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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

Capital rationing decision involving four proposals

Kopecky Industries Inc. is considering allocating a limited amount of capital investmentfunds among four proposals. The amount of proposed investment, estimated income fromoperations, and net cash flow for each proposal are as follows:

The company’s capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 12% is required on all projects. 1f the preceding standards are met, the net present value method and present value indexes are used to rank the remaining proposals.

Instructions

For the proposals accepted for further analysis in part (3), compute the net present value. Use arate 0112% and the present value of $1 table appearing in thischapter. Round to the nearest dollar.

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 Calculate:

The Net Present Value for each accepted project

Explanation

The Net Present Value for each accepted project is calculated as follows:

    Proposal TangoNet Cash Flows PVF (12%) PV
    A B =A*B
    Year 0 $ (1,200,000) 1.0000 $ (1,200,000)
    Year 1 $ 560,000 0.8929 $ 500,000
    Year 2 $ 540,000 0.7972 $ 430,485
    Year 3 $ 400,000 0.7118 $ 284,712
    Year 4 $ 300,000 0.6355 $ 190,655
    Year 5 $ 220,000 0...

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