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Concept Introduction:
Time value of money: Time value of money is the concept that differentiates the value of money received today and the value of same money received in future. According to this concept, the same amount of money to be received in future shall have lower present value (value of the money today) due to the interest that could be earned on that money.
NPV:
IRR:
Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual
Requirement-a:
To Calculate:
The Net present value of the investment
Answer to Problem 16.32P
The Net present value of the investment is $ 15,866
Explanation of Solution
The Net present value of the investment is calculated as follows;
| Year 2016 | Year 2017 | Year 2018 | Year 2019 | Year 2020 | ||
| Production (dozen) (A) | 3,000 | 4,700 | 7,100 | 9,400 | 10,000 | |
| Contribution Margin per dozen (B) | $ 4.20 | $ 4.20 | $ 4.20 | $ 4.20 | $ 4.20 | |
| Cash inflows (C) = (A*B) | $ 12,600 | $ 19,740 | $ 29,820 | $ 39,480 | $ 42,000 | |
| PV of $1 (8%) (D) | 1.0000 | 0.9259 | 0.8573 | 0.7938 | 0.7350 | 0.6806 |
| PV = C*D | $ - | $ 11,667 | $ 16,924 | $ 23,672 | $ 29,019 | $ 28,584 |
| Initial investment (88,000+6000) | $ (94,000) | |||||
| Net Present value | $ 15,866 |
Concept Introduction:
Time value of money: Time value of money is the concept that differentiates the value of money received today and the value of same money received in future. According to this concept, the same amount of money to be received in future shall have lower present value (value of the money today) due to the interest that could be earned on that money.
NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
IRR: Internal
Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
Requirement-b:
To Calculate:
The Present value ratio to investment
Answer to Problem 16.32P
The Present value ratio to investment is 16.88%
Explanation of Solution
The Present value ratio to investment is calculated as follows:
| Year 2016 | Year 2017 | Year 2018 | Year 2019 | Year 2020 | ||
| Production (dozen) (A) | 3,000 | 4,700 | 7,100 | 9,400 | 10,000 | |
| Contribution Margin per dozen (B) | $ 4.20 | $ 4.20 | $ 4.20 | $ 4.20 | $ 4.20 | |
| Cash inflows (C) = (A*B) | $ 12,600 | $ 19,740 | $ 29,820 | $ 39,480 | $ 42,000 | |
| PV of $1 (8%) (D) | 1.0000 | 0.9259 | 0.8573 | 0.7938 | 0.7350 | 0.6806 |
| PV = C*D | $ - | $ 11,667 | $ 16,924 | $ 23,672 | $ 29,019 | $ 28,584 |
| Initial investment (88,000+6000) | $ (94,000) | |||||
| Net Present value | $ 15,866 |
Present value to Investment (15866/94000) = 16.88%
Concept Introduction:
Time value of money: Time value of money is the concept that differentiates the value of money received today and the value of same money received in future. According to this concept, the same amount of money to be received in future shall have lower present value (value of the money today) due to the interest that could be earned on that money.
NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
IRR: Internal Rate of Return (IRR) is the rate at which the NPV of the project is 0 or we can say that IRR is the rate of return at which the project is at breakeven. IRR is calculated using excel or approximation method.
Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
Requirement-c:
To Calculate:
The Internal Rate of Return
Answer to Problem 16.32P
The Internal Rate of Return is 13.10%
Explanation of Solution
The Internal Rate of Return is calculated as follows:
| Year 2016 | Year 2017 | Year 2018 | Year 2019 | Year 2020 | ||
| Production (dozen) (A) | 3,000 | 4,700 | 7,100 | 9,400 | 10,000 | |
| Contribution Margin per dozen (B) | $ 4.20 | $ 4.20 | $ 4.20 | $ 4.20 | $ 4.20 | |
| Cash inflows (C) = (A*B) | $ 12,600 | $ 19,740 | $ 29,820 | $ 39,480 | $ 42,000 | |
| Initial investment (88,000+6000) | $ (94,000) | |||||
| Net | $ (94,000) | $ 12,600 | $ 19,740 | $ 29,820 | $ 39,480 | $ 42,000 |
| IRR (using excel function) | 13.10% |
Concept Introduction:
Time value of money: Time value of money is the concept that differentiates the value of money received today and the value of same money received in future. According to this concept, the same amount of money to be received in future shall have lower present value (value of the money today) due to the interest that could be earned on that money.
NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
IRR: Internal Rate of Return (IRR) is the rate at which the NPV of the project is 0 or we can say that IRR is the rate of return at which the project is at breakeven. IRR is calculated using excel or approximation method.
Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
Requirement-d:
To Calculate:
The Payback period of the project
Answer to Problem 16.32P
The Payback period of the project is 3.81 years
Explanation of Solution
The Payback period of the project is calculated as follows:
| Year 2016 | Year 2017 | Year 2018 | Year 2019 | Year 2020 | ||
| Production (dozen) (A) | 3,000 | 4,700 | 7,100 | 9,400 | 10,000 | |
| Contribution Margin per dozen (B) | $ 4.20 | $ 4.20 | $ 4.20 | $ 4.20 | $ 4.20 | |
| Cash inflows (C) = (A*B) | $ 12,600 | $ 19,740 | $ 29,820 | $ 39,480 | $ 42,000 | |
| Initial investment (88,000+6000) | $ (94,000) | |||||
| Net Cash Flows | $ (94,000) | $ 12,600 | $ 19,740 | $ 29,820 | $ 39,480 | $ 42,000 |
| Cumulative Cash Flows | -94000 | $ (81,400) | $ (61,660) | $ (31,840) | $ 7,640 | $ 49,640 |
| Payback Period = 3+(1*31840/39480) | 3.81 |
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Chapter 16 Solutions
Accounting: What the Numbers Mean
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