M Porcelain Computer Company is considering purchasing two different types of servers. Server A will generate net cash inflows of $26,000 per year and have a zero residual value. Server A's estimated useful life is three years, and it costs $46,000. Server B will generate net cash inflows of $30,000 in year 1. $12,000 in year 2, and $4,000 in year 3. Server B has a $5,000 residual value and an estimated useful life of three years. Server B also costs $46,000 Porcelain Computer Company's required rate of return 14%. Read the requirements. Requirement 1. Calculate payback, accounting rate of return, net present value, and internal rate of return for both server investments. Use Microsoft Excel to calculate NPV and IRR Begin with the payback period for Server A. (Round your answer to one decimal place, X.X.) Amount invested Expected annual net cash inflow 26000 Now determine the payback period for Server B. (Round your answer to one decimal place, X.X.) The payback period for Server Bis years. Calculate the accounting rate of return (ARR) for both server investments (Round all intermediary calculations to the nearest whole dollar. Round your answers to the nearest hundredth percent, X.XX%.) Average annual operating income Average amount invested Server A Server A Server B 46000 Server A Server B Y Y % % Payback 1.8 years ARR Calculate the net present value (NPV) for both server investments. Use Microsoft Excel to calculate NPV. (Round the NPV calculations to the nearest whole dollar. Use parentheses or a minus sign for a negative net present value.) NPV % % Calculate the internal rate of return (IRR) for both server investments. Use Microsoft Excel to calculate IRR. (Round the IRR calculations to two decimal places, X.XX%.) IRR Server A Server B Requirement 2. Assuming capital rationing applies, which server should Porcelain Computer Company invest in?
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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