solve all parts within 30 minutes The following information relates to three possiblecapital expenditure projects. Because of capitalrationing, only one project can be accepted:EPInitial cost £250,000Expected life (years)Scrap value expectedExpected cash inflowsEnd of year 123455£20,000£ProjectQ£210,0004£17,500£75,00090,00070,000 70,00065,00055,00060,00080,00055,000R£190,0005£12,000£60,00065,00070,00075,00080000The company estimates its cost of capital is 14 percent. Required: Calculate a) The payback period foreach project. b) The accounting rate of return for eachproject. c) The net present value of each project. d)Which project should be accepted - give reasons. e)Explain the factors management would need toconsider, in addition to the financial factors, beforemaking a final decision on a project.

(Note: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the…

The following information relates to three possible capital expenditure projects. Because of capital rationing, only one project can be accepted: E Initial cost £250,000 Expected life (years) Scrap value expected Expected cash inflows. End of year 1 2 3 4 P 5 5 £20,000 £ Project Q £210,000 £190,000 4 £17,500 £ 75,000 90,000 70,000 70,000 65,000 55,000 60,000 80,000 55,000 R 5 £12,000 £ 60,000 65,000 70,000 75,000 80000 The company estimates its cost of capital is 14 per cent. Required: Calculate a) The payback period for each project. b) The accounting rate of return for each project. c) The net present value of each project. d) Which project should be accepted - give reasons. e) Explain the factors management would need to consider, in addition to the financial factors, before making a final decision on a project.

The following information relates to three possible capital expenditure projects. Because of capital rationing, only one project can be accepted: E Initial cost £250,000 Expected life (years) Scrap value expected Expected cash inflows. End of year 1 2 3 4 P 5 5 £20,000 £ Project Q £210,000 £190,000 4 £17,500 £ 75,000 90,000 70,000 70,000 65,000 55,000 60,000 80,000 55,000 R 5 £12,000 £ 60,000 65,000 70,000 75,000 80000 The company estimates its cost of capital is 14 per cent. Required: Calculate a) The payback period for each project. b) The accounting rate of return for each project. c) The net present value of each project. d) Which project should be accepted - give reasons. e) Explain the factors management would need to consider, in addition to the financial factors, before making a final decision on a project.

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter15: Capital Investment Analysis

