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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Average rate of return, cash payback period, net present value method

Southwest Transportation Inc. is considering a distribution facility at a cost of $10,000.000.The facility has an estimated life of 10 years and a $2,000.000 residual value. It is expectedto provide yearly net cash flows of $2,500,000. The company’s minimum desired rate ofreturn for net present value analysis is 15%.

Compute the following:

a. The average rate of return, giving effect to straight-tine depreciation on the investment.Round to one decimal place.

b. The cash payback period.

c. The net present value. Use the table of the present value of an annuity of $1 appearing inExhibit 5,

To determine

Concept Introduction:

Capital budgeting is a technique to plan long term investment of funds in long term activities whose benefit released for several years.

Example: - Purchase of machineries, purchase of building for business purpose, setting of factories etc.

Net Present value refers to the difference between the present value of inflows and the present value of outflows associated with the projects.

Requirement-1:

To Calculate:

Average Rate of Return

Explanation

Calculation of Average Rate of Return

Average rate of Return = Annual average Cash Inflows /Average Investment *100

: - Average Investment =1/2(Original cost-Salvage value) +Salvage value + Working Capital

Or

(Opening Investment +Closing Investment) /2

: - Average Annual Cash Inflows = Total Cash Inflows after Tax / Total period of the Project

In the present case

For...

To determine

Concept Introduction:

Capital budgeting is a technique to plan long term investment of funds in long term activities whose benefit released for several years.

Example: - Purchase of machineries, purchase of building for business purpose, setting of factories etc.

Cash payback period refers to the period in which entire cost of project introduced is expected to realize by way of cash inflows.

Requirement-2:

To Calculate

Cash Payback Period

To determine

Concept Introduction:

Capital budgeting is a technique to plan long term investment of funds in long term activities whose benefit released for several years.

Example: - Purchase of machineries, purchase of building for business purpose, setting of factories etc.

Net Present value refers to the difference between the present value of inflows and the present value of outflows associated with the projects.

Requirement-3:

To Calculate:

Net Present Value

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