Chapter 1: The Role of Managerial Finance

Problems
P1–2 Accrual income versus cash flow for a period
The Motor Corporation sold vehicles for $500,000 to one specific dealer during the year. At the
financial year end, the dealer still owed The Motor Corporation $350,000. The cost of the
vehicles sold was $400,000, and this cost was incurred and paid by The Motor Corporation.
a. Determine the net profit using the accrual basis of accounting.
b. Determine the net cash flow using the cash basis of accounting.
c. The accountant and financial manager need to present the results to the CEO of The Motor
Corporation. What will be their message regarding the performance of the corporation?

P1–4 Marginal cost-benefit analysis and the goal of the firm

Wendy Winter needs to determine whether or not the current warehouse system should be
upgraded to a new system. The new system would require an initial cash outlay of $250,000. The
current system could be sold for $55,000. The monetary benefit of the new system over the next
five years is $325,000 while the monetary benefit of the current system over the same period is
$125,000. Furthermore, it is expected that the firm’s stock price will increase if the new system
is implemented because it will make the firm more cost efficient and cost effective in the long
run.
a. Identify and describe the analysis Wendy should use to make the decision.
b. Calculate the marginal benefit of the proposed new warehouse system.
c. Calculate the marginal cost of the proposed new warehouse system.
d. What should Wendy’s recommendation be to the firm regarding the new warehouse system?
Explain your recommendation.
e. If the new system is implemented, will the firm achieve the primary financial goal of
managers?