1.
Net present value method is the method which is used to compare the initial
To determine: The net present value of each investment, using the present value of $1 table in Exhibit 5, ignoring the unequal lives of the project.
2.
To calculate: The net present value of each project assuming the office expansion is adjusted to a four year life, using the present value of $1 table in Exhibit 2.
3.
To prepare: The report the merits of the two investments to the capital investment committee.
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Chapter 26 Solutions
Bundle: Accounting, Chapters 1-13, 26th + Working Papers, Chapters 1-17 For Warren/reeve/duchac's Accounting, 26th And Financial Accounting, 14th + ... For Warren/reeve/duchac's Accounting, 26th
- Average 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_forwardThe investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $490,000. The estimated net cash flows from each project are as follows: Net Cash Flows Year Office Expansion Servers 1 $125,000 $165,000 2 125,000 165,000 3 125,000 165,000 4 125,000 165,000 5 125,000 6 125,000 The committee has selected a rate of 12% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $180,000. 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 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432…arrow_forwardThe investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $1,104,000. The estimated net cash flows from each project are as follows: Net Cash Flow Year OfficeExpansion Server 1 $308,000 $407,000 2 308,000 407,000 3 308,000 407,000 4 308,000 407,000 5 308,000 6 308,000 The committee has selected a rate of 15% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $385,000. 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 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5…arrow_forward
- The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $838,000. The estimated net cash flows from each project are as follows: Net Cash Flow Year Office Expansion Server 1 $234,000 $309,000 2 234,000 309,000 3 234,000 309,000 4 234,000 309,000 5 234,000 6 234,000 The committee has selected a rate of 15% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $293,000. 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 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5…arrow_forwardThe investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $838,000. The estimated net cash flows from each project are as follows: Net Cash Flow Year Office Expansion Server 1 $234,000 $309,000 2 234,000 309,000 3 234,000 309,000 4 234,000 309,000 5 234,000 6 234,000 The committee has selected a rate of 15% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $293,000. 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 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665…arrow_forwardThe Lake Tahow Ski Resort is comparing a half dozen capital improvement projects. It has allocated $1 million for capital budgeting purposes. The following proposals and associated profitability indexes have been determined. The projects themselves are independent of one another. PROFITABILITY PROJECTS AMOUNT INDEX Extend ski lift 3 $500,000 1.22 Build a new sports shop 150,000 0.95 Extend ski lift 4 350,000 1.20 Build a new restaurant 450,000 1.18 Build addition to housing complex 200,000 1.19 Build an indoor skating rink 400,000 1.05 Required: a). If strict capital rationing for only the current period is assumed, which of the investments should be undertaken? b) Calculate the NPV of any three projects in the above list…arrow_forward
- Star City is considering an investment in the community center that is expected to return the following cash flows: Use Exhibit A.8. Year Net Cash Flow 1234in 5 $ 28,000 58,000 88,000 88,000 108,000 This schedule includes all cash inflows from the project, which will also require an immediate $208,000 cash outlay. The city is tax-exempt; therefore, taxes need not be considered. Required: a. What is the net present value of the project if the appropriate discount rate is 22 percent? (Round PV factor to 3 decimal places. Negative amount should be indicated by a minus sign.) Net present valuearrow_forwardToby Amberville’s Manhattan Café, Inc., is considering investment in two alternative capital budgeting projects. Project A is an investment of $75,000 to replace working but obsolete refrigeration equipment. Project B is an investment of $150,000 to expand dining roomfacilities.Relevant cash flowdata forthe two projects over their expected two-year lives are: Project A year 1 year 2 probability cash flow probability cash flow 0.18 0 $ 0.08 0 $ 0.64 50,000 $ 0.084 50,000 0.18 100,000 0.08 100,00 Project B year 1 year 2 probability cash flow probability cash flow 0.50 0 $ 0.125 0 $ 0.50 200,000 0.75 100,000 0.125 200,000 A. Calculate the expected value, standard deviation, and coefficient of variation for cash flows from each project. B. Calculate the risk-adjusted NPV for each project using a 15% cost of capital for the riskier project and a 12% cost of capital for the less risky one. Which project is preferred…arrow_forwardNet Present Value and Competing Projects Spiro Hospital is investigating the possibility of investing in new dialysis equipment. Two local manufacturers of this equipment are being considered as sources of the equipment. After-tax cash inflows for the two competing projects are as follows: Year Puro Equipment Briggs Equipment 1 $320,000 $120,000 2 280,000 120,000 3 240,000 320,000 4 160,000 400,000 5 120,000 440,000 Both projects require an initial investment of $560,000. In both cases, assume that the equipment has a life of 5 years with no salvage value. Required: Round present value calculations and your final answers to the nearest dollar. 1. Assuming a discount rate of 16%, compute the net present value of each piece of equipment. Puro equipment: $fill in the blank Briggs equipment: $fill in the blank 2. A third option has surfaced for equipment purchased from an out-of-state supplier. The cost is also $560,000, but this…arrow_forward
- Perit Industries has $110,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Cost of equipment required Working capital investment required Annual cash inflows i Salvage value of equipment in six years Life of the project Project A $ 110,000 $0 $ 20,000 $ 8,600 1. Net present value project A 2. Net present value project B 3. Which investment alternative (if either) would you recommend that the company accept? 6 years Project B $0 $ 110,000 $ 68,000 $0 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 16%. Click here to view Exhibit 148-1 and Exhibit 148-2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net present value of Project A. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.) 2. Compute the net present value of Project B. (Enter…arrow_forwardThe following data are accumulated by Watershed Inc. in evaluating two competing capital investment proposals: Project A Project Z Amount of investment $64,000 $48,000 Useful life 4 years 5 years Estimated residual value 0 0 Estimated total income over the useful life $8,960 $12,600 Determine the expected average rate of return for each project. Round your answers to one decimal place.arrow_forwardSubject :- Accountarrow_forward
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