Net Present Value (NPV): NPV is a technique used in capital budgeting to see the project is profitable for the company or not. The acceptance of the project is based on the result of NPV as if it is positive then it should be selected and in the case of negative NPV it should be rejected. Payback period: It is ascertained when cost of project is divided by the annual cash flows of the respective project. The payback period is a method used in capital budgeting. It does not involve the time value of money factor. Discounted payback period: Discounted payback period is the time period in which the company earns back their investment. It is use to determine whether to take this project or not. In this, cash inflow is adjusted according to time value of money. Internal Rate of Return (IRR): IRR is a capital budgeting technique that involves the time value of money concept. The IRR percentage gives the idea about the profitability arises from an investment. The IRR of a project is calculated with the help of NPV calculations. To compute: The NPV.
Net Present Value (NPV): NPV is a technique used in capital budgeting to see the project is profitable for the company or not. The acceptance of the project is based on the result of NPV as if it is positive then it should be selected and in the case of negative NPV it should be rejected. Payback period: It is ascertained when cost of project is divided by the annual cash flows of the respective project. The payback period is a method used in capital budgeting. It does not involve the time value of money factor. Discounted payback period: Discounted payback period is the time period in which the company earns back their investment. It is use to determine whether to take this project or not. In this, cash inflow is adjusted according to time value of money. Internal Rate of Return (IRR): IRR is a capital budgeting technique that involves the time value of money concept. The IRR percentage gives the idea about the profitability arises from an investment. The IRR of a project is calculated with the help of NPV calculations. To compute: The NPV.
Solution Summary: The author explains that NPV is a technique used in capital budgeting to see the project is profitable for the company or not.
Definition Definition Discount rate of a project wherein its net present value equals zero. Internal rate of return equates the present value of future cash flows with the initial investments. Internal rate of return helps to determine nominal cash flows.
Chapter 21, Problem 21.30E
1 (a)
To determine
Net Present Value (NPV):
NPV is a technique used in capital budgeting to see the project is profitable for the company or not. The acceptance of the project is based on the result of NPV as if it is positive then it should be selected and in the case of negative NPV it should be rejected.
Payback period:
It is ascertained when cost of project is divided by the annual cash flows of the respective project. The payback period is a method used in capital budgeting. It does not involve the time value of money factor.
Discounted payback period:
Discounted payback period is the time period in which the company earns back their investment. It is use to determine whether to take this project or not. In this, cash inflow is adjusted according to time value of money.
Internal Rate of Return (IRR):
IRR is a capital budgeting technique that involves the time value of money concept. The IRR percentage gives the idea about the profitability arises from an investment. The IRR of a project is calculated with the help of NPV calculations.
To compute: The NPV.
1 (b)
To determine
To compute: Payback period.
1 (c)
To determine
To compute: The discounted payback period
1 (d)
To determine
To compute: IRR
2.
To determine
To explain: The comparison and contrast the capital budgeting method.
The following were selected from among the transactions completed by Babcock Company during November of the current year:
Nov.
3
Purchased merchandise on account from Moonlight Co., list price $85,000, trade discount 25%, terms FOB destination, 2/10, n/30.
4
Sold merchandise for cash, $37,680. The cost of the goods sold was $22,600.
5
Purchased merchandise on account from Papoose Creek Co., $47,500, terms FOB shipping point, 2/10, n/30, with prepaid freight of $810 added to the invoice.
6
Returned merchandise with an invoice amount of $13,500 ($18,000 list price less trade discount of 25%) purchased on November 3 from Moonlight Co.
8
Sold merchandise on account to Quinn Co., $15,600 with terms n/15. The cost of the goods sold was $9,400.
13
Paid Moonlight Co. on account for purchase of November 3, less return of November 6.
14
Sold merchandise with a list price of $236,000 to customers who used VISA and who redeemed $8,000 of pointof- sale coupons. The cost…
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