COST MANAGEMENT LOOSELEAF CUSTOM
COST MANAGEMENT LOOSELEAF CUSTOM
8th Edition
ISBN: 9781307659177
Author: BLOCHER
Publisher: MCG/CREATE
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Chapter 12, Problem 40E
To determine

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

Expert Solution & Answer
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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.

YearAfter tax cash inflowsCumulative 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 investmentSalvage value)Useful life=$5,0005 years=$1,000

Working note (2):

Calculate the taxable income each year.

Taxable income each year} = (Net cash inflowDepreciation 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 investmentEstimated salvage value)Estimated years($5,000$500)5 years=$900

Working note (5):

Calculate the operating income after tax for project D.

ParticularsAmount ($)Amount ($)
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 LOOSELEAF CUSTOM, Chapter 12, Problem 40E , additional homework tip  1

COST MANAGEMENT LOOSELEAF CUSTOM, Chapter 12, Problem 40E , additional homework tip  2

Table (3)

Workings:

COST MANAGEMENT LOOSELEAF CUSTOM, Chapter 12, Problem 40E , additional homework tip  3COST MANAGEMENT LOOSELEAF CUSTOM, Chapter 12, Problem 40E , additional homework tip  4

Table (4)

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Chapter 12 Solutions

COST MANAGEMENT LOOSELEAF CUSTOM

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