Capital Budgeting: The method of planning and analysing the viability of long term investments proposed by the business in new equipment or new projects . Capital budgeting is the type of budgeting methods in which the business determines the success of the investments on acquisition or replacement of property, plant and equipment, new merchandise or other projects over a long term period. It is simply the process of analysing whether the proposed project or investment are worth pursuing. Requirement-1: To identify: The management tools that can be used by Caron for investment appraisal.

Question

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Answer 1

Question

Chapter 25, Problem 7BTN

To determine

Introduction:

Capital Budgeting: The method of planning and analysing the viability of long term investments proposed by the business in new equipment or new projects.

Capital budgeting is the type of budgeting methods in which the business determines the success of the investments on acquisition or replacement of property, plant and equipment, new merchandise or other projects over a long term period. It is simply the process of analysing whether the proposed project or investment are worth pursuing.

Requirement-1:

To identify:

The management tools that can be used by Caron for investment appraisal.

Expert Solution

Answer to Problem 7BTN

Solution:

Capital budgeting techniques such as payback period, accounting rate of return, net present value are useful for Caron Proschan in evaluating the investment in new manufacturing facility and warehousing center.

Explanation of Solution

The capital budgeting techniques are explained in detail below:

Payback Period: It refers to the time period required to take back or regain the amount invested. It is computed in relation to the initial investment and inflow of cash per period. The project feasibility is assured if the payback period is less than the targeted period of returns on investment.

Accounting rate of return: The method used to determine the returns from the net income of the investment in capital budgeting referred as accounting or average rate of return. This accounting rate of return is represented by the average return during period and average investment. The time value of money is ignored in this method.

Net present value method: The difference between the value of cash inflows and outflows at present from the proposed project or investment refers to the Net Present Value. It considers the time value of money and use the net present value as a benchmark to decide whether to accept or reject a project or proposed investment.

Conclusion

Hence Caron can use the capital budgeting techniques for evaluating her investment appraisal.

To determine

Requirement-2:

To discuss:

The information required for Caron for the usage of capital budgeting techniques in evaluating the investments.

Expert Solution

Answer to Problem 7BTN

Solution:

The information required for the usage of capital budgeting techniques by Caron are as follows:

1. For using Payback Period: Cost of new manufacturing facility and warehouse center and annual net cash flow.

2. For using Accounting Rate of return:

a. Straight line depreciation method: Net income after deducting taxes and annual average investment.

b. Other depreciation methods except straight line: Net income after deducting taxes, average book values for the individual years and number of years of the planned investment.

3. For using Net present value: The discounted rate of return and the actual amount invested.

Explanation of Solution

1. Payback Period: The formula for determining the payback period of an investment is:

$P a y b a c k P e r i o d = C o s t o f i n v e s t m e n t / A n n u a l n e t c a s h f l o w$

The payback period determines the time period required to payback or to generate a reasonable return of amount that is initially invested.

2. Accounting rate of return: The formula for computing the accounting rate of return for the investment is:

$A c c o u n t i n g r a t e o f r e t u r n = N e t i n c o m e a f t e r t a x e s / A n n u a l a v e r a g e i n v e s t m e n t$

1. Straight Line Depreciation Method:

$A n n u a l A v e r a g e i n v e s t m e n t = [B e g i n n i n g b o o k v a l u e + E n d i n g b o o k v a l u e] / 2$

2. Other depreciation methods except straight line:

$A n n u a l A v e r a g e i n v e s t m e n t = S u m o f a v e r a g e b o o k v a l u e s f o r i n d i v i d u a l y e a r s / N u m b e r o f y e a r s o f p l a n n e d i n v e s t m e n t$

3. Net Present Value:

The formula for computing the net present value of the investment is:

$N e t P r e s e n t V a l u e = P r e s e n t v a l u e o f n e t c a s h f l o w s - A m o u n t i n v e s t e d$

Conclusion

Hence the information of amount or cost of an investment, cash flows, discount rates etc. are required for the usage of management tools.

To determine

Requirement-3:

To discuss:

The advantages and disadvantages of using the management tools of capital budgeting techniques.

