Provide appropriate answer for (a) to (e).

Question

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Answer 1

Question

Chapter 12, Problem 40E

To determine

Provide appropriate answer for (a) to (e).

Expert Solution & Answer

Explanation of Solution

Provide appropriate answer for (a) to (e) as follows:

(a) Calculate the payback period for project A.

$Payback period = Initial investmentCash inflow=$5,000$1,800=2.78 years$

(b) Calculate the payback period for project B.

Year	After tax cash inflows	Cumulative after tax cash inflows
1	$ 500	$ 500
2	$ 1,200	$ 1,700
3	$ 2,000	$ 3,700
4	$ 2,500

Table(1)

$Payback period = 3+($5,000−$3,700$2,500)=3.52 years$

(c) Calculate the payback period for project C.

$Payback period = Initial investmentAnnual after-tax net cash inflow (3)=$5,000$2,125=2.35 years$

Working note (1):

Calculate the depreciation expense per year.

$Depreciation expense per year}=(Cost of investment−Salvage value)Useful life=$5,0005 years=$1,000$

Working note (2):

Calculate the taxable income each year.

$Taxable income each year} = (Net cash inflow−Depreciation expense (1))=$2,500−$1,000=$1,500$

Working note (3):

Calculate the annual after-tax net cash inflow.

$Annual after-tax net cash inflow}=(Net cash inflow−(Taxable income×Tax rate))=$2,500−($1,500×25%)=$2,500−$375=$2,125$

(d) (1) Calculate the accounting rate of return based on the original investment of project D.

$Accounting rate of return = Operating income after tax (5)Initial investment×100=$1,200$5,000×100=24%$

Working note (4):

Calculate the depreciation expense for project D.

$Depreciation expense =(Cost of investment−Estimated salvage value)Estimated years= ($5,000−$500)5 years=$900$

Working note (5):

Calculate the operating income after tax for project D.

Particulars	Amount ($)	Amount ($)
Sales		$ 4,000
Less: Expenses
Cash expenditures	$ 1,500
Depreciation (4)	$ 900	$ 2,400
Operating income before tax		$ 1,600
Less: Income tax @25%		$ 400
Operating income after tax		$ 1,200

Table (2)

(d) (2) Calculate the accounting rate of return based on the average investment of project D.

$Accounting rate of return = Operating income after tax (5)Average investment (6)×100=$1,200$2,750×100=43.64%$

Working note (6):

Calculate the average book value.

$Average book value = Original investment + Salvage value2=$5,000+$5002=$2,750$

e. Calculate the net present value for project A, project B, project C and project D.

Cost Management, Chapter 12, Problem 40E , additional homework tip 1

Cost Management, Chapter 12, Problem 40E , additional homework tip 2

Table (3)

Workings:

Cost Management, Chapter 12, Problem 40E , additional homework tip 3

Table (4)

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Answer 2

Question

Chapter 12, Problem 40E

To determine

Provide appropriate answer for (a) to (e).

Expert Solution & Answer

Explanation of Solution

Provide appropriate answer for (a) to (e) as follows:

(a) Calculate the payback period for project A.

$Payback period = Initial investmentCash inflow=$5,000$1,800=2.78 years$

(b) Calculate the payback period for project B.

Year	After tax cash inflows	Cumulative after tax cash inflows
1	$ 500	$ 500
2	$ 1,200	$ 1,700
3	$ 2,000	$ 3,700
4	$ 2,500

Table(1)

$Payback period = 3+($5,000−$3,700$2,500)=3.52 years$

(c) Calculate the payback period for project C.

$Payback period = Initial investmentAnnual after-tax net cash inflow (3)=$5,000$2,125=2.35 years$

Working note (1):

Calculate the depreciation expense per year.

$Depreciation expense per year}=(Cost of investment−Salvage value)Useful life=$5,0005 years=$1,000$

Working note (2):

Calculate the taxable income each year.

$Taxable income each year} = (Net cash inflow−Depreciation expense (1))=$2,500−$1,000=$1,500$

Working note (3):

Calculate the annual after-tax net cash inflow.

$Annual after-tax net cash inflow}=(Net cash inflow−(Taxable income×Tax rate))=$2,500−($1,500×25%)=$2,500−$375=$2,125$

(d) (1) Calculate the accounting rate of return based on the original investment of project D.

$Accounting rate of return = Operating income after tax (5)Initial investment×100=$1,200$5,000×100=24%$

Working note (4):

Calculate the depreciation expense for project D.

$Depreciation expense =(Cost of investment−Estimated salvage value)Estimated years= ($5,000−$500)5 years=$900$

Working note (5):

Calculate the operating income after tax for project D.

