Managerial Accounting
Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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Chapter 12, Problem 6PA

1.

To determine

Calculate the cash payback period for the given proposals.

1.

Expert Solution
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Explanation of Solution

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

The cash payback period for the given proposals is as follows:

Proposal A:

Initial investment=$680,000

 Cash payback period of Proposal A
 Year  Net cash flows  Cumulative net cash flows
                1     200,000         200,000
                2     200,000         400,000
                3     200,000         600,000
6 months (1)      80,000         680,000

Table (1)

Hence, the cash payback period of proposal A is 3 years and 6 months.

Working note:

1. Calculate the no. of months in the cash payback period:

  No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$80,000$160,000×12 months= 6 months (1)

Proposal B:

Initial investment=$320,000

Cash payback period of Proposal B
 Year  Net cash flows  Cumulative net cash flows
                1          90,000         90,000
                2          90,000       180,000
 3          70,000       250,000
                4          70,000       320,000

Table (2)

Hence, the cash payback period of proposal B is 4 years.

Proposal C:

Initial investment=$108,000

Cash payback period of Proposal C
 Year  Net cash flows  Cumulative net cash flows
                  1     55,000          55,000
                  2     53,000        108,000

Table (3)

Hence, the cash payback period of proposal C is 2 years.

Proposal D:

Initial investment=$400,000

Cash payback period of Proposal D
 Year  Net cash flows  Cumulative net cash flows
                1   180,000        180,000
                2   180,000        360,000
3 months (2)    40,000        400,000

Table (4)

Hence, the cash payback period of proposal D is 2 years and 3 months.

Working note:

2. Calculate the no. of months in the cash payback period:

  No. of months = (Balance amount of intital investmentTotal cash flow for particular year)×No. of months in a year=$40,000$160,000×12 months= 3 months (2)

2.

To determine

Calculate the average rate of return for the give proposals.

2.

Expert Solution
Check Mark

Explanation of Solution

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

Average rate of return =Estimated average annual incomeAverage investment

The average rate of return for the given proposals is as follows:

Proposal A:

Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($240,0005 years)($680,0002)=$48,000$340,000=0.141In percentage 0.141×100 = 14.1%

Hence, the average rate of return for Proposal A is 14.1%.

Proposal B:

Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($20,0005 years)($320,0002)=$4,000$160,000=0.025In percentage 0.025×100 = 2.5%

Hence, the average rate of return for Proposal B is 2.5%.

Proposal C:

Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($142,0005 years)($108,0002)=$28,400$54,000=0.526In percentage 0.526×100 = 52.6%

Hence, the average rate of return for Proposal C is 52.6%.

Proposal D:

Average rate of investment = (Income from operationsUseful life of years)(Cost of investment2)=($300,0005 years)($400,0002)=$60,000$200,000=0.300In percentage 0.300×100 = 30.0%

Hence, the average rate of return for Proposal D is 30.0%.

3.

To determine

Indicate the proposals which should be accepted for further analysis, and which should be rejected.

3.

Expert Solution
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Explanation of Solution

The proposals which should be accepted for further analysis, and which should be rejected is as follows:

Managerial Accounting, Chapter 12, Problem 6PA , additional homework tip  1

Figure (1)

Proposals A and B are rejected, because proposal A and B fails to meet the required maximum cash back period of 3 years, and they has less rate of return than the other proposals. Hence, Proposals C and D are preferable.

4.

To determine

Calculate the net present value of preferred proposals.

4.

Expert Solution
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Explanation of Solution

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Calculate the net present value of the proposals which has 12% rate of return as follows:

Proposal C:

Managerial Accounting, Chapter 12, Problem 6PA , additional homework tip  2

Figure (2)

Hence, the net present value of proposal C is $62,067.

Proposal D:

Managerial Accounting, Chapter 12, Problem 6PA , additional homework tip  3

Figure (3)

Hence, the net present value of proposal D is $94,920.

5.

To determine

Calculate the present value index for each proposal.

5.

Expert Solution
Check Mark

Explanation of Solution

Present value index:

Present value index is a technique, which is used to rank the proposals of the business.  It is used by the management when the business has more investment proposals, and limited fund. 

The present value index for each proposal is as follows:

Proposal C:

Calculate the present value index for proposal C:

Present value index for proposal C = Total presest value of cash flowAmount to be invested=$170,067$108,000=1.575

Hence, the present value index for proposal C is 1.575.

Proposal D:

Calculate the present value index for proposal D:

Present value index for proposal D= Total presest value of cash flowAmount to be invested=$494,920$400,000=1.237

Hence, the present value index for proposal D is 1.237.

6.

To determine

Rank the proposal from most attractive to least attractive, based on the present value of net cash flows.

6.

Expert Solution
Check Mark

Explanation of Solution

Present value index:

Present value index is a technique, which is used to rank the proposals of the business.  It is used by the management when the business has more investment proposals, and limited fund. 

The present value index is computed as follows:

Present value index =Total present value of net cash flowAmount to be invested

Proposals are arranged by rank is as follows:

Proposals  Net present value  Rank
 Proposal D  $      94,920 1
 Proposal C  $      62,067 2

Table (5)

7.

To determine

Rank the proposal from most attractive to least attractive, based on the present value of index.

7.

Expert Solution
Check Mark

Explanation of Solution

Present value index:

Present value index is a technique, which is used to rank the proposals of the business.  It is used by the management when the business has more investment proposals, and limited fund. 

The present value index is computed as follows:

Present value index =Total present value of net cash flowAmount to be invested

Proposals are arranged by rank is as follows:

Proposals  Present value index Rank
 Proposal C 1.571
 Proposal D 1.242

Table (6)

8.

To determine

Analyze the proposal which is favor to investment, and comment on the relative attractiveness of the proposals based on the rank.

8.

Expert Solution
Check Mark

Explanation of Solution

On the basis of net present value:

The net present value of Proposal C is $62,067, and Proposal D is $94,920. In this case, the net present value of proposal D is more than the net present value of proposal C. Hence, investment in Proposal D is preferable.

On the basis of present value index:

The present value index of Proposal C is 1.57, and the present value index of Proposal D is 1.24. In this case, Proposal C has the favorable present value index, because the present value index of Proposal C (1.57) is more than Proposal D (1.24).  Thus, the investment in Proposal C is preferable (favorable).

Every business tries to get maximum profit with minimum investment. Hence, the cost of investment in Proposal C is less than the proposal D. Thus, investment in Proposal C is preferable.

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Please see attached:

Chapter 12 Solutions

Managerial Accounting

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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