Expert Solution

Answer to Problem 7BTN

Solution:

Payback Period:

Advantages:

a. Simplicity

b. Risk focus

Disadvantages:

a. Time value of money is ignored.

b. Ignores profitability of an investment.

Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings.

b. Facilitates Comparison

Disadvantages:

a. Ignores time factor

b. Ignores external factors

Net present value:

Advantages:

a. Time value of money is considered.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult.

b. Difficulty in decision-making.

Explanation of Solution

The explanation to each advantages and disadvantages of using each management tools are as below:

1. Payback Period:

The advantage of using payback period are:

Simplicity: It is very easy and simple to understand and calculate where the analysis of a project can be calculated using a calculator or spreadsheet.

Risk focus: Payback period focus on how quickly the amount invested in a project can be returned or payback and thus it is a risk measure.

The disadvantages of using payback periods are:

a. Time value of money is ignored: Time value of money is important because the amount in hand today is greater than the future value of money.

b. Ignores profitability of an investment: The shorter payback period may or may not generate a profit when the cash flows end at the payback period are reduced.

2. Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings: The most important factor for any project appraisal is its net earnings. Net earnings refer to earnings after taxes and depreciation.

b. Facilitates Comparison: The comparison of new project with cost reducing projects or other competitive projects is easily facilitated.

Disadvantages:

a. Ignores time factor: The most important factor that is considered by an investor is the time value of money invested. Hence ignorance of time factor is a major drawback of this method.

b. Ignores external factors: The profitability of the project is influenced by both internal and external factors. But accounting rate of return considers only the internal factors and ignores external factors outside the organisation that affects its profitability.

3. Net Present Value:

Advantages:

a. Considers time value of money: Net present value considers the basic fact that present value of money on hand today is worth more than the value of money or returns guaranteed in the future.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult: A discount rate is the interest rate used in discounting futures values to present values which is a very difficult task to estimate.

b. Difficulty in decision-making: When projects have unequal life span, it is difficult for the management to take correct decisions.

Conclusion

Hence the usage of management tools for evaluating the business efficiency and reduction of costs has its own advantages and disadvantages.

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Answer 2

Question

Chapter 25, Problem 7BTN

To determine

Introduction:

Capital Budgeting: The method of planning and analysing the viability of long term investments proposed by the business in new equipment or new projects.

Capital budgeting is the type of budgeting methods in which the business determines the success of the investments on acquisition or replacement of property, plant and equipment, new merchandise or other projects over a long term period. It is simply the process of analysing whether the proposed project or investment are worth pursuing.

Requirement-1:

To identify:

The management tools that can be used by Caron for investment appraisal.

Expert Solution

Answer to Problem 7BTN

Solution:

Capital budgeting techniques such as payback period, accounting rate of return, net present value are useful for Caron Proschan in evaluating the investment in new manufacturing facility and warehousing center.

Explanation of Solution

The capital budgeting techniques are explained in detail below:

Payback Period: It refers to the time period required to take back or regain the amount invested. It is computed in relation to the initial investment and inflow of cash per period. The project feasibility is assured if the payback period is less than the targeted period of returns on investment.

Accounting rate of return: The method used to determine the returns from the net income of the investment in capital budgeting referred as accounting or average rate of return. This accounting rate of return is represented by the average return during period and average investment. The time value of money is ignored in this method.

Net present value method: The difference between the value of cash inflows and outflows at present from the proposed project or investment refers to the Net Present Value. It considers the time value of money and use the net present value as a benchmark to decide whether to accept or reject a project or proposed investment.

Conclusion

Hence Caron can use the capital budgeting techniques for evaluating her investment appraisal.

To determine

Requirement-2:

To discuss:

The information required for Caron for the usage of capital budgeting techniques in evaluating the investments.

Expert Solution

Answer to Problem 7BTN

Solution:

The information required for the usage of capital budgeting techniques by Caron are as follows:

1. For using Payback Period: Cost of new manufacturing facility and warehouse center and annual net cash flow.

2. For using Accounting Rate of return:

a. Straight line depreciation method: Net income after deducting taxes and annual average investment.

b. Other depreciation methods except straight line: Net income after deducting taxes, average book values for the individual years and number of years of the planned investment.

