The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade tocomputer servers. The projects have different useful lives, but each requires an investment of $490,000. Theestimated net cash flows from each project are as follows:Year112342Year563789104The committee has selected a rate of 12% for purposes of net present value analysis. It also estimates that theresidual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion'sresidual value would be $180,000.560.9430.8900.840Present Value of $1 at Compound Interest6%10%0.7920.7470.7050.6650.627Net CashFlowsOfficeExpansion$125,000125,000125,000125,000125,000125,0000.5920.5580.9090.8260.7510.6830.6210.5640.513Net CashFlowsServers0.467$165,000165,000165,000165,0000.4240.38612%0.8930.7970.7120.6360.5670.5070.4520.4040.3610.32215%0.8700.7560.6580.5720.4970.4320.3760.3270.2840.24720%0.8330.6940.5790.4820.4020.3350.2790.2330.1940.162 Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%123456789100.9431.8332.6733.4654.2124.9175.5826.2106.8027.360Amount to be investedNet present value0.9091.7362.4873.170Amount to be invested3.791Net present value4.3554.8685.3355.7596.1450.8931.6902.4023.0373.605Present value of annual net cash flows4.1114.5644.9685.3285.650Total present value of net cash flow0.8701.6262.2832.8553.3533.7854.1604.4874.7725.019Required:1. For each project, compute the net present value. Use the present value of an annuity of $1 table above. Ignorethe unequal lives of the projects. If required, round to the nearest dollar.Office Expansion0.833$1.528$2.1062.5892.9913.3263.6053.8374.0314.1921,967,250 X2. For each project, compute the net present value, assuming that the office expansion is adjusted to a 4-yearlife for purposes of analysis. Use the present value of $1 table above.Office Expansion490,000Servers Upgrade490,000$490,000Servers Upgrade$$490,000

The NPV of a project refers to its profitability measured by discounting its cash flows to the…

Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 2 3 4 5 6 7 8 9 10 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 Amount to be invested 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 Net present value 6.145 0.893 1.690 2.402 Net present value 3.037 3.605 4.111 4.564 4.968 Present value of annual net cash flows 5.328 5.650 0.870 Total present value of net cash flow Amount to be invested 1.626 2.283 2.855 3.353 3.785 4.160 4.487 4.772 5.019 0.833 1.528 Required: 1. For each project, compute the net present value. Use the present value of an annuity of $1 table above. Ignor the unequal lives of the projects. If required, round to the nearest dollar. Office Expansion 1,967,250 X 490,000 $ 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 2. For each project, compute the net present value, assuming that the office expansion is adjusted to a 4-year life for purposes of analysis. Use the present value of $1 table above. Office Expansion Servers Upgrade 490,000 $ 490,000 Servers Upgrade $ 490,000

Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 2 3 4 5 6 7 8 9 10 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 Amount to be invested 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 Net present value 6.145 0.893 1.690 2.402 Net present value 3.037 3.605 4.111 4.564 4.968 Present value of annual net cash flows 5.328 5.650 0.870 Total present value of net cash flow Amount to be invested 1.626 2.283 2.855 3.353 3.785 4.160 4.487 4.772 5.019 0.833 1.528 Required: 1. For each project, compute the net present value. Use the present value of an annuity of $1 table above. Ignor the unequal lives of the projects. If required, round to the nearest dollar. Office Expansion 1,967,250 X 490,000 $ 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 2. For each project, compute the net present value, assuming that the office expansion is adjusted to a 4-year life for purposes of analysis. Use the present value of $1 table above. Office Expansion Servers Upgrade 490,000 $ 490,000 Servers Upgrade $ 490,000

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 5PA

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There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: Use the information from the previous exercise to calculate the internal rate of return on both projects and make a recommendation on which one to accept. For further instructions on internal rate of return in Excel, see Appendix C.
Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget. The projects are independent. The cash outlay for the truck is $17,100, and that for the pulley system is $22,430. The firm’s cost of capital is 14%. After-tax cash flows, including depreciation, are as follows: Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept/reject decision for each.
Garnette Corp is considering the purchase of a new machine that will cost $342,000 and provide the following cash flows over the next five years: $99,000, $88,000, $92,000. $87,000, and $72,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel. see Appendix C.
Consolidated Aluminum is considering the purchase of a new machine that will cost $308,000 and provide the following cash flows over the next five years: $88,000, 92,000, $91,000, $72,000, and $71,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel, see Appendix C.
Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of 150,000 and will operate for five years. The cash flows associated with these projects are as follows: Statens required rate of return is 10%. Using the net present value method and the present value table provided in Appendix A, which of the following actions would you recommend to Staten? a. Accept Project X and reject Project Y. b. Accept Project Y and reject Project X. c. Accept Projects X and Y. d. Reject Projects X and Y.
Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is 2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Required: 1. Compute the projects payback period. 2. Compute the projects accounting rate of return. 3. Compute the projects net present value, assuming a required rate of return of 10 percent. 4. Compute the projects internal rate of return.
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).
Markoff Products is considering two competing projects, but only one will be selected. Project A requires an initial investment of $42,000 and is expected to generate future cash flows of $6,000 for each of the next 50 years. Project B requires an initial investment of $210,000 and will generate $30,000 for each of the next 10 years. If Markoff requires a payback of 8 years or less, which project should it select based on payback periods?
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?