Section: Chapter Questions

Problem 15.6.2P

See similar textbooks

Similar questions

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?
CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S requires an initial outlay at t = 0 of 17,000, and its expected cash flows would be 5,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of 30,000, and its expected cash flows would be 8,750 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Explain.
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Capital rationing decision involving four proposals Kopecky Industries Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated income from operations, and net cash flow for each proposal are as follows: The company’s 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 allprojects. 1f the preceding standards are met, the net present value method and presentvalue indexes are used to rank the remaining proposals. Instructions Compute the present value index for each oldie proposals in part (4). Round to two decimal places.
The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted. Project A Project B Project C Initial Cost $230,000 $250,000 $190,000 Expected life 5years 5 years 4 years Scrap value expected $10,000 $15,000 $10,000 Expected Cash Inflows: $ $ $ End Year 1 85,000 95,000 45,000 End Year 2 70,000 70,000 65,000 End Year 3 65,000 55,000 95,000 End Year 4 60,000 50,000 100,000 End Year 5 50,000 50,000 The company estimates cost of capital is 18%. The table below shows the present value of $1 at 14%, 18% and 22%. Periods 14% 18% 22% 1 0.877 0.847 0.820 2 0.769 0.718 0.672 3 0.675 0.609 0.551 4 0.592 0.516 0.451 5 0.519 0.437 0.370 6 0.456 0.370 0.303 Required: Calculate: The payback period for each project The accounting rate of…
The following information relates to two projects of which you have to select one to invest in.Both projects have an initial cost of $400,000 and only one can be undertaken.Project X YExpected profits $ $Year 1 160,000 60,000Year 2 160,000 100,000Year 3 80,000 180,000Year 4 40,000 240,000Estimated resale value atthe end of year 4 80,000 80,000i) Profit is calculated after deducting straight line depreciationii) The cost of capital is 16%Required:a) For both projects, calculate the following:i) The payback period to one decimal place ii) The accounting rate of return using average investments iii) The net present value iv) Advise the board which project in your opinion should be undertaken, givingreasons for your decision.
REQUIRED Study the information given below and calculate the Accounting Rate of Return on initial investment (expressed to two decimal places) of each project. INFORMATION The following data relate to two investment projects, only one of which may be selected: Project A Project B R R Initial capital expenditure 180 000 180 000 Net cash inflow per year: Year 1 90 000 36 000 Year 2 72 000 36 000 Year 3 54 000 86 000 Year 4 36 000 94 000 Expected scrap value (not included in the figures above) 36 000 0 Note: Depreciation is calculated using the straight-line The cost of capital is 15%. REQUIRED Use the capital asset pricing model to calculate the cost of the ordinary shares from the information provided below. INFORMATION The financial managers of Computex have…
Kayeu Ltd is evaluating the investment in two new projects X and Y which would generate the following expected net cashflows: Project X Project Y Year 1 320 000 190 000 Year 2 300 000 280 000 Year 3 280 000 290 000 Year 4 240 000 300 000 Year 5 200 000 320 000 Details of the initial invesment for the two projects X and Y are : $950 000 and $1 250 000 with life of 5 years each. Residual value for project X is $150 000 and for Project Y $250 000 The company has a cost of capital of 12% per annum. Discount factors Year 1 0.893 Year 2 0.797 Year 3 0.712 Year 4 0.636 Year 5 0.566 Required (a) Assume that each project will sell for its residual value at the end of five years evaluate each project using each of the following methods: (i) Payback (ii) Accounting rate of return (iii) Net present value (b) based upon your calculation above in (a) advise management which project should be picked.
The following information relates to three potential investment projects that are being considered by Scrappit plc. Due to capital rationing, only one of the three projects can be pursued. Project A Project B Project C £ £ £ Initial cost 175,000 195,000 190,000 Expected life 5 years 5 years 5 years Scrap value expected 5,000 8,000 4,000 Expected cash inflows: End of year 1 75,000 95,000 50,000 2 65,000 65,000 60,000 3 60,000 45,000 65,000 4 55,000 45,000 66,000 5 50,000 45,000 57,000 Additional information: Scrappit plc estimates its cost of capital to be 18%. £35,000 depreciation is charged to Project A each year. £39,000 depreciation is charged to Project B each year. £38,000 depreciation is charged to Project C each year (a) Calculate the payback period, accounting rate of return and net present value of each of thepotential projects.(b) Explain which of the…
nformation on four investment proposals is given below: Investment Proposal A B C D Investment required $ (94,000 ) $ (104,000 ) $ (74,000 ) $ (126,000 ) Present value of cash inflows 141,000 153,920 100,640 194,040 Net present value $ 47,000 $ 49,920 $ 26,640 $ 68,040 Life of the project 5 years 7 years 6 years 6 years Required: 1. Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.) 2. Rank the proposals in terms of preference. Investment Proposal Project Profitability Index Rank Preference A ____________ Second B ____________ Third C ____________ Fourth D ____________ First
Information on four investment proposals is given below:Investment ProposalA B C DInvestment required ........................ $(90,000) $(100,000) $(70,000) $(120,000)Present value of cash inflows ......... 126,000 138,000 105,000 160,000Net present value ............................ $ 36,000 $ 38,000 $ 35,000 $ 40,000Life of the project ............................ 5 years 7 years 6 years 6 yearsRequired:1. Compute the project profitability index for each investment proposal.2. Rank the proposals in terms of preference.
Kayeu Ltd is evaluating the investment in two new projects X and Y which would generate the following expected net cashflows Project X Project Y Year 1 320 000 190 000 Year 2 300 000 280 000 Year 3 280 000 290 000 Year 4 240 000 300 000 Year 5 200 000 320 000 Details of the initial investment for the two projects X and Y are; $950 000 and $1 250 000 with life of 5 years Residual value for Project X is $150 000 and for Project Y is $250 000 The company has a cost of capital of 12% per annum. Discount factors Year 1 0.893 Year 2 0.797 Year 3 0.712 Year 4 0.636 Year 5 0.566 Required: (a) Assume that each project will sell for its residual value at the end of five years evaluate each project using each of the following methods: (i) Payback (ii) Accounting rate of return (iii) Net present value (b) Explain what is meant by internal rate of return