3. For using Net present value: The discounted rate of return and the actual amount invested.

Explanation of Solution

1. Payback Period: The formula for determining the payback period of an investment is:

$P a y b a c k P e r i o d = C o s t o f i n v e s t m e n t / A n n u a l n e t c a s h f l o w$

The payback period determines the time period required to payback or to generate a reasonable return of amount that is initially invested.

2. Accounting rate of return: The formula for computing the accounting rate of return for the investment is:

$A c c o u n t i n g r a t e o f r e t u r n = N e t i n c o m e a f t e r t a x e s / A n n u a l a v e r a g e i n v e s t m e n t$

1. Straight Line Depreciation Method:

$A n n u a l A v e r a g e i n v e s t m e n t = [B e g i n n i n g b o o k v a l u e + E n d i n g b o o k v a l u e] / 2$

2. Other depreciation methods except straight line:

$A n n u a l A v e r a g e i n v e s t m e n t = S u m o f a v e r a g e b o o k v a l u e s f o r i n d i v i d u a l y e a r s / N u m b e r o f y e a r s o f p l a n n e d i n v e s t m e n t$

3. Net Present Value:

The formula for computing the net present value of the investment is:

$N e t P r e s e n t V a l u e = P r e s e n t v a l u e o f n e t c a s h f l o w s - A m o u n t i n v e s t e d$

Conclusion

Hence the information of amount or cost of an investment, cash flows, discount rates etc. are required for the usage of management tools.

To determine

Requirement-3:

To discuss:

The advantages and disadvantages of using the management tools of capital budgeting techniques.

Expert Solution

Answer to Problem 7BTN

Solution:

Payback Period:

Advantages:

a. Simplicity

b. Risk focus

Disadvantages:

a. Time value of money is ignored.

b. Ignores profitability of an investment.

Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings.

b. Facilitates Comparison

Disadvantages:

a. Ignores time factor

b. Ignores external factors

Net present value:

Advantages:

a. Time value of money is considered.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult.

b. Difficulty in decision-making.

Explanation of Solution

The explanation to each advantages and disadvantages of using each management tools are as below:

1. Payback Period:

The advantage of using payback period are:

Simplicity: It is very easy and simple to understand and calculate where the analysis of a project can be calculated using a calculator or spreadsheet.

Risk focus: Payback period focus on how quickly the amount invested in a project can be returned or payback and thus it is a risk measure.

The disadvantages of using payback periods are:

a. Time value of money is ignored: Time value of money is important because the amount in hand today is greater than the future value of money.

b. Ignores profitability of an investment: The shorter payback period may or may not generate a profit when the cash flows end at the payback period are reduced.

2. Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings: The most important factor for any project appraisal is its net earnings. Net earnings refer to earnings after taxes and depreciation.

b. Facilitates Comparison: The comparison of new project with cost reducing projects or other competitive projects is easily facilitated.

Disadvantages:

a. Ignores time factor: The most important factor that is considered by an investor is the time value of money invested. Hence ignorance of time factor is a major drawback of this method.

b. Ignores external factors: The profitability of the project is influenced by both internal and external factors. But accounting rate of return considers only the internal factors and ignores external factors outside the organisation that affects its profitability.

3. Net Present Value:

Advantages:

a. Considers time value of money: Net present value considers the basic fact that present value of money on hand today is worth more than the value of money or returns guaranteed in the future.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult: A discount rate is the interest rate used in discounting futures values to present values which is a very difficult task to estimate.

b. Difficulty in decision-making: When projects have unequal life span, it is difficult for the management to take correct decisions.

Conclusion

Hence the usage of management tools for evaluating the business efficiency and reduction of costs has its own advantages and disadvantages.

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Answer 3

Question

Chapter 25, Problem 7BTN

To determine

Introduction:

Capital Budgeting: The method of planning and analysing the viability of long term investments proposed by the business in new equipment or new projects.

Capital budgeting is the type of budgeting methods in which the business determines the success of the investments on acquisition or replacement of property, plant and equipment, new merchandise or other projects over a long term period. It is simply the process of analysing whether the proposed project or investment are worth pursuing.

