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(a) Evaluate the projects using each of the following criteria, stating which project(s) DEVCON Industries should choose under each criteria and why: i. Payback ii. Discounted Payback iii. Net Present Value iv. Profitability Index (b) Compute the Internal Rate of Return (IRR) for the Project A only, given that it falls between 15% and 18%.

(a) Evaluate the projects using each of the following criteria, stating which project(s) DEVCON Industries should choose under each criteria and why: i. Payback ii. Discounted Payback iii. Net Present Value iv. Profitability Index (b) Compute the Internal Rate of Return (IRR) for the Project A only, given that it falls between 15% and 18%.

Survey of Accounting (Accounting I)
Survey of Accounting (Accounting I)
8th Edition
ISBN:9781305961883
Author:Carl Warren
Publisher:Carl Warren
Chapter9: Metric-analysis Of Financial Statements
Section: Chapter Questions
Problem 9.23E: Unusual income statement items Assume that the amount of each of the following items is material to...
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DEVCON INDUSTRIES LIMITED Income Statement For the years ended Dec. 31, 2018 and 2019 2018 2019 s000's so00's Sales 900000 1125000 Cost of Goods Sold 300000 306600 Gross Profit 600000 818400 Selling and Administrative Expenses 150000 156000 Depreciation Expense 54000 57000 Advertising Expenses 18000 21000 Earnings Before Interest and Taxes Interest Expense 378000 584400 3000 3000 Taxable Income 375000 581400 Taxation (35%) 131250 203490 Net Income 243750 377910 Dividends (40%) 97500 151164 Addition to Retained Earnings 146250 226746 Additional Information Share Price 21 27.3 Ordinary Shares Outstanding 120000000 144000000 DEVCON INDUSTRIES LIMITED Statement of Financial Position As at Dec. 31, 2018 and 2019 2019 s000's ASSETS 2018 LIABILITIES & EQUITY 2018 2019 Current Assets so00's Current Liabilities so00's s000's Inventories 264000 276000 Accounts Payables Notes Payables 138000 114000 Accounts Receivables 294000 330000 150900 132654 Cash and Equivalents 210900 270000 288900 246654 768900 876000 Non-current Liabilities 120000 90000 Total Liabilities 408900 336654 Net Fixed Assets 630600 690000 Equity Common Stock 264000 276000 Retained Earnings 726600 953346 Total Equity 990600 1229346 Total Assets 1399500 1566000 Total Liabilities & Equity 1399500 1566000
Transcribed Image Text:DEVCON INDUSTRIES LIMITED Income Statement For the years ended Dec. 31, 2018 and 2019 2018 2019 s000's so00's Sales 900000 1125000 Cost of Goods Sold 300000 306600 Gross Profit 600000 818400 Selling and Administrative Expenses 150000 156000 Depreciation Expense 54000 57000 Advertising Expenses 18000 21000 Earnings Before Interest and Taxes Interest Expense 378000 584400 3000 3000 Taxable Income 375000 581400 Taxation (35%) 131250 203490 Net Income 243750 377910 Dividends (40%) 97500 151164 Addition to Retained Earnings 146250 226746 Additional Information Share Price 21 27.3 Ordinary Shares Outstanding 120000000 144000000 DEVCON INDUSTRIES LIMITED Statement of Financial Position As at Dec. 31, 2018 and 2019 2019 s000's ASSETS 2018 LIABILITIES & EQUITY 2018 2019 Current Assets so00's Current Liabilities so00's s000's Inventories 264000 276000 Accounts Payables Notes Payables 138000 114000 Accounts Receivables 294000 330000 150900 132654 Cash and Equivalents 210900 270000 288900 246654 768900 876000 Non-current Liabilities 120000 90000 Total Liabilities 408900 336654 Net Fixed Assets 630600 690000 Equity Common Stock 264000 276000 Retained Earnings 726600 953346 Total Equity 990600 1229346 Total Assets 1399500 1566000 Total Liabilities & Equity 1399500 1566000
Based on the Weighted Average Cost of Capital calculated in question 4, DEVCON Industries decides, based on the risk profile of projects A and B, to use a required return of 15%. You have been tasked with evaluating the quantitative aspects of the projects, which are mutually exclusive. The projected cash flows of both projects are as follows: Project Years -2250000 -3750000 1 500000 1000000 750000 2000000 3 800000 2000000 4 1400000 2000000 As noted above, the company has a required rate of return of 15%. The following PV factors are provided: PV Year Factor (15%) 1 0.8696 2 0.7561 3 0.6575 4 0.5718 Required: (a) Evaluate the projects using each of the following criteria, stating which project(s) DEVCON Industries should choose under each criteria and why: i. Payback ii. Discounted Payback i. Net Present Value iv. Profitability Index (b) Compute the Internal Rate of Return (IRR) for the Project A only, given that it falls between 15% and 18%.
Transcribed Image Text:Based on the Weighted Average Cost of Capital calculated in question 4, DEVCON Industries decides, based on the risk profile of projects A and B, to use a required return of 15%. You have been tasked with evaluating the quantitative aspects of the projects, which are mutually exclusive. The projected cash flows of both projects are as follows: Project Years -2250000 -3750000 1 500000 1000000 750000 2000000 3 800000 2000000 4 1400000 2000000 As noted above, the company has a required rate of return of 15%. The following PV factors are provided: PV Year Factor (15%) 1 0.8696 2 0.7561 3 0.6575 4 0.5718 Required: (a) Evaluate the projects using each of the following criteria, stating which project(s) DEVCON Industries should choose under each criteria and why: i. Payback ii. Discounted Payback i. Net Present Value iv. Profitability Index (b) Compute the Internal Rate of Return (IRR) for the Project A only, given that it falls between 15% and 18%.
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