NCF(A) NCF(B) NCF(C) NCF(D) Initial investment $400,000 $400,000 $600,000 $300,000 Planning horizon Annual receipts 10 years 10 years 10 years 10 years $205,000 $215,000 $260,000 $230,000 Annual disbursements $110,000 $125,000 $120,000 $150,000 Salvage value $50,000 $50,000 $100,000 $50,000

NCF(A) NCF(B) NCF(C) NCF(D) Initial investment $400,000 $400,000 $600,000 $300,000 Planning horizon Annual receipts 10 years 10 years 10 years 10 years $205,000 $215,000 $260,000 $230,000 Annual disbursements $110,000 $125,000 $120,000 $150,000 Salvage value $50,000 $50,000 $100,000 $50,000

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter10: Property, Plant And Equipment: Acquisition And Subsequent Investments

Section: Chapter Questions

Problem 9P

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

A firm is faced with four investment proposals, A, B, C, and D, having the cash flow profiles shown below. Proposals A and C are mutually exclusive, and Proposal D is contingent on Proposal B being chosen. Currently, $750,000 is available for investment and the firm has stipulated a MARR of 10%. Determine which alternative the decision maker should select. Use the internal rate of return method.

NCF(A) NCF(B) NCF(C) NCF(D)
Initial investment
$400,000 $400,000 $600,000 $300,000
Planning horizon
Annual receipts
10 years 10 years 10 years 10 years
$205,000 $215,000 $260,000 $230,000
Annual disbursements $110,000 $125,000 $120,000 $150,000
Salvage value
$50,000 $50,000 $100,000 $50,000

Definition Definition Discount rate of a project wherein its net present value equals zero. Internal rate of return equates the present value of future cash flows with the initial investments. Internal rate of return helps to determine nominal cash flows.

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