Particulars	Amount ($)	Amount ($)
Sales		$ 4,000
Less: Expenses
Cash expenditures	$ 1,500
Depreciation (4)	$ 900	$ 2,400
Operating income before tax		$ 1,600
Less: Income tax @25%		$ 400
Operating income after tax		$ 1,200

Table (2)

(d) (2) Calculate the accounting rate of return based on the average investment of project D.

$Accounting rate of return = Operating income after tax (5)Average investment (6)×100=$1,200$2,750×100=43.64%$

Working note (6):

Calculate the average book value.

$Average book value = Original investment + Salvage value2=$5,000+$5002=$2,750$

e. Calculate the net present value for project A, project B, project C and project D.

Cost Management, Chapter 12, Problem 40E , additional homework tip 1

Cost Management, Chapter 12, Problem 40E , additional homework tip 2

Table (3)

Workings:

Cost Management, Chapter 12, Problem 40E , additional homework tip 3

Table (4)

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Answer 3

Question

Chapter 12, Problem 40E

To determine

Provide appropriate answer for (a) to (e).

Expert Solution & Answer

Explanation of Solution

Provide appropriate answer for (a) to (e) as follows:

(a) Calculate the payback period for project A.

$Payback period = Initial investmentCash inflow=$5,000$1,800=2.78 years$

(b) Calculate the payback period for project B.

Year	After tax cash inflows	Cumulative after tax cash inflows
1	$ 500	$ 500
2	$ 1,200	$ 1,700
3	$ 2,000	$ 3,700
4	$ 2,500

Table(1)

$Payback period = 3+($5,000−$3,700$2,500)=3.52 years$

(c) Calculate the payback period for project C.

$Payback period = Initial investmentAnnual after-tax net cash inflow (3)=$5,000$2,125=2.35 years$

Working note (1):

Calculate the depreciation expense per year.

$Depreciation expense per year}=(Cost of investment−Salvage value)Useful life=$5,0005 years=$1,000$

Working note (2):

Calculate the taxable income each year.

$Taxable income each year} = (Net cash inflow−Depreciation expense (1))=$2,500−$1,000=$1,500$

Working note (3):

Calculate the annual after-tax net cash inflow.

$Annual after-tax net cash inflow}=(Net cash inflow−(Taxable income×Tax rate))=$2,500−($1,500×25%)=$2,500−$375=$2,125$

(d) (1) Calculate the accounting rate of return based on the original investment of project D.

$Accounting rate of return = Operating income after tax (5)Initial investment×100=$1,200$5,000×100=24%$

Working note (4):

Calculate the depreciation expense for project D.

$Depreciation expense =(Cost of investment−Estimated salvage value)Estimated years= ($5,000−$500)5 years=$900$

Working note (5):

Calculate the operating income after tax for project D.

Particulars	Amount ($)	Amount ($)
Sales		$ 4,000
Less: Expenses
Cash expenditures	$ 1,500
Depreciation (4)	$ 900	$ 2,400
Operating income before tax		$ 1,600
Less: Income tax @25%		$ 400
Operating income after tax		$ 1,200

Table (2)

(d) (2) Calculate the accounting rate of return based on the average investment of project D.

$Accounting rate of return = Operating income after tax (5)Average investment (6)×100=$1,200$2,750×100=43.64%$

Working note (6):

Calculate the average book value.

$Average book value = Original investment + Salvage value2=$5,000+$5002=$2,750$

e. Calculate the net present value for project A, project B, project C and project D.

Cost Management, Chapter 12, Problem 40E , additional homework tip 1

Cost Management, Chapter 12, Problem 40E , additional homework tip 2

Table (3)

Workings:

Cost Management, Chapter 12, Problem 40E , additional homework tip 3

Table (4)

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Answer 4

Question

Chapter 12, Problem 40E

To determine

Provide appropriate answer for (a) to (e).

Expert Solution & Answer

Explanation of Solution

Provide appropriate answer for (a) to (e) as follows:

(a) Calculate the payback period for project A.

$Payback period = Initial investmentCash inflow=$5,000$1,800=2.78 years$

(b) Calculate the payback period for project B.

Year	After tax cash inflows	Cumulative after tax cash inflows
1	$ 500	$ 500
2	$ 1,200	$ 1,700
3	$ 2,000	$ 3,700
4	$ 2,500

Table(1)

$Payback period = 3+($5,000−$3,700$2,500)=3.52 years$

(c) Calculate the payback period for project C.

$Payback period = Initial investmentAnnual after-tax net cash inflow (3)=$5,000$2,125=2.35 years$

Working note (1):

Calculate the depreciation expense per year.

$Depreciation expense per year}=(Cost of investment−Salvage value)Useful life=$5,0005 years=$1,000$

Working note (2):

Calculate the taxable income each year.

$Taxable income each year} = (Net cash inflow−Depreciation expense (1))=$2,500−$1,000=$1,500$

Working note (3):

Calculate the annual after-tax net cash inflow.

$Annual after-tax net cash inflow}=(Net cash inflow−(Taxable income×Tax rate))=$2,500−($1,500×25%)=$2,500−$375=$2,125$

(d) (1) Calculate the accounting rate of return based on the original investment of project D.

$Accounting rate of return = Operating income after tax (5)Initial investment×100=$1,200$5,000×100=24%$

Working note (4):

Calculate the depreciation expense for project D.

$Depreciation expense =(Cost of investment−Estimated salvage value)Estimated years= ($5,000−$500)5 years=$900$

Working note (5):

Calculate the operating income after tax for project D.

Particulars	Amount ($)	Amount ($)
Sales		$ 4,000
Less: Expenses
Cash expenditures	$ 1,500
Depreciation (4)	$ 900	$ 2,400
Operating income before tax		$ 1,600
Less: Income tax @25%		$ 400
Operating income after tax		$ 1,200

Table (2)

(d) (2) Calculate the accounting rate of return based on the average investment of project D.

$Accounting rate of return = Operating income after tax (5)Average investment (6)×100=$1,200$2,750×100=43.64%$

Working note (6):

Calculate the average book value.

$Average book value = Original investment + Salvage value2=$5,000+$5002=$2,750$

e. Calculate the net present value for project A, project B, project C and project D.

Cost Management, Chapter 12, Problem 40E , additional homework tip 1

Cost Management, Chapter 12, Problem 40E , additional homework tip 2

Table (3)

Workings:

Cost Management, Chapter 12, Problem 40E , additional homework tip 3

Table (4)

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Answer 5

Chapter 12, Problem 40E

To determine

Provide appropriate answer for (a) to (e).

Expert Solution & Answer

Explanation of Solution

Provide appropriate answer for (a) to (e) as follows:

(a) Calculate the payback period for project A.

$Payback period = Initial investmentCash inflow=$5,000$1,800=2.78 years$

(b) Calculate the payback period for project B.

Year	After tax cash inflows	Cumulative after tax cash inflows
1	$ 500	$ 500
2	$ 1,200	$ 1,700
3	$ 2,000	$ 3,700
4	$ 2,500

Table(1)

$Payback period = 3+($5,000−$3,700$2,500)=3.52 years$

(c) Calculate the payback period for project C.

$Payback period = Initial investmentAnnual after-tax net cash inflow (3)=$5,000$2,125=2.35 years$

Working note (1):

Calculate the depreciation expense per year.

$Depreciation expense per year}=(Cost of investment−Salvage value)Useful life=$5,0005 years=$1,000$

Working note (2):

Calculate the taxable income each year.

$Taxable income each year} = (Net cash inflow−Depreciation expense (1))=$2,500−$1,000=$1,500$

Working note (3):

Calculate the annual after-tax net cash inflow.

$Annual after-tax net cash inflow}=(Net cash inflow−(Taxable income×Tax rate))=$2,500−($1,500×25%)=$2,500−$375=$2,125$

(d) (1) Calculate the accounting rate of return based on the original investment of project D.

$Accounting rate of return = Operating income after tax (5)Initial investment×100=$1,200$5,000×100=24%$

Working note (4):

Calculate the depreciation expense for project D.

$Depreciation expense =(Cost of investment−Estimated salvage value)Estimated years= ($5,000−$500)5 years=$900$

Working note (5):

Calculate the operating income after tax for project D.

Particulars	Amount ($)	Amount ($)
Sales		$ 4,000
Less: Expenses
Cash expenditures	$ 1,500
Depreciation (4)	$ 900	$ 2,400
Operating income before tax		$ 1,600
Less: Income tax @25%		$ 400
Operating income after tax		$ 1,200

Table (2)

(d) (2) Calculate the accounting rate of return based on the average investment of project D.

$Accounting rate of return = Operating income after tax (5)Average investment (6)×100=$1,200$2,750×100=43.64%$

Working note (6):

Calculate the average book value.

$Average book value = Original investment + Salvage value2=$5,000+$5002=$2,750$

e. Calculate the net present value for project A, project B, project C and project D.

Cost Management, Chapter 12, Problem 40E , additional homework tip 1

Cost Management, Chapter 12, Problem 40E , additional homework tip 2

Table (3)

Workings:

Cost Management, Chapter 12, Problem 40E , additional homework tip 3

Table (4)

Answer 6

Chapter 12, Problem 40E

To determine

Provide appropriate answer for (a) to (e).

Expert Solution & Answer

Explanation of Solution

Provide appropriate answer for (a) to (e) as follows:

(a) Calculate the payback period for project A.