Requirement-1:

To identify:

The management tools that can be used by Caron for investment appraisal.

Expert Solution

Answer to Problem 7BTN

Solution:

Capital budgeting techniques such as payback period, accounting rate of return, net present value are useful for Caron Proschan in evaluating the investment in new manufacturing facility and warehousing center.

Explanation of Solution

The capital budgeting techniques are explained in detail below:

Payback Period: It refers to the time period required to take back or regain the amount invested. It is computed in relation to the initial investment and inflow of cash per period. The project feasibility is assured if the payback period is less than the targeted period of returns on investment.

Accounting rate of return: The method used to determine the returns from the net income of the investment in capital budgeting referred as accounting or average rate of return. This accounting rate of return is represented by the average return during period and average investment. The time value of money is ignored in this method.

Net present value method: The difference between the value of cash inflows and outflows at present from the proposed project or investment refers to the Net Present Value. It considers the time value of money and use the net present value as a benchmark to decide whether to accept or reject a project or proposed investment.

Conclusion

Hence Caron can use the capital budgeting techniques for evaluating her investment appraisal.

To determine

Requirement-2:

To discuss:

The information required for Caron for the usage of capital budgeting techniques in evaluating the investments.

Expert Solution

Answer to Problem 7BTN

Solution:

The information required for the usage of capital budgeting techniques by Caron are as follows:

1. For using Payback Period: Cost of new manufacturing facility and warehouse center and annual net cash flow.

2. For using Accounting Rate of return:

a. Straight line depreciation method: Net income after deducting taxes and annual average investment.

b. Other depreciation methods except straight line: Net income after deducting taxes, average book values for the individual years and number of years of the planned investment.

3. For using Net present value: The discounted rate of return and the actual amount invested.

Explanation of Solution

1. Payback Period: The formula for determining the payback period of an investment is:

$P a y b a c k P e r i o d = C o s t o f i n v e s t m e n t / A n n u a l n e t c a s h f l o w$

The payback period determines the time period required to payback or to generate a reasonable return of amount that is initially invested.

2. Accounting rate of return: The formula for computing the accounting rate of return for the investment is:

$A c c o u n t i n g r a t e o f r e t u r n = N e t i n c o m e a f t e r t a x e s / A n n u a l a v e r a g e i n v e s t m e n t$

1. Straight Line Depreciation Method:

$A n n u a l A v e r a g e i n v e s t m e n t = [B e g i n n i n g b o o k v a l u e + E n d i n g b o o k v a l u e] / 2$

2. Other depreciation methods except straight line:

$A n n u a l A v e r a g e i n v e s t m e n t = S u m o f a v e r a g e b o o k v a l u e s f o r i n d i v i d u a l y e a r s / N u m b e r o f y e a r s o f p l a n n e d i n v e s t m e n t$

3. Net Present Value:

The formula for computing the net present value of the investment is:

$N e t P r e s e n t V a l u e = P r e s e n t v a l u e o f n e t c a s h f l o w s - A m o u n t i n v e s t e d$

Conclusion

Hence the information of amount or cost of an investment, cash flows, discount rates etc. are required for the usage of management tools.

To determine

Requirement-3:

To discuss:

The advantages and disadvantages of using the management tools of capital budgeting techniques.

Expert Solution

Answer to Problem 7BTN

Solution:

Payback Period:

Advantages:

a. Simplicity

b. Risk focus

Disadvantages:

a. Time value of money is ignored.

b. Ignores profitability of an investment.

Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings.

b. Facilitates Comparison

Disadvantages:

a. Ignores time factor

b. Ignores external factors

Net present value:

Advantages:

a. Time value of money is considered.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult.

b. Difficulty in decision-making.

Explanation of Solution

The explanation to each advantages and disadvantages of using each management tools are as below:

1. Payback Period:

The advantage of using payback period are:

Simplicity: It is very easy and simple to understand and calculate where the analysis of a project can be calculated using a calculator or spreadsheet.

Risk focus: Payback period focus on how quickly the amount invested in a project can be returned or payback and thus it is a risk measure.

