1.
Capital Budgeting:
It refers to the long term investment decisions that has been taken by the top management of a company and that are irreversible in nature. These decisions require investment of large amount of cash of the company.
Payback Method:
Payback Method refers to the method which measure the time period that is required to get an amount invested in a project with some return on it.
It is a method under capital budgeting which includes the calculation of net present value of the project in which company is investing. The calculation is done by calculating the difference between the value of
It refers to the rate of return that is computed by the company to make a decision of selection of a project for investment. This rate provides the basis for selection of projects with lower cost of capital and rejection of project with higher cost of capital.
Discounted Payback Period:
It refers to the time period that a project takes to repay the amount invested with some returns attached to it after considering the time value of money or discounted
To identify: a. the net present value, b. payback period, c. internal rate of return d. accrual accounting rate of return based on the net initial investment and e accrual accounting rate of return based on average investment.
2.
To identify: The other effect of disposable value over the values calculated in part 1.
Want to see the full answer?
Check out a sample textbook solutionChapter 21 Solutions
NEW MyLab Accounting with Pearson eText -- Access Card -- for Cost Accounting
- Jacob’s Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget. The projects are independent. The cash outlay for the truck is $39,500, and that for the pulley system is $94,800. The firm’s cost of capital is 14%. After-tax cash flows, including depreciation, are as follows: Year Truck Pulley 1 $12,500 $31,000 2 12,500 31,000 3 12,500 31,000 4 12,500 31,000 5 12,500 31,000 Requirements: Calculate the IRR, the NPV, Payback and Discounted Payback Periods for each project and indicate the correct accept/reject decision for each. 2. You are the project manager for Becker Enterprises, LTD. and have been asked to analyze two alternatives for the company’s newest plastics The two alternatives, A and B, will perform the same task, but Alternative A will cost $80,000 to purchase while Alternative B will cost only $55,000. Moreover, the two alternatives…arrow_forwardBlunt County needs $700,000 from property tax to meet its budget. The total value of assessed property in Blunt is $110,000,000. What is the tax rate of Blunt? Round to the nearest ten thousandth.arrow_forwardA firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Project A, IRR = 19.86% and Project B, IRR = 16.80% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project A -$6,000 $2,000 $2,000 $2,000 $2,000 $2,000 Project B -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600 a) Calculate NPV, payback, and discounted payback for each project. b) Assuming the projects are independent, which one(s) would you recommend? c) If the projects are mutually exclusive, which would you recommend?arrow_forward
- Assume that as a local government financial analyst you are asked to project the feasibility of a loan to a proposed public service venture for its start-up funding. The venture’s principals estimate that, at the end of 5 years, they will be able to pay back up to $800,000 from revenues accruing to the venture’s activities. Assuming that your organization’s current “average cost of capital” is 4.8% (the “discount rate”). Assuming monthly compounding, what is the maximum amount your government can commit to the venture for its start-up?arrow_forwardJefferson Memorial Hospital is an investment center as a division of Hospitals United. During the past year, Jefferson reported an after-tax income of $7 million. Total interest expense was $3,200,000, and the hospital tax rate was 30%. Total assets totaled $70 million, and non-interest-bearing current liabilities were $22,800,000. The required rate of return established by Jefferson is equal to 18% of invested capital. What is the residual income of Jefferson Memorial Hospital?arrow_forwardCapital expenditures budget On August 1, 20Y4. the controller of Handy Dan Tools Inc. is planning capital expenditures for the years 20Y5-20Y8. The controller interviewed several Handy Dan executives to collect the necessary information for the capital expenditures budget. Excerpts of the interviews are as follows: Director of Facilities: A construction contract was signed in May 20Y4 for the construction of a new factory building at a contract cost of $9,000,000. The construction is scheduled to begin in 20Y5 and completed in 20Y6. Vice President of Manufacturing: Once the new factor)' building is finished, we plan to purchase $3-6 million in equipment in late 20Y6. I expect that an additional $500,000 will lx-needed early in the following year (20Y7) to test and