Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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Question
Chapter 12, Problem 5PB
1.
To determine
Identify the
2.
To determine
Calculate the net present value of each project assuming the office expansion is adjusted to a four year life, using the present value of $1 table in Exhibit 2.
3.
To determine
Prepare the report the merits of the two investments to the capital investment committee.
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The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to
computer servers. The projects have different useful lives, but each requires an investment of $490,000. The
estimated net cash flows from each project are as follows:
Year
1
2
3
Year
4
5
6
1
2
The committee has selected a rate of 12% for purposes of net present value analysis. It also estimates that the
residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's
residual value would be $180,000.
7
8
9
10
3
4
5
6
0.943
0.890
Present Value of $1 at Compound Interest
6%
10%
12%
0.840
0.792
0.747
0.705
0.665
0.627
Net Cash
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Office
Expansion
$125,000
125,000
125,000
125,000
125,000
125,000
0.592
0.558
0.909
0.826
0.751
0.683
0.621
0.564
0.513
Net Cash
Flows
Servers
0.467
0.424
$165,000
165,000
165,000
165,000
0.386
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
15%
0.870
0.756
0.658
0.572
0.497
0.432…
The data given are estimated for the project study of a certain business investment. If money is worth 10% which of the project is more desirable, using Present worth Method and determine the difference in profit from each project study. For Plan A, the initial investment is 3,500 with an annual revenue of 1,900. Annual disbursement amounts to 645 with no salvage value at the end of its life which is 4 years. For Plan B, the initial investment is 5,000, with annual revenue of 2,500. Annual disbursement is 1,383 with no salvage value at the end of its life which is 8 years.
Consider how
Root
Valley
Waterfall
Park Lodge could use capital budgeting to decide whether the
$12,500,000
Waterfall
Park Lodge expansion would be a good investment. Assume
Root
Valley's managers developed the following estimates concerning the expansion:
1(Click
the icon to view the estimates.)
Assume that
Root
Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of
$950,000
at the end of its
eleven-year
life. The average annual net cash inflow from the expansion is expected to be
$2,892,254.
Compute the payback for the expansion project. Round to one decimal place.
(1)
÷
(2)
=
Payback
÷
=
years
1: Data Table
Number of additional skiers per day
122 skiers
Average number of days per year that weather conditions allow skiing at Root Valley
151 days
Useful life of expansion (in years)
11 years
Average cash spent by each skier per day…
Chapter 12 Solutions
Managerial Accounting
Ch. 12 - What are the principal objections to the use of...Ch. 12 - Discuss the principal limitations of the cash...Ch. 12 - Prob. 3DQCh. 12 - Your boss has suggested that a one-year payback...Ch. 12 - Prob. 5DQCh. 12 - Prob. 6DQCh. 12 - A net present value analysis used to evaluate a...Ch. 12 - Two projects have an identical net present value...Ch. 12 - Prob. 9DQCh. 12 - What are the major disadvantages of the use of the...
Ch. 12 - Prob. 11DQCh. 12 - Prob. 12DQCh. 12 - Average rate of return Determine the average rate...Ch. 12 - Prob. 2BECh. 12 - Prob. 3BECh. 12 - Internal rate of return A project is estimated to...Ch. 12 - Prob. 5BECh. 12 - Average rate of return The following data are...Ch. 12 - Average rate of returncost savings Maui...Ch. 12 - Average rate of returnnew product Hana Inc. is...Ch. 12 - Determine cash flows Natural Foods Inc. is...Ch. 12 - Cash payback period for a service company Janes...Ch. 12 - Cash payback method Lily Products Company is...Ch. 12 - Prob. 7ECh. 12 - Net present value method for a service company...Ch. 12 - Net present value methodannuity for a service...Ch. 12 - Net present value methodannuity Jones Excavation...Ch. 12 - Prob. 11ECh. 12 - Prob. 12ECh. 12 - Prob. 13ECh. 12 - Prob. 14ECh. 12 - Prob. 15ECh. 12 - Prob. 16ECh. 12 - Prob. 17ECh. 12 - Prob. 18ECh. 12 - Prob. 19ECh. 12 - Prob. 20ECh. 12 - Net present value-unequal lives Bunker Hill Mining...Ch. 12 - Prob. 22ECh. 12 - Average rate of return method, net present value...Ch. 12 - Prob. 2PACh. 12 - Net present value method, present value index, and...Ch. 12 - Net present value method, internal rate of return...Ch. 12 - Prob. 5PACh. 12 - Prob. 6PACh. 12 - Prob. 1PBCh. 12 - Prob. 2PBCh. 12 - Net present value method, present value index, and...Ch. 12 - Prob. 4PBCh. 12 - Prob. 5PBCh. 12 - Prob. 6PBCh. 12 - San Lucas Corporation is considering investment in...Ch. 12 - Prob. 2MADCh. 12 - Prob. 3MADCh. 12 - Prob. 4MADCh. 12 - Prob. 5MADCh. 12 - Assume Home Garden Inc. in MAD 26-5 assigns the...Ch. 12 - Ethics in Action Danielle Hastings was recently...Ch. 12 - Prob. 4TIFCh. 12 - CEO, Worthington Industries (WOR) (a...Ch. 12 - Prob. 6TIFCh. 12 - Prob. 1CMACh. 12 - Staten Corporation is considering two mutually...Ch. 12 - Prob. 3CMACh. 12 - Foster Manufacturing is analyzing a capital...
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