
1.
To compute: Annual expected net
1.

Explanation of Solution
Given below is the table for the computation of annual expected net cash flows:
Particulars | Project A ($) | Project B ($) |
Net income | 39,900 | 25,900 |
60,000 | 80,000 | |
Net cash flows | 99,900 | 105,900 |
Working note:
Calculation of annual depreciation of Project A,
Calculation of annual depreciation of Project B,
Hence, cash flow after tax is from project A is $99,900 and Project B is $105,900.
2.
To compute: Payback period.
2.

Explanation of Solution
Computation of payback period for project A:
Given,
Cost of investment of Project A is $240,000.
Annual net cash flow from Project A is $99,900.
Formula to calculate payback period,
Substitute $240,000 for initial investment and $99,900 for net annual
Computation of payback period for project B:
Given,
Cost of investment of Project B is $240,000.
Annual net cash flow from Project B is $105,900.
Formula to calculate payback period,
Substitute $240,000 for initial investment and $105,900 for net annual cash inflow.
Hence, payback period of project A is 2.40 years and Project B is 2.27 years.
3.
To compute: Accounting
3.

Explanation of Solution
Computation of accounting rate of return (ARR) for Project A:
Given,
Average annual profit of Project A is $39,900.
Average investment in Project A is $120,000.
Formula to calculate of accounting rate of return,
Substitute $39,900 for average annual profit and $120,000 for average investment.
Computation of accounting rate of return (ARR) for Project B:
Given,
Average annual profit of Project B is $25,900.
Average investment in Project B is $120,000.
Formula to calculate of accounting rate of return,
Substitute $25,900 for average annual profit and $120,000 for average investment.
Working note:
Calculation of average investment of Project A,
Calculation of average investment of Project B,
Hence, ARR for project A is 33.25% and Project B is 21.58%.
4.
To compute:
4.

Explanation of Solution
Computation of Net present value (NPV) for Project A:
Given,
Annual net cash flows from Project A is $199,900.
Cost of investment is $240,000.
Market interest rate is 8%.
Number of periods is 4 years.
Present value factor for cumulative 4 years is 3.3121.
Formula to calculate NPV,
Substitute $330,879 for the present value of cash flows and $240,000 for the cost of investment.
Computation of Net present value (NPV) for Project B:
Given,
Annual net cash flow from Project B is $105,900.
Cost of investment is $240,000.
Market interest rate is 8%.
Number of periods is 3 years.
Present value factor for cumulative 3 years is 2.5771.
Formula to calculate NPV,
Substitute $272,915 for the present value of cash flows and $240,000 for the cost of investment.
Working notes:
Formula to calculate present value of cash flows of Project A,
Formula to calculate present value of cash flows of Project B,
Hence, NPV for project A is $90,879 and Project B is $32,915.
5.
To identify: Recommendation to management to pursue Project A.
5.

Explanation of Solution
Hence, it is recommended to management to pursue Project A.
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Chapter 24 Solutions
FINANC. MANGERIAL ACCT. W/CONNECT (LL)
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