Concept explainers
1.(a)
Net present value method is the method which is used to compare the initial
Present value index:
Present value index is a technique, which is used to rank the proposals of the business. It is used by the management when the business has more investment proposals, and limited fund.
The present value index is computed as follows:
Internal rate of return method is one of the capital investment method which determines the rate of return wherein the net present value of all the cash flows (both positive and negative) from an investment is zero. This method also called as the time-adjusted rate of return method, and it used to evaluate the different proposal’s expected rate of return.
To calculate: The net present value of the investment of Power Incorporation.
2.
The internal rate of return for the given project
3.
To compare: The both projects, and discuss the advantages of internal rate of return over the net present value.
Trending nowThis is a popular solution!
Chapter 25 Solutions
Bundle: Financial & Managerial Accounting, Loose-leaf Version, 13th + CengageNOWv2, 1 term (6 months) Printed Access Card Corporate Financial ... Access Card for Managerial Accounting, 13th
- There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: Use the information from the previous exercise to calculate the internal rate of return on both projects and make a recommendation on which one to accept. For further instructions on internal rate of return in Excel, see Appendix C.arrow_forwardAverage rate of return method, net present value method, and analysis for a service company The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Each project requires an investment of 75,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. Instructions 1. Compute the following: A. The average rate of return for each investment. B. The net present value for each investment. Use the present value table appearing in Exhibit 2 of this chapter. (Round present values to the nearest dollar.) 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.arrow_forwardSan Lucas Corporation is considering investment in robotic machinery based upon the following estimates: a. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of 700,000. Use the present value tables appearing in Exhibits 2 and 5 of this chapter. b. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of 500,000, 700,000, and 900,000. Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer. c. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 10%. Round to the nearest dollar. d. Interpret the results of parts (a), (b), and (c).arrow_forward
- The management of Ryland International Is considering Investing in a new facility and the following cash flows are expected to result from the investment: A. What Is the payback period of this uneven cash flow? B. Does your answer change if year 6s cash inflow changes to $920,000?arrow_forwardFoster Manufacturing is analyzing a capital investment project that is forecast to produce the following cash flows and net income: The payback period of this project will be: a. 2.5 years. b. 2.6 years. c. 3.0 years. d. 3.3 years.arrow_forwardYour company is planning to purchase a new log splitter for is lawn and garden business. The new splitter has an initial investment of $180,000. It is expected to generate $25,000 of annual cash flows, provide incremental cash revenues of $150,000, and incur incremental cash expenses of $100,000 annually. What is the payback period and accounting rate of return (ARR)?arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT