Cash payback method: Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business. Average rate of return method: Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return. The average rate of return is computed as follows: Average rate of return = Estimated average annual income Average investment Net present value method: Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method . 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: Present value index = Total present value of net cash flow Amount to be invested To determine: The cash payback period for the given proposals.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter 26, Problem 26.6BPR

1.

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

Average rate of return =Estimated average annual incomeAverage investment

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

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:

Present value index =Total present value of net cash flowAmount to be invested

To determine: The cash payback period for the given proposals.

2.

To determine

The average rate of return for the give proposals.

3.

To determine

To indicate: The proposals which should be accepted for further analysis, and which should be rejected.

4.

To determine

The net present value of preferred proposals.

5.

To determine

To determine:  The present value index for each proposal.

6.

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of net cash flows.

7.

To determine

To rank: The proposal from most attractive to least attractive, based on the present value of index.

8.

To determine

To analysis: The proposal which is favor to investment, and comment on the relative attractiveness of the proposals based on the rank.

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