Note: You can use the Payback period onlyI included the formula and solution on our module for refence YOURUNDARSIANDINGDirections: Evaluate the following projects. Which is the best among them using the differenttools in capital budgeting?Use the following tools to make yourProjectCash outlayAВP920,000decisions:P1,000,000310,000P880,0001. Payback period2. Net present value3. Accounting rate of return4. Profitability indexNet Cash inflow Year 1200,000290,000Year 2310,000220,000280,000Year 3310,000250,000300,000Year 4310,000180,000250,000Year 5310,00090,000295,000Year 6310,00090,000195,000Salvage value70,00080,000Discount rate10%8%12%Economic life4 years5 years6 years Payback Period – the length of time required for an investment to recover its initial outlay in terms of profitsor savings. The longer the payback period, the higher the risk.Decision Rule: If: PB period s maximum allowed PB period; AcceptIf: PB period > maximum allowed PB period; RejectNote: the maximum allowed PB period is determined by the management.Ex 1. You bought a machine costs P100,000. Using this machine, the productivity of your products increaseswhich resulted into additional net profit of P30,000 per year. What is the payback period?Option 1: Manual computationIf the net profit is uneven,Net investmentP100,000Net investmentP100,000Cash return Yr130,00070,000Cash return Yr135,00065,000Yr230,00040,000Yr225,00040,000Yr330,00010,000Yr322,00018,000Yr430,000Yr428,000PB = 3 years + 10,000/30,000= 3.33 years or 3 years and 4 monthsUse this formula if the net profit/net cash flow is thePB = 3 years + 18,000/28,000= 3.64 years or 3 years and 8 monthssame every year.If the maximum allowed PB period is 4 years,Option 2: Formula: PB =Net investmentaccept; if less that 4 years, reject.Annual Cash return100,000PB == 3.33 years or 3 years and 4 months30,000

Note:- Here last year cash flows are included with Salvage value. To Find: Payback period

9OUR Directions: Evaluate the following projects. Which is the best among them using the different tools in capital budgeting? UNDERSFANDING Project Cash outlay A В Use the following tools to make your P1,000,000 P880,000 P920,000 decisions: 1. Payback period 2. Net present value 3. Accounting rate of return 4. Profitability index Net Cash inflow Year 1 310,000 200,000 290,000 Year 2 310,000 220,000 280,000 Year 3 310,000 250,000 300,000 Year 4 310,000 180,000 250,000 Year 5 295,000 195,000 80,000 310,000 90,000 Year 6 310,000 90,000 Salvage value 70,000 Discount rate 10% 8% 12% Economic life 4 years 5 years 6 years

9OUR Directions: Evaluate the following projects. Which is the best among them using the different tools in capital budgeting? UNDERSFANDING Project Cash outlay A В Use the following tools to make your P1,000,000 P880,000 P920,000 decisions: 1. Payback period 2. Net present value 3. Accounting rate of return 4. Profitability index Net Cash inflow Year 1 310,000 200,000 290,000 Year 2 310,000 220,000 280,000 Year 3 310,000 250,000 300,000 Year 4 310,000 180,000 250,000 Year 5 295,000 195,000 80,000 310,000 90,000 Year 6 310,000 90,000 Salvage value 70,000 Discount rate 10% 8% 12% Economic life 4 years 5 years 6 years

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 4CMA

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Define each of the following terms: Capital budgeting; payback period; discounted payback period Independent projects; mutually exclusive projects Net present value (NPV) method; internal rate of return (IRR) method; profitability index (PI) Modified internal rate of return (MIRR) method NPV profile; crossover rate Nonnormal cash flow projects; normal cash flow projects; multiple IRRs Reinvestment rate assumption Replacement chain; economic life; capital rationing; equivalent annual annuity (EAA)
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Suppose that you are working as a capital budgeting analyst in a finance department of a firm and you are going to evaluate two mutually exclusive projects by implementing different capital budgeting techniques. The cash flows for these two projects are given below. YEAR / CASH FLOW (A) /CASH FLOW (B)0 -$17,000 -$17,0001 8,000 2,0002 7,000 5,0003 5,000 9,0004 3,000 9,500 a. Calculate the Payback Period of each project. Which project should you accept according to this method? Explain whether the Payback Period is or is not an appropriate method in this case. b. Suppose that the discount rate is 11%. Calculate the Net Present Values (NPV) of both projects. Which project should you accept according to NPV? Evaluate your findings. c. Calculate the Internal Rate of Returns (IRR) for both projects (use excel). Which…
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