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CAPITAL INVESTMENT DECISION PROBLEMS
Exercises 14-26 to 14-29GROUP 1 AC 519 3:00 – 4:30 TTH
Payback Period
EXERCISE 14-26p. 601
Requirement 1
Payback Period =
What is the payback period for Colby?
Requirement 2
What is the payback period for Kylie?
Year Unrecovered Investment
Annual Cash Flow
Time Needed for Payback
(years)
1 $
1,400,000.00 $
350,000.00 1
2 1,050,000.00 490,000.00 1
3
560,000.00 700,000.00 0.8
4 0 420,000.00 0
5 0 280,000.00 0Payback period is 2.8 years.
Requirement 3
Payback Period =
Original Investment
How much did Carsen invest in the project?
Requirement 3
Payback Period =
Annual Cash Flow
How much cash did Rahn receive each year?
Accounting Rate of Return
EXERCISE 14-27p. 601-602
Requirement 1
Compute the ARR on the new equipment that Cobre Company is considering.
Accounting Rate of Return=
Accounting Rate of Return
Requirement 1 (supporting)
Yearly Depreciation Expense:
Average Net Income:
$6,000,000-4,800,000-720,000 = $480,000
Requirement 2 Conceptual Connection
ARR of Project A:Yearly Depreciation Expense: $75,000/5 = $15,000
Average Net Income:Year 1 $22,500-15,000 = $7,500 Year 2 $30,000-15,000 = $15,000 Year 3 $45,000-15,000 = $30,000 Year 4 $75,000-15,000 = $60,000
Year 5 $75,000-15,000 = $60,000 $172,500
$172,500/5 = $34,500Accounting Rate of Return = $34,500/75,000 = 46%
ARR of Project B:Yearly Depreciation Expense = $15,000Average Net Income:
Year 1 $22,500-15,000 = $7,500 Year 2 $30,000-15,000 = $15,000 Year 3 $45,000-15,000 = $30,000 Year 4 $22,500-15,000 = $7,500 Year 5 $22,500-15,000 = $7,500
$67,500 $67,500/5 = $13,500
Accounting Rate of Return = $13,500/75,000 = 18%
Requirement 2 Conceptual Connection
Requirement 2 Conceptual Connection
Based on the Accounting Rate of Return (ARR), Project A should be chosen because it has a higher ARR.
Unlike the Payback Period, the ARR correctly signals the one project should be preferred over the other because it considers the profitability of the project, as reflected in the equation (numerator of average net income).
Requirement 3
How much cash did the company in Scenario c invest in the project?
Accounting Rate of Return=
Requirement 4
What is the average net income earned by the project in Scenario d?
Accounting Rate of Return =
Net Present Value
EXERCISE 14-28p. 602
Requirement 1
Compute the NPV for Southward Manufacturing, assuming a discount rate of 12%. Should the company buy the new welding system?
Net Present Value = - I
$400,000 x = $ 2,260,089.211
$2,260,089.211 - 2,250,000 = $10,089.211 = NPV
Requirement 2 Conceptual Connection
$ 35,000 x= $
161,800.7882
$161,800.7882 - 180,000 = ($18,199.21176)
KaylinDay should not invest in the shop because the NPV is negative.
NPV of Kaylin Day @ $ 35,000 per year:
Requirement 2 Conceptual Connection
45,000 x= $
161,800.7882
$161,800.7882 - 180,000 = ($18,199.21176)
KaylinDay should not invest in the shop because the NPV is negative.
NPV of Kaylin Day:NPV of Kaylin Day @ $ 45,000 per year:
$45,000 x= $
208,029.5849
$208,029.5849 - 180,000 = $28,029.58488
KaylinDay should invest in the shop because the NPV is positive.
Requirement 2 Conceptual Connection
The two situations portray the impact of the periodic cash flows in determining the NPV, and consequently the accept-reject decision of the company.
Investments with greater net periodic cash flows will have higher NPV than investments with low net periodic cash flows, ceteris paribus.
Requirement 3
NPV = $21,300 =
45,000 x- Required Investment
Required Investment:
$ 240,071.6789 - 21,300 = $ 218,771.6789
What was the required investment for Goates Company’s project?
Internal Rate of Return
EXERCISE 14-29p. 603 - 604
Requirement 1
Calculate the IRR for Cuenca Company. Should the new equipment be purchased?
$7,200,000 = 2,000,000
x
IRR = 12.0535%
The new equipment should not be purchased because the IRR is less than the 16% cost of capital.
Requirement 2
Calculate Kathy Short’s IRR. Should she acquire the new system?
$1,248,000 = 240,000 x
IRR = 14.0974%
Kathy Shorts should acquire the new system because the IRR exceedsthe 10%cost of capital.
Requirement 3
What should be Elmo Enterprises'’ expected annual cash flow from the plant?
$2,880,000 = Annual Cash
Flow x
Annual Cash Flow = $ 746,256.5688
ABANGAN, SHAIRAALLERA, ODESSA MARIEDY, JAECELLE GO, JAN JENSENGO, SHAUN ANTHONYMANOLONG, JOHN MARJADAS, JAMAICAREBADOMIA, CHUMESCENESARANA, PHOEBE LOUTIU, MATTHEWVILLAHERMOSA, GIAH
End. Thank you!!