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ACCOUNTING AND FINANCIAL ENGINEERING - EXAMPLE 34.12 : You, as an engineer, buy a piece of biochemical instrument to start a servicing business. The instrument has a useful life of 3 years, that costs $60k. The instrumental business generates $100k per year. The labor costs $50k per year. The $60k new instrument depreciates in its value evenly up to 3 years, thereafter the old instrument needs to be replaced by another piece of new instrument. (i) In the first year of this engineering business : (a) what is its starting cash? (b) calculate the depreciation value of the instrument. (c) find the operating profit generated. (d) what is the capital expense of the business? (e) calculate the cash from operation. (f) calculate the ending cash. (ii) Based on the income statement of the business in the second year : (a) find the capital expense of the business. (b) what is its starting cash? (c) calculate the depreciation value of the instrument. (d) find the operating profit generated. (e) calculate the cash from operation. (f) calculate the ending cash.
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Answer Posted / kangchuentat
ACCOUNTING AND FINANCIAL ENGINEERING - ANSWER 34.12 : (i)(a) Starting cash = $60k = cost of instrument. (b) Depreciation = instrumental (cost / useful life) = $60k / 3 years = $20k / year. (c) Operating profit = revenue - labor cost - depreciation = $100k - $50k - $20k = $30k. (d) Capital expense = $60k = cost of instrument. (e) Cash from operation = operating profit + depreciation = $30k + $20k = $50k. (f) Ending cash = starting cash + cash from operation - capital expense = $60k + $50k - $60k = $50k. (ii) (a) Capital expense of year 2 = 0. (b) Starting cash of year 2 = ending cash of year 1 = $50k. (c) Depreciation value = answer in (i)(b) = $20k / year. (d) Operating profit = answer in (i)(c) = $30k. (e) Cash from operation = answer in (i)(e) = $50k. (f) Ending cash = answer in (ii)(b) + answer in (ii)(e) - answer in (ii)(a) = $50k + $50k - 0 = $100k. The answer is given by Kang Chuen Tat; PO Box 6263, Dandenong, Victoria VIC 3175, Australia; SMS +61405421706; chuentat@hotmail.com; http://kangchuentat.wordpress.com.
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