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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Net present value—unequal lives

Healey Development Company has two Competing projects: an office building and a condominium complex. Both projects have an initial investment of $2000000. 11w net cash flows estimated for the two projects are as follows:

The estimated residual value of the office building at the end of Year 4 is $900,000.

Determine which project should be favored, comparing the net present values of thetwo projects and assuming a minimum rate of return of 15%. Use the table of presentvalues in the chapter.

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.

To Recommend

Which Project should be favored for Management.

Explanation

Calculation of Annualized NPV

    Statement Showing Annualised Net Present Value In $
    YearsOffice BuildingCondominium complex
    (Cash Inflow)Present value of $1@15%Discounted cash flow (Cash Inflow)Present value of $1@15%Discounted cash flow
    0(2000000)1(2000000)(2000000)1(2000000)
    19500000.869682608712000000.86961043478
    26000000.75614536869000000.7561680529
    35000000.65753287587000000.6575460261
    44500000.57182572894000000...

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