Spacely Sprockets Inc is a new start-up evaluating a new project. They worry that they don't have all the requisite operating information they will need to estimate Cash Flows From Assets and that they wouldn't be able to evaluate this project based on NPV and IRR (which both use the CFFA's to evaluate). Instead they have decided to use the Average Accounting Return (AAR) rule to evaluate the project. What is the AAR for this project? (Enter your answer as a percentage and Round to 2 decimals) Accounting Info for Spacely Sprockets Year 1 Year 2 Year 3 Net Income 37,000 58,000 118,000 Book Value of Assets 686,000 560,000 672,000
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- Porbandar plc is considering the investment in a project that has an initial cash outlay followed by a series of net cash inflows. The business applied the NPV and IRR methods to evaluate the proposal but, after the evaluation had been undertaken, it was found that the correct cost of capital figure was lower than that used in the evaluation. What will be the effect of correcting for this error on the NPV and IRR figures? Effect on NPV Effect on IRR A Decrease Decrease B Decrease No Change C Increase No Change D Increase IncreaseWhich one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product? a. It is learned that land the company owns and would use for the new project, if it is accepted, could be sold to another firm. b. The cost of a study relating to the market for the new product that was completed last year. The results of this research were positive, and they led to the tentative decision to go ahead with the new product. The cost of the research was incurred and expensed for tax purposes last year. c. Revenues from an existing product would be lost as a result of customers switching to the new product. d. Shipping and installation costs associated with a machine that would be used to produce the new product. e. Using some of the firm's high-quality factory floor space that is currently unused to produce the proposed new product. This space could be…Why does a company evaluate both the money allocated to a project and the time allocated to the project? What is the next thing a company needs to do after it establishes investment criteria? What is the payback method used to determine? Why do businesses consider the time value of money before making an investment decision? A fellow student studying Financial Accounting says, “The net present value (NPV) weighs early receipts of cash much more heavily than more distant receipts of cash.” Do you agree or disagree? Why?
- Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutuallyexclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFOadvocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with thehigher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV?Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have noeffect on the value gained or lost.WACC: 7.50%Year 0 1 2 3 4CFS −$1,100 $550 $600 $100 $100CFL−$2,700 $650 $725 $800 $1,400Market Fresh Foods is evaluating a new project to determine whether it warrants funding consideration. Having just taken over managing the project initiation process for Market Fresh from the previous project controller, Ray Bones is trying to evaluate the project's potential given its projected cash flows. As a first step, Ray developed the table of investment and revenue estimates below that he plans to use to determine the project's net present value. Market Fresh's CFO has indicated that, based on assumptions about risk during the course of the project, Ray should initially use 0.15 as a discount rate, but use 0.14 beginning in year 6. Assume all cash flows occur at the end of the specified year and calculate all values to three decimal places. if the problem has table data, copy the following lines and paste into the appropriate spot in the text section\footnotesize \baselineskip = 12pt\begin{tabular}{c | c}Investment & Revenue \\ \hline12.4 & 0 \\ 15.8 & 0 \\ 17.5…ND Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates other methods. If the decision is made by choosing the project with the higher IRR, how much, if any, value will be forgone, i.e., what's the Profitability index? Discuss your results of these methods and make a recommendation on the projects to the CEO about which one to go for and why?
- ND Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates other methods. If the decision is made by choosing the project with the higher IRR, how much, if any, value will be forgone, i.e., what's the NPV and IRR of the chosen project(s). What is the Payback period and discounted payback period?Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. WACC: 10.25% 0 1 2 3 4 CFS -$800 $650 $350 $0 $0 CFL -$1,900 $550 $600 $600 $840 Please explain and show calculations.For projects with cash outflows up front and cash inflows later on, ignoring the time value of money would lead companies to understate the value of investment projects and therefore decline to make investments that they should in fact pursue. True False
- Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should be considered when cash flows are estimated? If the item should not be included, explain why not.A) Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost.B) The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment.C) The company has spent for tax purposes $3 million on research related to the new product. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future.D) The new product will cut into sales of some of the firm's other products.E) The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million…Your supervisor is on the company’s capital investment decision team that is to decide on alternatives for the acquisition of a new computer system for the company. The supervisor says, “The book value of the existing computer system for the firm that we are considering replacing is nothing but an accounting amount and as such is irrelevant in the capital expenditure analysis.” Does this reasoning make senseSexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used. WACC: 12.75% 0 1 2 3 4 CFs -$2050 $750 $760 $770 $780 CF L -$4300 $1500 $1518 $1536 $1554 Options: $24.80 $30.25 $22.32 $28.52 $22.57