Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Chapter 19, Problem 12E
Refer to Exercise 19.11.
- 1. Compute the payback period for each project. Assume that the manager of the clinic accepts only projects with a payback period of three years or less. Offer some reasons why this may be a rational strategy even though the
NPV computed in Exercise 19.11 may indicate otherwise. - 2. Compute the accounting
rate of return for each project.
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What will happen to the internal rate of return (IRR) of a project if the discount rate is decreased from 8% to 6%?
Select one:
a. We cannot determine the direction of the effect on IRR from the information provided.
b. The change in discount rate will not affect IRR.
c. IRR will always increase.
d. IRR will always decrease.
Looking for help on this question in attached image. Ive never seen probabilities in NPV like this.
4. Middleton Classics would like to test the sensitivity of the estimates used for the input data to compute the net present value and internal rate of return on this investment. Ignore the payback period and the accounting rate of return. Consider a, b, and c below independently by holding everything else constant:
a. What is the minimum cost of the investment (to the nearest $100) needed for the owner to accept it?
b. Reset cost to $500,000. What is the minimum salvage value (to the nearest $100) needed for the owner to accept it?
c.Reset salvage value to $25,000. What is the minimum annual cash flow (to the nearest $100) needed for the owner to accept it?
How sensitive to changes in the input data is the decision to accept or reject this investment? Do you have to change the estimates a lot or just a little to make the investment acceptable? Comment on the results of each of these analyses.
Chapter 19 Solutions
Cornerstones of Cost Management (Cornerstones Series)
Ch. 19 - Explain the difference between independent...Ch. 19 - Explain why the timing and quantity of cash flows...Ch. 19 - Prob. 3DQCh. 19 - Prob. 4DQCh. 19 - What is the accounting rate of return?Ch. 19 - What is the cost of capital? What role does it...Ch. 19 - Prob. 7DQCh. 19 - Explain how the NPV is used to determine whether a...Ch. 19 - Explain why NPV is generally preferred over IRR...Ch. 19 - Prob. 10DQ
Ch. 19 - Prob. 11DQCh. 19 - Prob. 12DQCh. 19 - Prob. 13DQCh. 19 - Prob. 14DQCh. 19 - Prob. 15DQCh. 19 - Jan Booth is considering investing in either a...Ch. 19 - Prob. 2CECh. 19 - Carsen Sorensen, controller of Thayn Company, just...Ch. 19 - Manzer Enterprises is considering two independent...Ch. 19 - Keating Hospital is considering two different...Ch. 19 - Prob. 6CECh. 19 - Prob. 7ECh. 19 - Prob. 8ECh. 19 - Each of the following scenarios is independent....Ch. 19 - Roberts Company is considering an investment in...Ch. 19 - NPV A clinic is considering the possibility of two...Ch. 19 - Refer to Exercise 19.11. 1. Compute the payback...Ch. 19 - Buena Vision Clinic is considering an investment...Ch. 19 - Consider each of the following independent cases....Ch. 19 - Gina Ripley, president of Dearing Company, is...Ch. 19 - Covington Pharmacies has decided to automate its...Ch. 19 - Postman Company is considering two independent...Ch. 19 - Prob. 18ECh. 19 - Prob. 19ECh. 19 - Prob. 20ECh. 19 - Assume there are two competing projects, X and Y....Ch. 19 - Prob. 22ECh. 19 - Assume that an investment of 100,000 produces a...Ch. 19 - Prob. 24PCh. 19 - Prob. 25PCh. 19 - Prob. 26PCh. 19 - Kent Tessman, manager of a Dairy Products...Ch. 19 - Friedman Company is considering installing a new...Ch. 19 - Okmulgee Hospital (a large metropolitan for-profit...Ch. 19 - Mallette Manufacturing, Inc., produces washing...Ch. 19 - Jonfran Company manufactures three different...Ch. 19 - Prob. 32P
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- Hello! Happy Sunday! Can you please help me with this problem? Me and my friends are having difficulties answering this problem.Thank you so much! *COST-BENEFIT ANALYSIS Listed in the diagram are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alternative. Round the cost projections to the nearest month. b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why?arrow_forwardIn my accounting class I am learning to find accounting rate of return. To solve for this I subtracted net cash flow- the salvage value divided by the initial investment. Have I done something incorrect?arrow_forwardWhen comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV) to the net present value (NPV)? A. so that the projects can be compared on their cost or value created per year B. to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter time frame C. so that you can see which project has the greatest net present value (NPV) D. to avoid complications arising from alternating cash inflows and outflows O E. to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are consideredarrow_forward
- a. They payback period of project A is ___ years (round to two decimal places) The payback period of project B is ____ years. (round to two decimal places) According to the payback method, which project should the firm choose? b. The NPV of project A is $___ The NPV of project B is $___ c. The IRR of project A is ___ The IRR of project B is ___ d. Make a reccomendationarrow_forwardPlease see attached. Second image is a completed similar question. Please answer the same for the new information sentarrow_forwardUsing image: a-1. What is the payback period for each project a-2. If you apply the payback criterion, which investment will you choose? b-1. What is the discounted payback period for each project? b-2. If you apply the discounted payback criterion, which investment will you choose? c-1. What is the NPV for each project? c-2. If you apply the NPV criterion, which investment will you choose? d-1. What is the IRR for each project? d-2. If you apply the IRR criterion, which investment will you choose? e-1. What is the profitability index for each project? e-2. If you apply the profitability index criterion, which investment will you choose? f. Based on your answers in (a) through (e), which project will you finally choose?arrow_forward
- The internal rate of return (IRR) on a project is the average annual rate of return provided by investing in the project. A. Explain this thoroughly. B. Give some example if you have any idea.arrow_forward2) First, calculate the payback period and NPV for all projects below. For all the projects, the relevant discount rate is 10%. Then, comment on why the payback period provides misleading information about the following: a. Project A b. Project B versus Project C c. Project D versus Project E d. Project D versus Project F Year A B C D E F 0 -1.000 -1.000 -1.000 -1.000 -1.000 -1.000 1 1,000 100 400 500 400 500 2 200 300 500 400 500 3 300 200 500 400 10.000 4 400 100 400 5 500 500 400arrow_forwardwhy is my answer wrong? please correct it Required:2.2.1 Calculate the payback period and the accounting rate of return. 2.2.2 Malda Ltd requires a payback period of no more than 3 years and a return of at least 30%. Purelyon the basis of these criteria, should this project be accepted. Explain. 2.2.3 The payback period method makes a crucial omission in the calculation, namely the time valueof money. Complete the above computation using a method that accounts for the time value of money?On the basis of this calculation, should the project be accepted? Explain. my answer calculation of payback period Assumption : It is assumed that the cashflows given in the question are before depreciation and taxes. Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Cash flow 220,000 200,000 120,000 110,000 50,000 - Depreciation (100,000) (100,000) (100,000) (100,000) (100,000) Earnings before tax 120,000 100,000 20,000 10,000 (50,000) Less: Tax at 30% 36,000 30,000 6,000 3,000 NIL…arrow_forward
- Use the information provided to answer the questions.Use the information provided below to calculate the following. Where applicable, use the presentvalue tables provided in APPENDICES 1 and 2 that appear after QUESTION 5.5.15.1.1 Calculate the Payback Period of Project A (expressed in years, months and days). INFORMATION Zeda Enterprises has the option to invest in machinery in projects A and B but finance is only available to invest inone of them. You are given the following projected data:Project A Project BInitial cost R300 000 R300 000Scrap value R40 000 0Depreciation per year R52 000 R60 000Net profitYear 1 R20 000Year 2 R30 000Year 3 R50 000Year 4 R60 000Year 5 R10 000Net cash flowsYear 1 R90 000Year 2 R90 000Year 3 R90 000Year 4 R90 000Year 5 R90 000 Additional informationThe discount rate used by the company is 12%.arrow_forwardJust need b-1, d-1, and e-1 answered.arrow_forwardPlease see attached:arrow_forward
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Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License