 1960 will include the cost of barrels in …show more content…
This seems unlikely; therefore it appears that Booker Jones is beating its cost of capital in 1960.
5. Can you estimate the cash flows for the business for 1961? What about for the 3 year period, 1962, 1963, 1964, combined? (Assume Jones does not change its tax accounting method.) Now, so what?
Cash Flow Statement:
Operating Activities Net Income -407 Depreciation 1394 Change in Receivables -404 Change in Bulk Whisky -524 Change in Bottled Whisky 0 Change in Barrels -630 Change in Payables -441 Change in Other Current Liabilities -496 Change in Short-term Notes 400 Investing Activities Increase in PPE -147 Financing Activities Increase in Long-term liabilities 853 Increase in S/H equity -1407
Cash Beginning of Year 1274 Cash at End of Year 316 Change in Cash 958
We don’t have information about years 1962, 1963, 1964. We know though that there will be additional sales in 1964 after 1960’s whisky ages.
6. Can you estimate the economic return for the expansion decision?
Economic return for the expansion decision is equal to discounted profit in 4 years due to sale of extra whisky produced divided by amount invested today. Assuming the cost of capital of 6% and that cost are proportional to number of barrels, discounted profit is 1.06-4 * 20,000/43,000 * ($21,000 - $15,802 - $229 - $987 - $564) = $1,260. I assumed that price does not change in 4 years and Jones will spend money on taxes, bottling,