A. Assuming cash flows arise evenly throughout the year,calculate the payback period of each of the projects.Show your workings.B. Calculate the accounting rate of return of each of theprojects. Show your workings.c. Assuming cash inflows arise at the end of the year,calculate the internal rate of return of each of theprojects. Show your workings. Ron is an avid woodworker and a grill master and isthinking about investing £900,000 of his savings to start anew business. He is considering two alternative businessopportunities, a furniture workshop and a steak restaurant,but can only accept one investment project. The projectedcash flows of the two investments are shown below.Ron asks for your help and advice in reaching a decisionon which investment project to accept. He tells you herequires a 6% rate of return on his investment.FurnitureSteakworkshoprestaurantCash flows£000£000Initial investment(900)(900)Cash inflows year 1Cash inflows year 2Cash inflows year 3Cash inflows year 4Cash inflows year 5Cash inflow from sale of the investment at the end of year 5225300300262.5337.5262.5337.5300262.5375112.5150Assume the initial investment arises at the start of the firstyear of the project. The depreciation method is straight lineover the project's life.

Long-term investment decisions are known as capital budgeting. The company needs to allocate its…

A. Assuming cash flows arise evenly throughout the year, calculate the payback period of each of the projects. Show your workings. B. Calculate the accounting rate of return of each of the projects. Show your workings.

A. Assuming cash flows arise evenly throughout the year, calculate the payback period of each of the projects. Show your workings. B. Calculate the accounting rate of return of each of the projects. Show your workings.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

A. Assuming cash flows arise evenly throughout the year,
calculate the payback period of each of the projects.
Show your workings.
B. Calculate the accounting rate of return of each of the
projects. Show your workings.
c. Assuming cash inflows arise at the end of the year,
calculate the internal rate of return of each of the
projects. Show your workings.

Ron is an avid woodworker and a grill master and is
thinking about investing £900,000 of his savings to start a
new business. He is considering two alternative business
opportunities, a furniture workshop and a steak restaurant,
but can only accept one investment project. The projected
cash flows of the two investments are shown below.
Ron asks for your help and advice in reaching a decision
on which investment project to accept. He tells you he
requires a 6% rate of return on his investment.
Furniture
Steak
workshop
restaurant
Cash flows
£000
£000
Initial investment
(900)
(900)
Cash inflows year 1
Cash inflows year 2
Cash inflows year 3
Cash inflows year 4
Cash inflows year 5
Cash inflow from sale of the investment at the end of year 5
225
300
300
262.5
337.5
262.5
337.5
300
262.5
375
112.5
150
Assume the initial investment arises at the start of the first
year of the project. The depreciation method is straight line
over the project's life.

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When an investment’s annual net cash inflows are equal every year, the investment’s payback period can be calculated as: (See your Chapter 25 notes, page 2) When an investment’s annual net cash inflows are equal every year, the investment’s payback period can be calculated as: (See your Chapter 25 notes, page 2) Initial cost of the investment minus the annual net cash inflow Average amount of the investment divided by the average annual net income Initial cost of the investment divided by the annual net cash inflow Present value of net cash inflow divided by the initial cost of the investment Future value of net cash inflow divided by the initial cost of the investment Present value of the net cash inflow minus the initial cost of the investment Annual net cash inflow minus the initial cost of the investment Average annual net income divided by the average amount of the investment
22)
Identify and explain the three components of cash flow for a project. Discuss some of the most important factors that go into calculating these.
Which of the following statements is true regarding the payback period? Multiple Choice It measures the length of time that it takes for a project to recover its initial cost from the discounted net cash inflows that it genera It measures the length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates. It measures the length of time that it takes for a project to recover its initial cost from the incremental net operating income that It measures the length of time that it takes for a project to recover its initial cost from the discounted incremental net operating it generates.
Question: Which of the following methods of capital budgeting accounts for the time value of money? Options: A) Net Present Value (NPV) B) Payback Period C) Accounting Rate of Return (ARR) D) Profitability Index (PI)
Keane & Co plc is considering two possible investments. The company requires an Accounting Rate of Return of 12% and payback within 2 years. It has a cost of capital of 12%. Forecast sales and production units Year 1 Year 2 Year 3 Year 4 Contribution per unit Fixed cost per year Initial investment Residual (scrap) value Accounting Rate of Return Internal Rate Return Discount factors at 12% are: Year 1 Year 2 Year 3 Year 4 Year 5 0.893 0.797 0.712 0.636 0.567 Project J 60,000 110,000 80,000 50,000 £40 £800,000 £7,600,000 £300,000 9.5% 8% Project K 30,000 24,000 20,000 12,000 £120 £700,000 £5,500,000 £150,000 19% 18%
To project the appropriate anticipated cash flow for a project, we must put all cash flow knowledge together. This includes of the incremental cash flow. OA) the amount but not the timing B) the timing C) the amount D) both the amount and timing 33
What is the 'golden rule' for finding the Internal Rate of Return (IRR) of an investment project cash flow? a)Vary the discount rate until the net present value of the cash flow equals zero. b)Vary the discount rate until the net present value of the cash flow is positive c)Vary the discount rate to the point of maximum increase in the net present value d)Vary the discount rate until the net present value of the cash is negative

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