$Payback period = Initial investmentCash inflow=$5,000$1,800=2.78 years$

(b) Calculate the payback period for project B.

Year	After tax cash inflows	Cumulative after tax cash inflows
1	$ 500	$ 500
2	$ 1,200	$ 1,700
3	$ 2,000	$ 3,700
4	$ 2,500

Table(1)

$Payback period = 3+($5,000−$3,700$2,500)=3.52 years$

(c) Calculate the payback period for project C.

$Payback period = Initial investmentAnnual after-tax net cash inflow (3)=$5,000$2,125=2.35 years$

Working note (1):

Calculate the depreciation expense per year.

$Depreciation expense per year}=(Cost of investment−Salvage value)Useful life=$5,0005 years=$1,000$

Working note (2):

Calculate the taxable income each year.

$Taxable income each year} = (Net cash inflow−Depreciation expense (1))=$2,500−$1,000=$1,500$

Working note (3):

Calculate the annual after-tax net cash inflow.

$Annual after-tax net cash inflow}=(Net cash inflow−(Taxable income×Tax rate))=$2,500−($1,500×25%)=$2,500−$375=$2,125$

(d) (1) Calculate the accounting rate of return based on the original investment of project D.

$Accounting rate of return = Operating income after tax (5)Initial investment×100=$1,200$5,000×100=24%$

Working note (4):

Calculate the depreciation expense for project D.

$Depreciation expense =(Cost of investment−Estimated salvage value)Estimated years= ($5,000−$500)5 years=$900$

Working note (5):

Calculate the operating income after tax for project D.

Particulars	Amount ($)	Amount ($)
Sales		$ 4,000
Less: Expenses
Cash expenditures	$ 1,500
Depreciation (4)	$ 900	$ 2,400
Operating income before tax		$ 1,600
Less: Income tax @25%		$ 400
Operating income after tax		$ 1,200

Table (2)

(d) (2) Calculate the accounting rate of return based on the average investment of project D.

$Accounting rate of return = Operating income after tax (5)Average investment (6)×100=$1,200$2,750×100=43.64%$

Working note (6):

Calculate the average book value.

$Average book value = Original investment + Salvage value2=$5,000+$5002=$2,750$

e. Calculate the net present value for project A, project B, project C and project D.

Cost Management, Chapter 12, Problem 40E , additional homework tip 1

Cost Management, Chapter 12, Problem 40E , additional homework tip 2

Table (3)

Workings:

Cost Management, Chapter 12, Problem 40E , additional homework tip 3

Table (4)

Answer 7

Chapter 12, Problem 40E

To determine

Provide appropriate answer for (a) to (e).

Answer 8

Expert Solution & Answer

Explanation of Solution

Provide appropriate answer for (a) to (e) as follows:

(a) Calculate the payback period for project A.

$Payback period = Initial investmentCash inflow=$5,000$1,800=2.78 years$

(b) Calculate the payback period for project B.

Year	After tax cash inflows	Cumulative after tax cash inflows
1	$ 500	$ 500
2	$ 1,200	$ 1,700
3	$ 2,000	$ 3,700
4	$ 2,500

Table(1)

$Payback period = 3+($5,000−$3,700$2,500)=3.52 years$

(c) Calculate the payback period for project C.

$Payback period = Initial investmentAnnual after-tax net cash inflow (3)=$5,000$2,125=2.35 years$

Working note (1):

Calculate the depreciation expense per year.

$Depreciation expense per year}=(Cost of investment−Salvage value)Useful life=$5,0005 years=$1,000$

Working note (2):

Calculate the taxable income each year.

$Taxable income each year} = (Net cash inflow−Depreciation expense (1))=$2,500−$1,000=$1,500$

Working note (3):

Calculate the annual after-tax net cash inflow.

$Annual after-tax net cash inflow}=(Net cash inflow−(Taxable income×Tax rate))=$2,500−($1,500×25%)=$2,500−$375=$2,125$

(d) (1) Calculate the accounting rate of return based on the original investment of project D.

$Accounting rate of return = Operating income after tax (5)Initial investment×100=$1,200$5,000×100=24%$

Working note (4):

Calculate the depreciation expense for project D.

$Depreciation expense =(Cost of investment−Estimated salvage value)Estimated years= ($5,000−$500)5 years=$900$

Working note (5):

Calculate the operating income after tax for project D.

Particulars	Amount ($)	Amount ($)
Sales		$ 4,000
Less: Expenses
Cash expenditures	$ 1,500
Depreciation (4)	$ 900	$ 2,400
Operating income before tax		$ 1,600
Less: Income tax @25%		$ 400
Operating income after tax		$ 1,200