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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 method, present value index, and analysis

Donahue Industries Inc. wishes to evaluate three capital investment projects by using thenet present value method. Relevant data related to the projects are summarized as follows:

Instructions

Assuming that the desired rate of Si urn is 20%, preparea net present value analysts for eachproject. Use the present value of Si table appearing in this chapter.

To determine

Concept Introduction:

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the 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:

  NPV = Present value of cash inflows  Present value of cash out flows

To Prepare:

The Net Present value analysis for each project

Explanation

The Net Present value analysis for each project is prepared as follows:

    Product Line ExpansionAmount PVF (20%) PV
    A B =A*B
    Annual Net Cash Flows
    Year 1 $ 4,200,000 0.83333 $ 3,500,000
    Year 2 $ 3,600,000 0.69444 $ 2,500,000
    Year 3 $ 3,000,000 0.57870 $ 1,736,111
    Present Value of Cash Inflow (A) $ 7,736,111
    Investment (B) $ 4,000,000 1.00000 $ 4,000,000
    Net Present Value (A-B)$ 3,736,111
    Distribution FacilitiesAmount PVF (20%) PV
    A B =A*B
    Annual Net Cash Flows
    Year 1 $ 1,000,000 0.83333 $ 833,333
    Year 2 $ 1,200,000 0...

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