The disadvantages of using payback periods are:

a. Time value of money is ignored: Time value of money is important because the amount in hand today is greater than the future value of money.

b. Ignores profitability of an investment: The shorter payback period may or may not generate a profit when the cash flows end at the payback period are reduced.

2. Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings: The most important factor for any project appraisal is its net earnings. Net earnings refer to earnings after taxes and depreciation.

b. Facilitates Comparison: The comparison of new project with cost reducing projects or other competitive projects is easily facilitated.

Disadvantages:

a. Ignores time factor: The most important factor that is considered by an investor is the time value of money invested. Hence ignorance of time factor is a major drawback of this method.

b. Ignores external factors: The profitability of the project is influenced by both internal and external factors. But accounting rate of return considers only the internal factors and ignores external factors outside the organisation that affects its profitability.

3. Net Present Value:

Advantages:

a. Considers time value of money: Net present value considers the basic fact that present value of money on hand today is worth more than the value of money or returns guaranteed in the future.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult: A discount rate is the interest rate used in discounting futures values to present values which is a very difficult task to estimate.

b. Difficulty in decision-making: When projects have unequal life span, it is difficult for the management to take correct decisions.

Conclusion

Hence the usage of management tools for evaluating the business efficiency and reduction of costs has its own advantages and disadvantages.

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Answer 4

Question

Chapter 25, Problem 7BTN

To determine

Introduction:

Capital Budgeting: The method of planning and analysing the viability of long term investments proposed by the business in new equipment or new projects.

Capital budgeting is the type of budgeting methods in which the business determines the success of the investments on acquisition or replacement of property, plant and equipment, new merchandise or other projects over a long term period. It is simply the process of analysing whether the proposed project or investment are worth pursuing.

Requirement-1:

To identify:

The management tools that can be used by Caron for investment appraisal.

Expert Solution

Answer to Problem 7BTN

Solution:

Capital budgeting techniques such as payback period, accounting rate of return, net present value are useful for Caron Proschan in evaluating the investment in new manufacturing facility and warehousing center.

Explanation of Solution

The capital budgeting techniques are explained in detail below:

Payback Period: It refers to the time period required to take back or regain the amount invested. It is computed in relation to the initial investment and inflow of cash per period. The project feasibility is assured if the payback period is less than the targeted period of returns on investment.

Accounting rate of return: The method used to determine the returns from the net income of the investment in capital budgeting referred as accounting or average rate of return. This accounting rate of return is represented by the average return during period and average investment. The time value of money is ignored in this method.

Net present value method: The difference between the value of cash inflows and outflows at present from the proposed project or investment refers to the Net Present Value. It considers the time value of money and use the net present value as a benchmark to decide whether to accept or reject a project or proposed investment.

Conclusion

Hence Caron can use the capital budgeting techniques for evaluating her investment appraisal.

To determine

Requirement-2:

To discuss:

The information required for Caron for the usage of capital budgeting techniques in evaluating the investments.

Expert Solution

Answer to Problem 7BTN

Solution:

The information required for the usage of capital budgeting techniques by Caron are as follows:

1. For using Payback Period: Cost of new manufacturing facility and warehouse center and annual net cash flow.

2. For using Accounting Rate of return:

a. Straight line depreciation method: Net income after deducting taxes and annual average investment.

b. Other depreciation methods except straight line: Net income after deducting taxes, average book values for the individual years and number of years of the planned investment.

3. For using Net present value: The discounted rate of return and the actual amount invested.

Explanation of Solution

1. Payback Period: The formula for determining the payback period of an investment is:

$P a y b a c k P e r i o d = C o s t o f i n v e s t m e n t / A n n u a l n e t c a s h f l o w$

The payback period determines the time period required to payback or to generate a reasonable return of amount that is initially invested.

