Garrison Company has two Investment opportunitles. A cash flow schedule for the Investments Is provided below:YearInvestment AInvestment B$(4,900)1,9601,9601,960$(5,850)2,94021,9601,96041,960980Considering the unequal Investments, which of the following techniques would be most approprlate for choosIng between Investment A and Investment B?Multiple ChoicePayback methodPresent value indexNet present value methodNone of these answers is correct

Payback Period: It is the period in which the project recovers the cash outflow. Net Present…

Answered: Considering the unequal investments,…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 52P

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Assume San Lucas Corporation in MAD 26-1 assigns the following probabilities to the estimated annual net cash flows: a. Compute the expected value of the annual net cash flows. b. Determine the expected net present value of the equipment, assuming a desired rate of return of 10% and the expected annual net cash flows computed in part (a). Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer. c. Based on your results in parts (a) and (b), should San Lucas Corporation invest in the equipment?
Clearcast Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated operating income, and net cash flow for each proposal are as follows: The companys capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are met, the net present value method and present value indexes are used to rank the remaining proposals. Instructions 1. Compute the cash payback period for each of the four proposals. 2. Giving effect to straight-line depreciation on the investments and assuming no estimated residual value, compute the average rate of return for each of the four proposals. Round to one decimal place. 3. Using the following format, summarize the results of your computations in parts (1) and (2). By placing the computed amounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should be accepted for further analysis and which should be rejected. 4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 12% and the present value table appearing in Exhibit 2 of this chapter. 5. Compute the present value index for each of the proposals in part (4). Round to two decimal places. 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).
The management of Ryland International Is considering Investing in a new facility and the following cash flows are expected to result from the investment: A. What Is the payback period of this uneven cash flow? B. Does your answer change if year 6s cash inflow changes to $920,000?
The NPV method assumes that cash inflows associated with a particular investment occur when? A. only at the time of the initial Investment B. only at the end of the year C. only at the beginning of the year D. at any of these times
Assume a company is going to make an investment in a machine of $825,000 and the following are the cash flows that two different products would bring. Which of the two options would you choose based on the payback method?
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)
Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
The “Logistics and Transportation Star” Ltd is considering its alternative investmentscomprising its investment opportunity set (Investment A - Investment Z). Theinvestments with their relevant cash flows are as follows:Year Investment A Investment B Investment C Investment D Investment E Investment Ζ0 -600,000,00 € -480,000.00 € -360,000.00 € -240,000.00 € -720,000.00 € -840,000.00 €1 168,000,00 € 120,000.00 € 180,000.00 € 48,000.00 € 240,000.00 € 300,000.00 €2 168,000,00 € 120,000.00 € 84,000.00 € 48,000.00 € 240,000.00 € 240,000.00 €3 180,000,00 € 180,000.00 € 84,000.00 € 84,000.00 € 240,000.00 € 240,000.00 €4 180,000,00 € 180,000.00 € 84,000.00 € 84,000.00 € 192,000.00 € 168,000.00 €5 190,000,00 € 190,000.00 € 94,000.00 € 94,000.00 € 190,000.00 € 178,000.00 € You are asked to evaluate the above investments and answer the following questionsassuming that the firm’s cost of capital is 10%.a. Rank the investments from the best to the worst according to their Net PresentValue (NPV) and…

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Considering the unequal investments, which of the following techniques would be most approprlate for choosing between Investment A and Investment B?