Managerial Accounting
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ISBN: 9781260195408
Author: Whitecotton
Publisher: MCG
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Chapter 11, Problem 11ME
To determine
Concept introduction:
It is the method to evaluate the project feasibility. This method calculates the PV (present value) of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
To choose:
The better project using the NPV technique.
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Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%.
project 1
project 2
initial investment
$(510,000)
$(685,000)
cash flow year 1
485,000
610,000
Compute the following for each project:
NPV (net present value)
PI (profitability index)
IRR (internal rate of return)
Based on your analysis, answer the following questions :
Which is the best choice? Why?
Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain.
Project Q requires an initial outlay at t = 0 of $20,000, 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 $26,000, and its expected cash flows would be $13,600 per year for 5 years. If both projects have a WACC of 16%, which project would you recommend?
Select the correct answer.
a. Neither Project S nor L, since each project's NPV < 0.
b. Project S, since the NPVS > NPVL.
c. Project L, since the NPVL > NPVS.
d. Both Projects S and L, since both projects have IRR's > 0.
e. Both Projects S and L, since both projects have NPV's > 0.
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $6,750 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions:
Project A
Project B
Probability
Cash Flows
Probability
Cash Flows
0.2
$6,500
0.2
$0
0.6
$6,750
0.6
$6,750
0.2
$7,000
0.2
$19,000
BPC has decided to evaluate the riskier project at 11% and the less-risky project at 9%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.
Open spreadsheet
What is each project's expected annual cash flow? Round your answers to two decimal places.
Project A: $ fill in the blank 2
Project B: $ fill in the blank 3
Chapter 11 Solutions
Managerial Accounting
Ch. 11 - Prob. 1QCh. 11 - Prob. 2QCh. 11 - Prob. 3QCh. 11 - Which capital budgeting methods incorporate the...Ch. 11 - What is a company’s hurdle rate? How is it...Ch. 11 - How do cash flow and net income differ? Explain...Ch. 11 - In everyday terms, explain what information the...Ch. 11 - What do a positive NPV and a negative NPV indicate...Ch. 11 - Prob. 9QCh. 11 - Prob. 10Q
Ch. 11 - Why is the net present value method generally...Ch. 11 - Briefly explain how the profitability mdcx is...Ch. 11 - Prob. 13QCh. 11 - Prob. 14QCh. 11 - Prob. 15QCh. 11 - When would you use the PV of annuity table instead...Ch. 11 - Prob. 17QCh. 11 - Which of the following requires managers to...Ch. 11 - Prob. 2MCCh. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Prob. 5MCCh. 11 - Prob. 6MCCh. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 9MCCh. 11 - Prob. 10MCCh. 11 - Matching Key Terms and Concepts to DefinitionsCh. 11 - Prob. 2MECh. 11 - Prob. 3MECh. 11 - Prob. 4MECh. 11 - Prob. 5MECh. 11 - Prob. 6MECh. 11 - Prob. 7MECh. 11 - Prob. 8MECh. 11 - Computing Present Value of Complex Contract As a...Ch. 11 - Prob. 11MECh. 11 - Prob. 12MECh. 11 - Prob. 1ECh. 11 - Prob. 2ECh. 11 - Prob. 3ECh. 11 - Prob. 4ECh. 11 - Prob. 5ECh. 11 - Prob. 6ECh. 11 - Prob. 8ECh. 11 - Prob. 9ECh. 11 - Using NPV to Evaluate Mutually Exclusive Projects...Ch. 11 - Prob. 12ECh. 11 - Prob. 13ECh. 11 - Prob. 1.1GAPCh. 11 - Prob. 1.2GAPCh. 11 - Prob. 1.3GAPCh. 11 - Prob. 1.4GAPCh. 11 - Prob. 1.5GAPCh. 11 - Prob. 2.1GAPCh. 11 - Prob. 2.2GAPCh. 11 - Prob. 2.3GAPCh. 11 - Prob. 2.4GAPCh. 11 - Prob. 2.5GAPCh. 11 - Making Automation Decision Beacon Company is...Ch. 11 - Prob. 3.1GAPCh. 11 - Prob. 3.2GAPCh. 11 - Prob. 3.3GAPCh. 11 - Prob. 3.4GAPCh. 11 - Prob. 4.1GAPCh. 11 - Prob. 4.2GAPCh. 11 - Prob. 4.3GAPCh. 11 - Prob. 4.4GAPCh. 11 - Prob. 4.5GAPCh. 11 - Prob. 5.1GAPCh. 11 - Prob. 5.2GAPCh. 11 - Prob. 6.1GAPCh. 11 - Evaluating Sustainability Projects Citco Company...Ch. 11 - Evaluating Sustainability Projects Citco Company...Ch. 11 - Evaluating Sustainability Projects Citco Company...Ch. 11 - Prob. 1.1GBPCh. 11 - Prob. 1.2GBPCh. 11 - Prob. 1.3GBPCh. 11 - Prob. 1.4GBPCh. 11 - Prob. 1.5GBPCh. 11 - Prob. 2.1GBPCh. 11 - Prob. 2.2GBPCh. 11 - Prob. 2.3GBPCh. 11 - Prob. 2.4GBPCh. 11 - Prob. 2.5GBPCh. 11 - Prob. 2.6GBPCh. 11 - Prob. 3.1GBPCh. 11 - Comparing, Prioritizing Multiple Projects Harmony...Ch. 11 - Prob. 3.3GBPCh. 11 - Prob. 3.4GBPCh. 11 - Prob. 4.1GBPCh. 11 - Prob. 4.2GBPCh. 11 - Prob. 4.3GBPCh. 11 - Prob. 4.4GBPCh. 11 - Prob. 4.5GBPCh. 11 - Prob. 5.1GBPCh. 11 - Prob. 5.2GBPCh. 11 - Prob. 6.1GBPCh. 11 - Prob. 6.2GBPCh. 11 - Prob. 6.3GBPCh. 11 - Prob. 6.4GBP
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- 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.arrow_forwardThe Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of 50 million on a large-scale, integrated plant that will provide an expected cash flow stream of 8 million per year for 20 years. Plan B calls for the expenditure of 15 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of 3.4 million per year for 20 years. The firms cost of capital is 10%. a. Calculate each projects NPV and IRR. b. Set up a Project by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant. What are the NPV and the IRR for this Project ? c. Graph the NPV profiles for Plan A, Plan B, and Project .arrow_forwardThe Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $6,750 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Project B Probability Cash Flows Probability Cash Flows 0.2 $6,500 0.2 $0 0.6 $6,750 0.6 $6,750 0.2 $7,000 0.2 $19,000 BPC has decided to evaluate the riskier project at 12% and the less-risky project at 8%. What is each project's expected annual cash flow? Round your answers to two decimal places. Project A: $ Project B: $ Project B's standard deviation (σB) is $6,157.52 and its coefficient of variation (CVB) is 0.78. What are the values of (σA) and (CVA)? Round your answers to two decimal places. σA = $ CVA =arrow_forward
- Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%. Project 1 Project 2 Initial investment $(684,000) $(585,000) Cash inflow Year 1 $275,000 $380,000 Compute the following: NPV (net present value) PI (profitability index) IRR (internal rate of return) Based on your analysis, answer the following questions: Which is the best choice? Why? Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain. What would happen if both projects had negative NPV totals? Which project would you choose? What do negative NPVs indicate? Explain. Should we also use the payback method to assist us in project selection? Why or why not? Explain.arrow_forwardProject S requires an initial outlay at t = 0 of $19,000, and its expected cash flows would be $5,500 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $37,000, and its expected cash flows would be $10,800 per year for 5 years. If both projects have a WACC of 13%, which project would you recommend? Select the correct answer. a. Project L, because the NPVL > NPVS. b. Neither Project S nor L, because each project's NPV < 0. c. Both Projects S and L, because both projects have NPV's > 0. d. Both Projects S and L, because both projects have IRR's > 0. e. Project S, because the NPVS > NPVL.arrow_forwardBetter plc is comparing two mutually exclusive projects, whose details are given below.The company’s cost of capital is 12 per cent.Project A Project B£m £mYear 0 (150) (152)Year 1 40 80Year 2 50 80Year 3 60 50Year 4 60 40Year 5 80 30(a). Using the net present value method, which project should be accepted?(b). Using the internal rate of return method, which project should be accepted?(c). If the cost of capital increases to 20 per cent in year 5, would your advice change?arrow_forward
