Concept explainers
Videos
1.
Introduction:
Cash flow:
The movement of cash into and out of a business enterprise or company at a specific time refers to the cash flow.
The item(s) in the income statement that will not affect cash flows.
2.
Introduction:
The movement of cash amount that comes into a business enterprise refers to the cash inflow.
The project's annual net cash inflows.
3.
Introduction:
Net cash inflow:
The movement of cash amount that comes into a business enterprise refers to the cash inflow and net cash inflow of a company involving sales and variable costs.
The present value of the project's annual net cash inflows.
4.
Introduction:
For a specific project, by comparing initial investment, the present value of cash flows in a particular time at a particular
The project's net present value.
5.
Introduction:
Profitability Index:
The attractiveness or profitability of investment in the project can be measured by the profitability index by ranking projects.
The project profitability index for this project.
6.
Introduction:
Internal Rate of Return (IRR) is a rate of interest that is helpful to compare investments of the project with one another and makes the net present value of all cash flows equal to zero.
The project's internal rate of return nearest whole percent.
7.
Introduction:
Payback period:
The payback period indicates the number of years that are required to recover the original/actual or real investment of the project.
The project's payback period.
8.
Introduction:
The simple rate of return:
The simple rate of return considers the annual increase in net operating income by reducing or subtracting the depreciation on the investment.
The project's simple rate of return for each of the 5 years.
9.
Introduction:
Net present value:
For a specific project, by comparing initial investment, the present value of cash flows in a particular time at a particular rate of return is the net present value.
Whether the project's net present value is to be higher/lower/the same if the company's discount rate was 16% instead of 14%.
10.
Introduction:
Payback period:
The payback period indicates the number of years that are required to recover the original/actual or real investment of the project.
Whether the project's payback period is higher/lower/the same as before if the equipment used had a salvage value of 300k at the end of 5 years.
11.
Introduction:
Net present value:
For a specific project, by comparing initial investment, the present value of cash flows in a particular time at a particular rate of return is the net present value.
Whether the project's net present value is higher/lower/the same as before If the equipment had a salvage value of 300k at the end of 5 years.
12.
Introduction:
Internal Rate of Return:
Internal Rate of Return (IRR) is a rate of interest that is helpful to compare investments of the project with one another and makes the net present value of all cash flows equal to zero.
Whether the project's simple rate of return is higher/lower/the same if the equipment had a salvage value of 300k at the end of 5 years.
13.
Introduction:
Net present value:
For a specific project, by comparing initial investment, the present value of cash flows in a particular time at a particular rate of return is the net present value.
The project's actual net present value if all estimates (including total sales) were exactly correct except for the variable expense ratio, which was actually 45%.
14.
Introduction:
The payback period:
The payback period indicates the number of years that are required to recover the original/actual or real investment of the project.
The project's actual payback period if all estimates (including total sales) were exactly correct except for the variable expense ratio, which was actually 45%.
15.
Introduction:
Simple rate of return:
The simple rate of return considers the annual increase in net operating income by reducing or subtracting the depreciation on the investment.
The project's actual simple rate of return if all estimates (including total sales) were exactly correct except for the variable expense ratio, which was actually 45%.
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Chapter 7 Solutions
MANAGERIAL ACCOUNTING F/MGRS.
- Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of 150,000 and will operate for five years. The cash flows associated with these projects are as follows: Statens required rate of return is 10%. Using the net present value method and the present value table provided in Appendix A, which of the following actions would you recommend to Staten? a. Accept Project X and reject Project Y. b. Accept Project Y and reject Project X. c. Accept Projects X and Y. d. Reject Projects X and Y.arrow_forwardDrake Corporation is reviewing an investment proposal. The initial cost is $105,700. Estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is assumed to equal its book value. There would be no salvage value at the end of the investment's life. Year 1 2 3 4 Investment Proposal Book Value $70,500 42,400 20,600 6,800 Annual Annual Cash Flows Net Income $9,700 11.100, $44,900 39.200 36,000 29,100 25,205 14,200 15,300 18,405 Drake Corporation uses an 11% target rate of return for new investment proposals. Click here to view the factor table. SUarrow_forwardWade Corporation is reviewing an investment proposal. The initial cost is $105,000. Estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal to its book value. There would be no salvage value at the end of the investment's life. Year 1 2 3 4 5 Investment Proposal Annual Book Value Cash Flows $70,000 42,000 21,000 7,000 0 $45,000 40,000 35,000 30,000 25,000 Annual Net Income $16,000 18,000 20,000 22,000 24,000 Wade Corporation uses a 15% target rate of return for new investment proposals. a. What is the cash payback period for this proposal? b. What is the annual rate of return for the investment? c. What is the net present value of the investment?arrow_forward
- Mountain Frost is considering a new project with an initial cost of $205,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The projected net income for each year is $20,000, $20,900, $24,600, and $16,900, respectively. What is the average accounting return? Please make sure its correctarrow_forwardThe management of SoComfy Hotel wishes to capitalize on an investment project that will cost the management to pay $85,000 as an initial cost. This project will take three years to finish with the net cash flows stream of $18,000 for the first year, $21,000 for the second year, and $22,500 for the third year. Should the management accept the project by analyzing the net present value (NPV) of the cash flow stream if they have 12.00% minimum required rate of return on the project?arrow_forwardCrane Corporation is reviewing an investment proposal. The initial cost is $104,600. Estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the following schedule. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is assumed to equal its book value. There would be no salvage value at the end of the investment's life. Year 1 2 3 4 5 Book Value Investment Proposal $69,900 41,000 (b) 21,000 7,600 0 Annual Cash Flows Click here to view PV table. Cash payback period $46,000 40,600 36,000 31,000 24,220 Annual Net Income $11,300 11,700 Crane Corporation uses an 11% target rate of return for new investment proposals. Annual rate of return for the investment 16,000 17,600 (a) What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.) 16,620 3 years What is the annual rate of return…arrow_forward
- Management of Manning Corporation is considering a project that would require an investment of $282, 000 and would last for 6 years. The annual net operating income from the project would be $107,000, (note: operating income is affected by $43,000 of annual depreciation related to the investment). The scrap value of the project's assets at the end of the project would be $54,000. What is the present value of the future cash flows from this investment assuming Manning Co. has a discount rate of 18% ? A. $642,003 B. $544, 680 C. $524,700 D. $394, 266 E. $325,000arrow_forwardUrsus, Incorporated, is considering a project that would have a five-year life and would require a $3,000,000 investment in equipment. At the end of five years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows (Ignore income taxes.): Sales Variable expenses Contribution margin Fixed expenses: Fixed out-of-pocket cash expenses Depreciation Net operating income $ 500,000 600,000 b. Compute the project's internal rate of return. Note: Round your final answer to the nearest whole percent. c. Compute the project's payback period. Note: Round your answer to 2 decimal place. d. Compute the project's simple rate of return. Note: Round your final answer to the nearest whole percent. a. Net present value b. Internal rate of return c. Payback period d. Simple rate of return Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. All…arrow_forwardBlossom Corporation is reviewing an investment proposal. The initial cost is $105,700. Estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the following schedule. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is assumed to equal its book value. There would be no salvage value at the end of the investment's life. Investment Proposal Annual Year Book Value Cash Flows Annual Net Income 1 $70,500 $44,900 $9,700 2 42,400 39,200 11,100 3 20,600 36,000 14,200 4 6,800 29,100 15,300 5 0 25,205 18,405 Blossom Corporation uses an 11% target rate of return for new investment proposals. 1arrow_forward
- Mountain Frost is considering a new project with an initial cost of $180,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The projected net income for each year is $19,500, $20,400, $24,600, and $16,400, respectively. What is the average accounting return?arrow_forwardNormally, JC Corporation pursue a project only if the payback period is not more than 50% of the project's useful life. However the accounting manager suggested that investment decision should not be based only on payback period. Currently, the company is considering to purchase a new machine that will provide annual cash flow of P1,500,000 in the first year of use, P1,200,000 in its second year of use, P1,000,000 in the third year, and P740,000 in each year of the remaining of 8 years life of the project. The machine cost P5,600,000 and could be sold for P2,500,000 after its useful life. The company's cost of capital is 12%. As the investment analyst of the company which of the Payback Method and the Present Value Method would you recommend to become the basis for pursuing the project? Explain your answers. Support your recommendation with computed values.arrow_forwardThe management of Kunkel Company is considering the purchase of a $22,000 machine that would reduce operating costs by $5,000 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 16%. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?arrow_forward
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