Financial And Managerial Accounting
15th Edition
ISBN: 9781337902663
Author: WARREN, Carl S.
Publisher: Cengage Learning,
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Question
Chapter 26, Problem 12E
(a)
To determine
Compute the present value index for each proposal.
(b)
To determine
Compute the
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Average Rate of Return Method, Net Present Value Method, and Analysis
The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:
Warehouse
Tracking Technology
Year
Income fromOperations
Net CashFlow
Income fromOperations
Net CashFlow
1
$34,200
$104,000
$72,000
$166,000
2
34,200
104,000
55,000
140,000
3
34,200
104,000
27,000
99,000
4
34,200
104,000
12,000
68,000
5
34,200
104,000
5,000
47,000
Total
$171,000
$520,000
$171,000
$520,000
Each project requires an investment of $360,000. 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.
Present Value of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826…
Average Rate of Return Method, Net Present Value Method, and Analysis
The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:
Warehouse
Tracking Technology
Year
Income fromOperations
Net CashFlow
Income fromOperations
Net CashFlow
1
$58,000
$183,000
$122,000
$293,000
2
58,000
183,000
93,000
247,000
3
58,000
183,000
46,000
174,000
4
58,000
183,000
20,000
119,000
5
58,000
183,000
9,000
82,000
Total
$290,000
$915,000
$290,000
$915,000
Each project requires an investment of $580,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis.
Present Value of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890…
Use the information provided to answer the questions
Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to twodecimal places).Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). Use your answers from previous question to recommend the project that should be chosen. Motivateyour choice.
Chapter 26 Solutions
Financial And Managerial Accounting
Ch. 26 - What are the principal objections to the use of...Ch. 26 - Discuss the principal limitations of the cash...Ch. 26 - Why would the average rate of return differ from...Ch. 26 - Prob. 4DQCh. 26 - Prob. 5DQCh. 26 - Prob. 6DQCh. 26 - Prob. 7DQCh. 26 - Two projects have an identical net present value...Ch. 26 - Prob. 9DQCh. 26 - What are the major disadvantages of the use of the...
Ch. 26 - Prob. 11DQCh. 26 - Prob. 12DQCh. 26 - Average rate of return Determine the average rate...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Prob. 3BECh. 26 - Internal rate of return A project is estimated to...Ch. 26 - Net present valueunequal lives Project 1 requires...Ch. 26 - Average rate of return The following data are...Ch. 26 - Average rate of returncost savings Maui...Ch. 26 - Average rate of returnnew product Hana Inc. is...Ch. 26 - Determine cash flows Natural Foods Inc. is...Ch. 26 - Prob. 5ECh. 26 - Cash payback method Lily Products Company is...Ch. 26 - Prob. 7ECh. 26 - Prob. 8ECh. 26 - Net present value methodannuity for a service...Ch. 26 - Net present value methodannuity Jones Excavation...Ch. 26 - Prob. 11ECh. 26 - Prob. 12ECh. 26 - Net present value method and present value index...Ch. 26 - Average rate of return, cash payback period, net...Ch. 26 - Prob. 15ECh. 26 - Internal rate of return method The internal rate...Ch. 26 - Prob. 17ECh. 26 - Internal rate of return methodtwo projects Munch N...Ch. 26 - Net present value method and internal rate of...Ch. 26 - Identify error in capital investment analysis...Ch. 26 - Prob. 21ECh. 26 - Prob. 22ECh. 26 - Prob. 1PACh. 26 - Cash payback period, net present value method, and...Ch. 26 - Prob. 3PACh. 26 - Net present value method, internal rate of return...Ch. 26 - Alternative capital investments The investment...Ch. 26 - Capital rationing decision for a service company...Ch. 26 - Prob. 1PBCh. 26 - Prob. 2PBCh. 26 - Net present value method, present value index, and...Ch. 26 - Net present value method, internal rate of return...Ch. 26 - Prob. 5PBCh. 26 - Clearcast Communications Inc. is considering...Ch. 26 - San Lucas Corporation is considering investment in...Ch. 26 - Assume San Lucas Corporation in MAD 26-1 assigns...Ch. 26 - Prob. 3MADCh. 26 - Prob. 4MADCh. 26 - Home Garden Inc. is considering the construction...Ch. 26 - Assume Home Garden Inc. in MAD 26-5 assigns the...Ch. 26 - Ethics in Action Danielle Hastings was recently...Ch. 26 - Prob. 4TIFCh. 26 - Prob. 5TIFCh. 26 - Prob. 6TIFCh. 26 - Foster Manufacturing is analyzing a capital...Ch. 26 - Staten Corporation is considering two mutually...Ch. 26 - Prob. 3CMACh. 26 - Prob. 4CMA
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- Tasty Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows: Des Moines Cedar Rapids Total present value of net cash flow $194,880 $254,100 Amount to be invested (203,000) (242,000) Net present value $(8,120) $12,100 a. Determine the present value index for each proposal. Round your answers for the present value index to two decimal places. Des Moines Cedar Rapids Total present value of net cash flow $fill in the blank 1 $fill in the blank 2 Amount to be invested $fill in the blank 3 $fill in the blank 4 Present value index fill in the blank 5 fill in the blank 6 b. Which location does your analysis support? (If both present value indexes are the same, either location will grade as correct.) , because the net present value index is 1.arrow_forwardCompare and Contrast the four capital budgeting methods. Show Future Value examples of a) Lump Sum b) annuity. Show Present value of a) Lump Sum and b) annuity Compare Payback Period Method and ARR. What is a valid criticism of the Payback Period Method Rank the four projects in order of preference by the four methods in no. 1 Explain the rankings and which method is best for evaluating all capital investment projectsarrow_forward(a)Evaluate the projects using each of the following criteria, stating which project(s) Insignia Corporation Limited should choose under each criteria and why: Payback Discounted Payback Net Present Value Profitability Indexarrow_forward
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