Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Question
Chapter 12, Problem 9P
a.
Summary Introduction
To calculate: The selection of the investment using the PBP method.
Introduction:
Pay-back period (PBP):
It is one of the methods of capital budgeting that helps evaluate the time period in which the amount of initial investment is recovered. The formula for the calculation of the PBP is shown below.
Here,
Year = The year in which the cumulative cash flow is close to and less than the initial investment.
Initial investment = The amount of the investment.
Cumulative cash flow = The cumulative cash flow is close to and less than the initial investment.
Cash flow = The cash flow of the next year from the “Year� used for the calculation.
b.
Summary Introduction
To explain: The reason why the answer of part (a) is misleading.
Introduction:
Pay-back period (PBP):
It is one of the methods of capital budgeting that helps evaluate the time period in which the amount of initial investment is recovered. The formula for the calculation of the PBP is shown below.
Here,
Year = The year in which the cumulative cash flow is close to and less than the initial investment.
Initial investment = The amount of the investment.
Cumulative cash flow = The cumulative cash flow is close to and less than the initial investment.
Cash flow = The cash flow of the next year from the “Year� used for the calculation.
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Students have asked these similar questions
9. The Short-Line Railroad is considering a $100,000 investment in either of two companies. The cash flows are as follows: Year Electric Co. Water Works $70,000 $15,000 2 15,000 15,000 3 15,000 70,000 ......... 4-10 10,000 10,000 a. Using the payback method, what will the decision be? b. Explain why the answer in part a can be misleading.
Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?
A. The company spent and expensed $10 million on a marketing study before its current analysis regarding whether to accept or reject the project.
B. The company has spent and expensed $1 million on R&D associated with the new project.
C. The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year.
D. 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.
E. The new project is expected to reduce sales of one of the company's existing products by 5%.
The Short-Line Railroad is considering a $140,000 investment in either of two companies. The cash flows are as follows:
Year
Electric Co.
Water Works
1
$
85,000
$
30,000
2
25,000
25,000
3
30,000
85,000
4–10
10,000
10,000
a. Compute the payback period for both companies.
Chapter 12 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 12 - Prob. 1DQCh. 12 - Why does capital budgeting rely on analysis of...Ch. 12 - Prob. 3DQCh. 12 - Prob. 4DQCh. 12 - What does the term mutually exclusive investments...Ch. 12 - Prob. 6DQCh. 12 - If a corporation has projects that will earn more...Ch. 12 - What is the net present value profile? What three...Ch. 12 - How does an asset’s ADR (asset depreciation...Ch. 12 - Assume a corporation has earnings before...
Ch. 12 - Assume a corporation has earnings before...Ch. 12 - Assume a firm has earnings before depreciation and...Ch. 12 - Assume a firm has earnings before depreciation and...Ch. 12 - Al Quick, the president of a New York Stock...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Assume a 90,000 investment and the following cash...Ch. 12 - Prob. 9PCh. 12 - X-treme Vitamin Company is considering two...Ch. 12 - You buy a new piece of equipment for 16,230, and...Ch. 12 - Prob. 12PCh. 12 - Home Security Systems is analyzing the purchase of...Ch. 12 - Aerospace Dynamics will invest 110,000 in a...Ch. 12 - The Horizon Company will invest 60,000 in a...Ch. 12 - Skyline Corp. will invest 130,000 in a project...Ch. 12 - The Hudson Corporation makes an investment of ...Ch. 12 - The Pan American Bottling Co. is considering the...Ch. 12 - You are asked to evaluate the following two...Ch. 12 - Turner Video will invest 76,344 in a project. The...Ch. 12 - The Suboptimal Glass Company uses a process of...Ch. 12 - Keller Construction is considering two new...Ch. 12 - Davis Chili Company is considering an investment...Ch. 12 - Telstar Communications is going to purchase an...Ch. 12 - Assume 65,000 is going to be invested in each of...Ch. 12 - The Summit Petroleum Corporation will purchase an...Ch. 12 - Oregon Forest Products will acquire new equipment...Ch. 12 - Universal Electronics is considering the purchase...Ch. 12 - Prob. 30PCh. 12 - Prob. 31PCh. 12 - Prob. 32PCh. 12 - Hercules Exercise Equipment Co. purchased a...Ch. 12 - Prob. 2WECh. 12 - Returning to TXN’s summary page, record the...
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