Financial & Managerial Accounting
13th Edition
ISBN: 9781285866307
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 25, Problem 25.1BPR
1. (a)
To determine
Average
Average rate of return is a method that measures the average earnings of a particular business, as a percentage of the average investment. It is also known as accounting rate of return.
Calculation of Average rate of return:
The average rate of return for each project.
2.
To determine
To prepare: The report the merits of the two investments to the capital investment committee.
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Net present value method, internal rate of return method,
and analysis for a service company
The management of Advanced Alternative Power Inc. is
considering two capital investment projects. The estimated
net cash flows from each project are as follows:
Year
3
4
5
6
1
7
8
2
9
10
3
4
The wind turbines require an investment of $713,750, while
the biofuel equipment requires an investment of
$1,518,500. No residual value is expected from either
project.
Present Value of an Annuity of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
1
0.909
0.893
0.870
0.833
2
1.690
1.626
1.528
2.106
0.943
1.833
2.673
3.465
4.212
Wind
Turbines
$250,000
250,000
250,000
250,000
3.170
3.791
4.917
4.355
5.582
4.868
6.210
5.335
6.802 5.759
7.360
6.145
Required:
Biofuel
Equipment
1.736
2.487
Amount to be invested
Net present value
$500,000
500,000
500,000
500,000
Wind Turbines
Biofuel Equipment
2.402
3.037
Present value of annual net cash flows
2.283
2.855
3.605 3.353
4.111
3.785
4.564
4.160
4.968
4.487
5.328…
Average rate of return method, net present value method, and analysisThe capital investment committee of Nature's Portrait LandscapingCompany is considering two capital investments. The estimated incomefrom operations and net cash flows from each investment are as follows:
Each project requires an investment of $75,000. Straight-linedepreciation will be used, and no residual value is expected. Thecommittee has selected a rate of 12% for purposes of the net presentvalue analysis.
Instructions1. Compute the following:a. The average rate of return for each investment. Round to onedecimal place.b. The net present value for each investment. Use the present valueof $1 table appearing in this chapter (Exhibit 2). Round present values to the nearest dollar.2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.
A company is considering three alternative investment projects with different net cash flows. The
present value of net cash flows is calculated using Excel and the results follow.
Potential Projects
Present value of net cash flows (excluding initial investment)
Initial investment
Project A
$ 11,226
(10,000)
Project B
$ 10,568
(10,000)
a. Compute the net present value of each project.
b. If the company accepts all positive net present value projects, which of these will it accept?
c. If the company can choose only one project, which will it choose on the basis of net present value?
Complete this question by entering your answers in the tabs below.
Required A
Required B
Required C
Compute the net present value of each project.
Potential Projects
Project A
Project B
Project C
Present value of net cash flows
Initial investment
Net present value
$
$
$
Chapter 25 Solutions
Financial & Managerial Accounting
Ch. 25 - Prob. 1DQCh. 25 - Discuss the principal limitations of the cash...Ch. 25 - Prob. 3DQCh. 25 - Prob. 4DQCh. 25 - Prob. 5DQCh. 25 - Prob. 6DQCh. 25 - Prob. 7DQCh. 25 - Two projects have an identical net present value...Ch. 25 - Prob. 9DQCh. 25 - Prob. 10DQ
Ch. 25 - Prob. 11DQCh. 25 - Give an example of a qualitative factor that...Ch. 25 - Average rate of return Determine the average rate...Ch. 25 - Average rate of return Determine the average rate...Ch. 25 - Cash payback period A project has estimated annual...Ch. 25 - Prob. 25.2BPECh. 25 - Prob. 25.3APECh. 25 - Prob. 25.3BPECh. 25 - Internal rate of return A project is estimated to...Ch. 25 - Prob. 25.4BPECh. 25 - Prob. 25.5APECh. 25 - Prob. 25.5BPECh. 25 - Prob. 25.1EXCh. 25 - Average rate of returncost savings Midwest...Ch. 25 - Average rate of returnnew product Galactic Inc. is...Ch. 25 - Calculate cash flows Natures Way Inc. is planning...Ch. 25 - Prob. 25.5EXCh. 25 - Cash payback method Lily Products Company is...Ch. 25 - Prob. 25.7EXCh. 25 - Prob. 25.8EXCh. 25 - Prob. 25.9EXCh. 25 - Prob. 25.10EXCh. 25 - Net present value method for a service company...Ch. 25 - Present value index Dip N' Dunk Doughnuts has...Ch. 25 - Net present value method and present value index...Ch. 25 - Average rate of return, cash payback period, net...Ch. 25 - Cash payback period, net present value analysis,...Ch. 25 - Internal rate of return method The internal rate...Ch. 25 - Prob. 25.17EXCh. 25 - Internal rate of return methodtwo projects Munch N...Ch. 25 - Prob. 25.19EXCh. 25 - Prob. 25.20EXCh. 25 - Net present value unequal lives Bunker Hill Mining...Ch. 25 - Net present value unequal lives Daisys Creamery...Ch. 25 - Prob. 25.1APRCh. 25 - Cash payback period, net present value method, and...Ch. 25 - Prob. 25.3APRCh. 25 - Prob. 25.4APRCh. 25 - Prob. 25.5APRCh. 25 - Prob. 25.6APRCh. 25 - Prob. 25.1BPRCh. 25 - Cash payback period, net present value method, and...Ch. 25 - Prob. 25.3BPRCh. 25 - Net present value method, internal rate of return...Ch. 25 - Prob. 25.5BPRCh. 25 - Capital rationing decision for a service company...Ch. 25 - Ethics in Action Danielle Hastings was recently...Ch. 25 - Prob. 25.2CPCh. 25 - Prob. 25.3CPCh. 25 - Qualitative issues in investment analysis The...Ch. 25 - Prob. 25.5CP
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