install the equipment before we can begin production. If sales continue to grow, I expect we'll need to invest another half million in equipment in 20Y8. Vice President of Marketing: We have really been growing lately. I wouldn't be surprised if we need to expand the size of our new factory building in 20YS by at least 25%. Fortunately, we expect inflation to have minimal impact on construction costs over the next four years. Additionally, 1 would expect the cost of the expansion to Ik- proportional to the size of the expansion. Director of Information Systems: We need to upgrade our information systems to wireless network technology. It doesn't make sense to do this until after the new factory building is completed and producing product. During 20Y7, once the factor)' is up and running, we should equip the whole facility with wireless technology. I think it would cost us $400,000 today to install the technology. However, prices have been dropping by 10% per year, so it should be less expensive at a later date. President: I am excited about our long-term prospects. My only short-term concern is financing the $5,000,000 of construction costs on the portion of the new factor)' building scheduled to be completed in 20Y5. Use the interview information above to prepare a capital expenditures budget for Handy Dan Tools Inc. for the years 20Y5-20Y8.arrow_forward
- A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including yearly depreciation, are as follows: Project M -$6,000 $2,000 $2,000 $2,000 $2,000 $2,000 Project N -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600 Calculate discounted payback for each project. Do not round intermediate calculations. Round your answers to two decimal places. Project M: years Project N: yearsarrow_forwardThe independent projects shown below are under consideration for possible implementation by Renishaw, Inc. If the company’s MARR is 14% per year and it uses the IROR method of capital budgeting, the projects it should select under a budget limitation of $105,000 are: (a) A, B, and C (b) A, B, and D (c) B, C, and D (d) A, C, and D First Annual Rate of Project Cost, $ Income, $/Year Return, % A −20,000 4,000 20.0 B −10,000 1,900 19.0 C −15,000 2,600 17.3 D −70,000 10,000 14.3 E −50,000 6,000 12.0arrow_forward|The capital budgeting process would evaluate all of the following proposals EXCEPT: a) building a new factory. warehouse, or office building. b) buying new equipment to increase capacity of the production line. () c) replacing computer equipment with upgraded models. d) buving T-bills and I-bonds for the next six monthsarrow_forward
- Stockinger Corporation has provided the following information concerning a capital budgeting project: Investment required in equipment $ 296,000 Expected life of the project 4 Salvage value of equipment $ 0 Annual sales $ 620,000 Annual cash operating expenses $ 444,000 Working capital requirement $ 30,000 One-time renovation expense in year 3 $ 88,000 The company’s income tax rate is 30% and its after-tax discount rate is 11%. The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The total cash flow net of income taxes in year 3 is:arrow_forwardA city starts a solid waste landfill that it expects to fill to capacity gradually over a 12-year period. At the end of the first year, it is 7 percent filled. At the end of the second year, it is 17 percent filled. Currently, the cost of closure and postclosure is estimated at $1 million. None of this amount will be paid until the landfill has reached its capacity. Which of the following is true for the Year 2 government-wide financial statements? a. Expense will be $100,000 and liability will be $170,000. b. Both expense and liability will be $100,000. c. Expense will be $90,000 and liability will be $180,000. d. Both expense and liability will be zero.arrow_forwardAfter-Tax Cash FlowsBelow is a list of aspects of various capital expenditure proposals that the capital budgeting team of Anchor, Inc., has incorporated into its net present value analyses during the past year. Unless otherwise noted, the items listed are unrelated to each other. All situations assume a 40% income tax rate and an 11% minimum desired rate of return.1. Pre-tax savings of $4,000 in cash expenses will occur in each of the next three years.2. A machine is purchased now for $52,000 cash.3. A long-haul tractor costing $42,000 will be depreciated $14,000, $18,600, $6,300, and $3,100, respectively, on the tax return over four years.4. Equipment costing $225,000 will be depreciated over five years on the tax return in the following amounts: $28,125 $56,250 $56,250 $56,250 and $28,125.5. Pre-tax savings of $12,800 in cash expenses will occur in each of the next six years.6. Pre-tax savings of $11,000 in cash expenses will occur in the first, third, and fifth years from now.7.…arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeSurvey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning