REVEL for Horngren's Cost Accounting: A Managerial Emphasis -- Access Card (16th Edition) (What's New in Accounting)

16th Edition

ISBN: 9780134789705

Author: Srikant M. Datar, Madhav V. Rajan

Publisher: PEARSON

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Textbook Question

Chapter 21, Problem 21.27E

Payback and NPV methods, no income taxes. (CMA, adapted) Andrews Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Lori Bart, staff analyst at Andrews, is preparing an analysis of the three projects under consideration by Corey Andrews, the company’s owner.

Chapter 21, Problem 21.27E, Payback and NPV methods, no income taxes. (CMA, adapted) Andrews Construction is analyzing its

1. Because the company’s cash is limited, Andrews thinks the payback method should be used to choose between the capital budgeting projects.

Required

a. What are the benefits and limitations of using the payback method to choose between projects?
b. Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method, which projects should Andrews choose?
2. Bart thinks that projects should be selected based on their NPVs. Assume all cash flows occur at the end of the year except for initial investment amounts. Calculate the NPV for each project. Ignore income taxes.
3. Which projects, if any, would you recommend funding? Briefly explain why.

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Chapter 21, Problem 21.26E

Chapter 21, Problem 21.28E

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Chapter 21 Solutions

REVEL for Horngren's Cost Accounting: A Managerial Emphasis -- Access Card (16th Edition) (What's New in Accounting)

Ch. 21 - Capital budgeting has the same focus as accrual...Ch. 21 - List and briefly describe each of the five stages...Ch. 21 - Prob. 21.3Q Ch. 21 - Only quantitative outcomes are relevant in capital...Ch. 21 - How can sensitivity analysis be incorporated in...Ch. 21 - Prob. 21.6Q Ch. 21 - Describe the accrual accounting rate-of-return...Ch. 21 - Prob. 21.8Q Ch. 21 - Lets be more practical. DCF is not the gospel....Ch. 21 - All overhead costs are relevant in NPV analysis....

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