Videos
a.
The
Explanation: The net present value of alternative 1 is -$5,921.3.
Explanation:
Calculate the net present value as shown below.
| Particulars | Cash flow | Present value at 10% | Present value of net cash flow |
| Year 1 |
$8,000 |
0.9091 |
$7,272.8 |
| Year 2 |
$8,000 |
0.8264 |
$6,611.2 |
| Year 3 |
$8,000 |
0.7513 |
$6,010.4 |
| Year 4 |
$8,000 |
0.6830 |
$5,464.0 |
| Year 5 |
$8,000 |
0.6209 |
$4,967.2 |
| Year 6 |
$8,000 |
0.5645 |
$4,516.0 |
| Year 7 |
$8,000 |
0.5132 |
$4,105.6 |
| Year 8 |
$11,000 |
0.4665 |
$5,131.5 |
| Total |
$44,078.7 | ||
| Invested outflows |
$67,000 |
($50,000.0) | |
| Net present value |
-$5,921.3 | ||
Table – 1
Therefore, the net present value of alternative 1 is -$5,921.3.
Working Notes:
(a) On deduction of yearly operating cost from yearly revenues, the yearly cash flow is obtained.
(b) The
(c) The cost of old machine is not considered as the invested amount, as such cost is historical cost.
Conclusion:
Since the total cash flows are smaller than the invested amount, the net present value is negative.
b.
The net present value of alternative 2.
Explanation: The net present value of alternative 2 is $61,458.2.
Explanation:
Calculate the net present value as shown below.
| Particulars | Cash flow | Present value at 10% | Present value of net cash flow |
| Year 1 | $38,000 | 0.9091 | $34,545.8 |
| Year 2 | $38,000 | 0.8264 | $31,403.2 |
| Year 3 | $38,000 | 0.7513 | $28,549.4 |
| Year 4 | $38,000 | 0.6830 | $25,954.0 |
| Year 5 | $38,000 | 0.6209 | $23,594.2 |
| Year 6 | $38,000 | 0.5645 | $21,451.0 |
| Year 7 | $38,000 | 0.5132 | $19,501.6 |
| Year 8 | $46,000 | 0.4665 | $21,459.0 |
| Total cash flows | $206,458.2 | ||
| Invested outflows | $312,000 | ($145,000.0) | |
| Net present value | $61,458.2 | ||
Table – 2
Therefore, the net present value of alternative 2 is $61,458.2.
Working Notes:
(a) On deduction of yearly operating cost from yearly revenues, the yearly cash flow is obtained.
(b) The cash inflow of $46,000 is obtained by adding the salvage value of $8,000 is added in the actual cash inflow of the eighth year.
(c) The cost of old machine is not considered as the invested amount, as such cost is historical cost.
Conclusion:
Since the total cash flows are greater than the invested amount, the net present value is negative.
c.
To ascertain: The alternative to be recommended to management.
Explanation: Alternative 2 should be selected.
Explanation:
The projects or alternatives with positive NPV should be accepted, as the total cash flows are greater than the invested amount. The net present value of the alternative 1 is -$5,921.3 and that of alternative 2 is $61,458.2.
Hence, alternative 1 shows the negative net present value and alternative 2 shows positive net present value.
Conclusion:
Hence, alternative 2 should be recommended to the management.
a.
Explanation of Solution
The net present value of alternative 1 is -$5,921.3.
Since the total cash flows are smaller than the invested amount, the net present value is negative.
b.
The net present value of alternative 2.
b.
Explanation of Solution
The net present value of alternative 2 is $61,458.2.
Since the total cash flows are greater than the invested amount, the net present value is negative.
c.
To ascertain: The alternative to be recommended to management.
c.
Explanation of Solution
Alternative 2 should be selected.
Hence, alternative 2 should be recommended to the management.
Want to see more full solutions like this?
Chapter 24 Solutions
FINANC. MANGERIAL ACCT. W/CONNECT (LL)
- Consider the following project which costs $2,000 with a salvage value of zero in 4 years. The project will produce a new widget which will be sold for $140 and has variable costs of $110 per unit. The company has fixed costs of $3,050 and a required return on projects of 14.5%. If the company sells 210 units, what is the firm's degree of leverage?arrow_forwardFinancial Accountingarrow_forwardNonearrow_forward
- What were the total sales for the year ?arrow_forwardMia Vision Clinic is considering an investment that required an outlay of $505,000 and promises a net cash inflow one year from now of $660,000. Assume the cost of capital is 13 percent. Break the $550,000 future cash inflow into three components: 1. The cost of capital. 2. The profit earned on the investment. Accounting Problem need solutionarrow_forwardSolve this financial accounting problemarrow_forward
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education