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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

Net present value—unequal lives

Buscho Industries is considering one of two investment options. Option I is a $45,000 investment in new blending equipment that is expected o produce equal annual cash flowsof $18.000 for each of eight years. Option 2 is a $17,000 investment in a new computersystem that is expected to produce equal annual cash flows (savings) of $10,000 for eachof four years. The residual value of the blending equipment at the end of the fourth yearis estimated to be $5,000. The computer system has no expected residual value at the endof the fourth year.

Assume there is sufficient capital to fund only one of the projects. Determine whichproject should be selected, comparing the (a) net present values and (h) present valueindices of the two projects, assuming a minimum rate of return of 12%. Round the present value index to two decimal places. Use the present value tables in Exhibits 2 and 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.

Profitability index: - Profitability index or Present value index is the ratio between Present Value of Inflow and Initial Cash Outflow associated with Project.

To Recommend

Which Project should be selected with sufficient fund for Management.

Explanation

Annualized NPV

Calculation of Annualized NPV

Profitability Index (Present value of Indices)

Present Value Indices = Present Value of Inflow /Present Value of Outflow

    ParticularNew Blending Equipment New Computer Syst...

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