Concept explainers
a.
Net present value method is the method which is used to compare the initial
To determine: The net present value of the project.
(b)
To explain: The
(c)
Internal rate of return method is one of the capital investment methods which determine 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 is also called as the time-adjusted rate of return method. It used to evaluate the different proposal’s expected rate of return.
To determine: The internal rate of return for the given project
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Chapter 26 Solutions
Accounting
- Net present value methodannuity for a service company Amenity Hotels Inc. is considering the construction of a new hotel for 50 million. The expected life of the hotel is 25 years, with no residual value. The hotel is expected to earn revenues of 30 million per year. Total expenses, including depreciation, are expected to be 23 million per year. Amenity Hotels management has set a minimum acceptable rate of return of 14%. a. Determine the equal annual net cash flows from operating the hotel. b. Compute the net present value of the new hotel, using the present value of an annuity table found in Appendix A. Round to the nearest million dollars. c. Does your analysis support construction of the new hotel? Explain.arrow_forwardCash payback period for a service company Janes Clothing Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of 975,000 and each with a seven-year life and expected total net cash flows of 1,050,000. Location 1 is expected to provide equal annual net cash flows of 150,000, and Location 2 is expected to have the following unequal annual net cash flows: Determine the cash payback period for both location proposals.arrow_forwardNet present value method, internal rate of return method, and analysis for a service company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: The wind turbines require an investment of 887,600, while the biofuel equipment requires an investment of 911,100. No residual value is expected from either project. Instructions 1. Compute the following for each project: A. The net present value. Use a rate of 6% and the present value of an annuity table appearing in Exhibit 5 of this chapter. B. A present value index. (Round to two decimal places.) 2. Determine the internal rate of return for each project by (A) computing a present value factor for an annuity of 1 and (B) using the present value of an annuity of 1 table appearing in Exhibit 5 of this chapter. 3. What advantage does the internal rate of return method have over the net present value method in comparing projects?arrow_forward
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