Videos
a.
The
Explanation: The net present value of alternative 1 is -$5,921.3.
Explanation:
Calculate the net present value as shown below.
| Particulars | Cash flow | Present value at 10% | Present value of net cash flow |
| Year 1 |
$8,000 |
0.9091 |
$7,272.8 |
| Year 2 |
$8,000 |
0.8264 |
$6,611.2 |
| Year 3 |
$8,000 |
0.7513 |
$6,010.4 |
| Year 4 |
$8,000 |
0.6830 |
$5,464.0 |
| Year 5 |
$8,000 |
0.6209 |
$4,967.2 |
| Year 6 |
$8,000 |
0.5645 |
$4,516.0 |
| Year 7 |
$8,000 |
0.5132 |
$4,105.6 |
| Year 8 |
$11,000 |
0.4665 |
$5,131.5 |
| Total |
$44,078.7 | ||
| Invested outflows |
$67,000 |
($50,000.0) | |
| Net present value |
-$5,921.3 | ||
Table – 1
Therefore, the net present value of alternative 1 is -$5,921.3.
Working Notes:
(a) On deduction of yearly operating cost from yearly revenues, the yearly cash flow is obtained.
(b) The
(c) The cost of old machine is not considered as the invested amount, as such cost is historical cost.
Conclusion:
Since the total cash flows are smaller than the invested amount, the net present value is negative.
b.
The net present value of alternative 2.
Explanation: The net present value of alternative 2 is $61,458.2.
Explanation:
Calculate the net present value as shown below.
| Particulars | Cash flow | Present value at 10% | Present value of net cash flow |
| Year 1 | $38,000 | 0.9091 | $34,545.8 |
| Year 2 | $38,000 | 0.8264 | $31,403.2 |
| Year 3 | $38,000 | 0.7513 | $28,549.4 |
| Year 4 | $38,000 | 0.6830 | $25,954.0 |
| Year 5 | $38,000 | 0.6209 | $23,594.2 |
| Year 6 | $38,000 | 0.5645 | $21,451.0 |
| Year 7 | $38,000 | 0.5132 | $19,501.6 |
| Year 8 | $46,000 | 0.4665 | $21,459.0 |
| Total cash flows | $206,458.2 | ||
| Invested outflows | $312,000 | ($145,000.0) | |
| Net present value | $61,458.2 | ||
Table – 2
Therefore, the net present value of alternative 2 is $61,458.2.
Working Notes:
(a) On deduction of yearly operating cost from yearly revenues, the yearly cash flow is obtained.
(b) The cash inflow of $46,000 is obtained by adding the salvage value of $8,000 is added in the actual cash inflow of the eighth year.
(c) The cost of old machine is not considered as the invested amount, as such cost is historical cost.
Conclusion:
Since the total cash flows are greater than the invested amount, the net present value is negative.
c.
To ascertain: The alternative to be recommended to management.
Explanation: Alternative 2 should be selected.
Explanation:
The projects or alternatives with positive NPV should be accepted, as the total cash flows are greater than the invested amount. The net present value of the alternative 1 is -$5,921.3 and that of alternative 2 is $61,458.2.
Hence, alternative 1 shows the negative net present value and alternative 2 shows positive net present value.
Conclusion:
Hence, alternative 2 should be recommended to the management.
a.
Explanation of Solution
The net present value of alternative 1 is -$5,921.3.
Since the total cash flows are smaller than the invested amount, the net present value is negative.
b.
The net present value of alternative 2.
b.
Explanation of Solution
The net present value of alternative 2 is $61,458.2.
Since the total cash flows are greater than the invested amount, the net present value is negative.
c.
To ascertain: The alternative to be recommended to management.
c.
Explanation of Solution
Alternative 2 should be selected.
Hence, alternative 2 should be recommended to the management.
Want to see more full solutions like this?
Chapter 11 Solutions
Managerial Accounting
- Calculate the company's overhead rate based on total direct labour hours.arrow_forwardnonearrow_forwardABC Industries produces a single product and has the following cost structure: Number of units produced each year: 5,500 Variable costs per unit: Direct materials: $38 Direct labor: $12 Variable manufacturing overhead: $6 Fixed costs per year: Fixed manufacturing overhead: $187,000 What is the absorption costing unit product cost?arrow_forward
- Travis Apparel Co. is considering the production of a new line of jackets. Based on preliminary market research, management has decided that each jacket should be priced at $210. Furthermore, management believes that the profit margin should be 30% of sales revenue. What is the target cost?arrow_forwardABC Manufacturing has the following financial data for the year: Cost of Goods Manufactured: $900,000 Beginning Finished Goods Inventory: $250,000 • Ending Finished Goods Inventory: $280,000 What is the cost of goods sold (COGS)?arrow_forwardKindly help me with accounting questionsarrow_forward
- Provide correct answer this general accounting questionarrow_forwardOn October 1, 2020, Fairview Transport purchased a truck for $90,000. The truck has a useful life of 8 years and a residual value of $10,000. The truck is depreciated using the straight-line method. What is the depreciation expense for 2020?arrow_forwardWhat is the amount of total liabilities?? Accountingarrow_forward
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education