2. Accounting rate of return: The formula for computing the accounting rate of return for the investment is:

$A c c o u n t i n g r a t e o f r e t u r n = N e t i n c o m e a f t e r t a x e s / A n n u a l a v e r a g e i n v e s t m e n t$

1. Straight Line Depreciation Method:

$A n n u a l A v e r a g e i n v e s t m e n t = [B e g i n n i n g b o o k v a l u e + E n d i n g b o o k v a l u e] / 2$

2. Other depreciation methods except straight line:

$A n n u a l A v e r a g e i n v e s t m e n t = S u m o f a v e r a g e b o o k v a l u e s f o r i n d i v i d u a l y e a r s / N u m b e r o f y e a r s o f p l a n n e d i n v e s t m e n t$

3. Net Present Value:

The formula for computing the net present value of the investment is:

$N e t P r e s e n t V a l u e = P r e s e n t v a l u e o f n e t c a s h f l o w s - A m o u n t i n v e s t e d$

Conclusion

Hence the information of amount or cost of an investment, cash flows, discount rates etc. are required for the usage of management tools.

To determine

Requirement-3:

To discuss:

The advantages and disadvantages of using the management tools of capital budgeting techniques.

Expert Solution

Answer to Problem 7BTN

Solution:

Payback Period:

Advantages:

a. Simplicity

b. Risk focus

Disadvantages:

a. Time value of money is ignored.

b. Ignores profitability of an investment.

Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings.

b. Facilitates Comparison

Disadvantages:

a. Ignores time factor

b. Ignores external factors

Net present value:

Advantages:

a. Time value of money is considered.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult.

b. Difficulty in decision-making.

Explanation of Solution

The explanation to each advantages and disadvantages of using each management tools are as below:

1. Payback Period:

The advantage of using payback period are:

Simplicity: It is very easy and simple to understand and calculate where the analysis of a project can be calculated using a calculator or spreadsheet.

Risk focus: Payback period focus on how quickly the amount invested in a project can be returned or payback and thus it is a risk measure.

The disadvantages of using payback periods are:

a. Time value of money is ignored: Time value of money is important because the amount in hand today is greater than the future value of money.

b. Ignores profitability of an investment: The shorter payback period may or may not generate a profit when the cash flows end at the payback period are reduced.

2. Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings: The most important factor for any project appraisal is its net earnings. Net earnings refer to earnings after taxes and depreciation.

b. Facilitates Comparison: The comparison of new project with cost reducing projects or other competitive projects is easily facilitated.

Disadvantages:

a. Ignores time factor: The most important factor that is considered by an investor is the time value of money invested. Hence ignorance of time factor is a major drawback of this method.

b. Ignores external factors: The profitability of the project is influenced by both internal and external factors. But accounting rate of return considers only the internal factors and ignores external factors outside the organisation that affects its profitability.

3. Net Present Value:

Advantages:

a. Considers time value of money: Net present value considers the basic fact that present value of money on hand today is worth more than the value of money or returns guaranteed in the future.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult: A discount rate is the interest rate used in discounting futures values to present values which is a very difficult task to estimate.

b. Difficulty in decision-making: When projects have unequal life span, it is difficult for the management to take correct decisions.

Conclusion

Hence the usage of management tools for evaluating the business efficiency and reduction of costs has its own advantages and disadvantages.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 25, Problem 7BTN

To determine

Introduction:

Capital Budgeting: The method of planning and analysing the viability of long term investments proposed by the business in new equipment or new projects.

Capital budgeting is the type of budgeting methods in which the business determines the success of the investments on acquisition or replacement of property, plant and equipment, new merchandise or other projects over a long term period. It is simply the process of analysing whether the proposed project or investment are worth pursuing.

Requirement-1:

To identify:

The management tools that can be used by Caron for investment appraisal.

Expert Solution

Answer to Problem 7BTN

Solution:

Capital budgeting techniques such as payback period, accounting rate of return, net present value are useful for Caron Proschan in evaluating the investment in new manufacturing facility and warehousing center.

Explanation of Solution

The capital budgeting techniques are explained in detail below:

Payback Period: It refers to the time period required to take back or regain the amount invested. It is computed in relation to the initial investment and inflow of cash per period. The project feasibility is assured if the payback period is less than the targeted period of returns on investment.

Accounting rate of return: The method used to determine the returns from the net income of the investment in capital budgeting referred as accounting or average rate of return. This accounting rate of return is represented by the average return during period and average investment. The time value of money is ignored in this method.