- Better plc is comparing two mutually exclusive projects, whose details are given below.The company’s cost of capital is 12 per cent.Project A Project B£m £mYear 0 (150) (152)Year 1 40 80Year 2 50 80Year 3 60 50Year 4 60 40Year 5 80 30(a). Using the net present value method, which project should be accepted?(b). Using the internal rate of return method, which project should be accepted?(c). If the cost of capital increases to 20 per cent in year 5, would your advice change? Hello.i have the solution you send me but i am trying to understand where did you get the calculations for in the worknotes tabel. I still cant calculate the IRR.i really dont understand how to do it. Can you help me please by using the numbers in the tabel so i can understand what is that you are adding or taking away please? I know how to calculate the NPV but not the IRRarrow_forwardBetter plc is comparing two mutually exclusive projects, whose details are given below.The company’s cost of capital is 12 per cent.Project A Project B£m £mYear 0 (150) (152)Year 1 40 80Year 2 50 80Year 3 60 50Year 4 60 40Year 5 80 30(a). Using the net present value method, which project should be accepted?(b). Using the internal rate of return method, which project should be accepted?(c). If the cost of capital increases to 20 per cent in year 5, would your advice change? Hello.i have the solution you send me but i am trying to understand where did you get the calculations for in the worknotes tabel. I did my own calculation but i dont get the same answer. Could you show mw the calculation but not in excel please, i need the calculation by formula manuallyarrow_forwardBetter plc is comparing two mutually exclusive projects, whose details are given below.The company’s cost of capital is 12 per cent.Project A Project B£m £mYear 0 (150) (152)Year 1 40 80Year 2 50 80Year 3 60 50Year 4 60 40Year 5 80 30(a). Using the net present value method, which project should be accepted?(b). Using the internal rate of return method, which project should be accepted?(c). If the cost of capital increases to 20 per cent in year 5, would your advice change? Hello.i have the solution you send me but i am trying to understand where did you get the calculations for in the worknotes tabel. I still cant calculate the IRR.i really dont understand how to do it. Can you help me please by using the numbers in the tabel so i can understand what is that you are adding or taking away please? I know how to calculate the NPV but not the IRR. I have went over and over this IRR but i still dont understand how you calculate it using the pv and the npv.i dont wanna use excel.arrow_forward
- Better plc is comparing two mutually exclusive projects, whose details are given below.The company’s cost of capital is 12 per cent.Project A Project B£m £mYear 0 (150) (152)Year 1 40 80Year 2 50 80Year 3 60 50Year 4 60 40Year 5 80 30(a). Using the net present value method, which project should be accepted?(b). Using the internal rate of return method, which project should be accepted?(c). If the cost of capital increases to 20 per cent in year 5, would your advice change? Hello.i have the solution you send me but i am trying to understand where did you get the calculations for in the worknotes tabel. I did my own calculation but i dont get the same answer. For example for year 2 for project A you have 39.8597 How did you get to that without using the formula in excel. I need to write down the actual numbers. I got 22.3214 some im not sure how you got to that number. Can you help me please? Thank youarrow_forwardProject S requires an initial outlay at t = 0 of $14,000, and its expected cash flows would be $6,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $26,500, and its expected cash flows would be $7,600 per year for 5 years. If both projects have a WACC of 14%, which project would you recommend? Select the correct answer. a. Neither Project S nor L, because each project's NPV < 0. b. Both Projects S and L, because both projects have NPV's > 0. c. Project S, because the NPVS > NPVL. d. Both Projects S and L, because both projects have IRR's > 0. e. Project L, because the NPVL > NPVS.arrow_forwardProject 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, 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?arrow_forward
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