Net present value method: The difference between the value of cash inflows and outflows at present from the proposed project or investment refers to the Net Present Value. It considers the time value of money and use the net present value as a benchmark to decide whether to accept or reject a project or proposed investment.

Conclusion

Hence Caron can use the capital budgeting techniques for evaluating her investment appraisal.

To determine

Requirement-2:

To discuss:

The information required for Caron for the usage of capital budgeting techniques in evaluating the investments.

Expert Solution

Answer to Problem 7BTN

Solution:

The information required for the usage of capital budgeting techniques by Caron are as follows:

1. For using Payback Period: Cost of new manufacturing facility and warehouse center and annual net cash flow.

2. For using Accounting Rate of return:

a. Straight line depreciation method: Net income after deducting taxes and annual average investment.

b. Other depreciation methods except straight line: Net income after deducting taxes, average book values for the individual years and number of years of the planned investment.

3. For using Net present value: The discounted rate of return and the actual amount invested.

Explanation of Solution

1. Payback Period: The formula for determining the payback period of an investment is:

$P a y b a c k P e r i o d = C o s t o f i n v e s t m e n t / A n n u a l n e t c a s h f l o w$

The payback period determines the time period required to payback or to generate a reasonable return of amount that is initially invested.

2. Accounting rate of return: The formula for computing the accounting rate of return for the investment is:

$A c c o u n t i n g r a t e o f r e t u r n = N e t i n c o m e a f t e r t a x e s / A n n u a l a v e r a g e i n v e s t m e n t$

1. Straight Line Depreciation Method:

$A n n u a l A v e r a g e i n v e s t m e n t = [B e g i n n i n g b o o k v a l u e + E n d i n g b o o k v a l u e] / 2$

2. Other depreciation methods except straight line:

$A n n u a l A v e r a g e i n v e s t m e n t = S u m o f a v e r a g e b o o k v a l u e s f o r i n d i v i d u a l y e a r s / N u m b e r o f y e a r s o f p l a n n e d i n v e s t m e n t$

3. Net Present Value:

The formula for computing the net present value of the investment is:

$N e t P r e s e n t V a l u e = P r e s e n t v a l u e o f n e t c a s h f l o w s - A m o u n t i n v e s t e d$

Conclusion

Hence the information of amount or cost of an investment, cash flows, discount rates etc. are required for the usage of management tools.

To determine

Requirement-3:

To discuss:

The advantages and disadvantages of using the management tools of capital budgeting techniques.

Expert Solution

Answer to Problem 7BTN

Solution:

Payback Period:

Advantages:

a. Simplicity

b. Risk focus

Disadvantages:

a. Time value of money is ignored.

b. Ignores profitability of an investment.

Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings.

b. Facilitates Comparison

Disadvantages:

a. Ignores time factor

b. Ignores external factors

Net present value:

Advantages:

a. Time value of money is considered.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult.

b. Difficulty in decision-making.

Explanation of Solution

The explanation to each advantages and disadvantages of using each management tools are as below:

1. Payback Period:

The advantage of using payback period are:

Simplicity: It is very easy and simple to understand and calculate where the analysis of a project can be calculated using a calculator or spreadsheet.

Risk focus: Payback period focus on how quickly the amount invested in a project can be returned or payback and thus it is a risk measure.

The disadvantages of using payback periods are:

a. Time value of money is ignored: Time value of money is important because the amount in hand today is greater than the future value of money.

b. Ignores profitability of an investment: The shorter payback period may or may not generate a profit when the cash flows end at the payback period are reduced.

2. Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings: The most important factor for any project appraisal is its net earnings. Net earnings refer to earnings after taxes and depreciation.

b. Facilitates Comparison: The comparison of new project with cost reducing projects or other competitive projects is easily facilitated.

Disadvantages:

a. Ignores time factor: The most important factor that is considered by an investor is the time value of money invested. Hence ignorance of time factor is a major drawback of this method.

b. Ignores external factors: The profitability of the project is influenced by both internal and external factors. But accounting rate of return considers only the internal factors and ignores external factors outside the organisation that affects its profitability.

3. Net Present Value:

Advantages:

a. Considers time value of money: Net present value considers the basic fact that present value of money on hand today is worth more than the value of money or returns guaranteed in the future.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult: A discount rate is the interest rate used in discounting futures values to present values which is a very difficult task to estimate.

b. Difficulty in decision-making: When projects have unequal life span, it is difficult for the management to take correct decisions.

Conclusion

Hence the usage of management tools for evaluating the business efficiency and reduction of costs has its own advantages and disadvantages.

Answer 6

Chapter 25, Problem 7BTN

To determine

Introduction:

Capital Budgeting: The method of planning and analysing the viability of long term investments proposed by the business in new equipment or new projects.

Capital budgeting is the type of budgeting methods in which the business determines the success of the investments on acquisition or replacement of property, plant and equipment, new merchandise or other projects over a long term period. It is simply the process of analysing whether the proposed project or investment are worth pursuing.

Requirement-1:

To identify:

The management tools that can be used by Caron for investment appraisal.

Expert Solution

Answer to Problem 7BTN

Solution:

Capital budgeting techniques such as payback period, accounting rate of return, net present value are useful for Caron Proschan in evaluating the investment in new manufacturing facility and warehousing center.

Explanation of Solution

The capital budgeting techniques are explained in detail below:

Payback Period: It refers to the time period required to take back or regain the amount invested. It is computed in relation to the initial investment and inflow of cash per period. The project feasibility is assured if the payback period is less than the targeted period of returns on investment.

Accounting rate of return: The method used to determine the returns from the net income of the investment in capital budgeting referred as accounting or average rate of return. This accounting rate of return is represented by the average return during period and average investment. The time value of money is ignored in this method.

Net present value method: The difference between the value of cash inflows and outflows at present from the proposed project or investment refers to the Net Present Value. It considers the time value of money and use the net present value as a benchmark to decide whether to accept or reject a project or proposed investment.

Conclusion

Hence Caron can use the capital budgeting techniques for evaluating her investment appraisal.

Answer 7

Chapter 25, Problem 7BTN

To determine

Introduction:

Capital Budgeting: The method of planning and analysing the viability of long term investments proposed by the business in new equipment or new projects.

Capital budgeting is the type of budgeting methods in which the business determines the success of the investments on acquisition or replacement of property, plant and equipment, new merchandise or other projects over a long term period. It is simply the process of analysing whether the proposed project or investment are worth pursuing.

Requirement-1:

To identify:

The management tools that can be used by Caron for investment appraisal.

Answer 8

Expert Solution

Answer to Problem 7BTN

Solution:

Capital budgeting techniques such as payback period, accounting rate of return, net present value are useful for Caron Proschan in evaluating the investment in new manufacturing facility and warehousing center.

Answer 9

Expert Solution

Answer 10

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

The capital budgeting techniques are explained in detail below:

Payback Period: It refers to the time period required to take back or regain the amount invested. It is computed in relation to the initial investment and inflow of cash per period. The project feasibility is assured if the payback period is less than the targeted period of returns on investment.

Accounting rate of return: The method used to determine the returns from the net income of the investment in capital budgeting referred as accounting or average rate of return. This accounting rate of return is represented by the average return during period and average investment. The time value of money is ignored in this method.

Net present value method: The difference between the value of cash inflows and outflows at present from the proposed project or investment refers to the Net Present Value. It considers the time value of money and use the net present value as a benchmark to decide whether to accept or reject a project or proposed investment.

Answer 13

Conclusion

Hence Caron can use the capital budgeting techniques for evaluating her investment appraisal.

Answer 14

To determine

Requirement-2:

To discuss:

The information required for Caron for the usage of capital budgeting techniques in evaluating the investments.

Expert Solution

Answer to Problem 7BTN

Solution:

The information required for the usage of capital budgeting techniques by Caron are as follows:

1. For using Payback Period: Cost of new manufacturing facility and warehouse center and annual net cash flow.

2. For using Accounting Rate of return:

a. Straight line depreciation method: Net income after deducting taxes and annual average investment.

b. Other depreciation methods except straight line: Net income after deducting taxes, average book values for the individual years and number of years of the planned investment.

3. For using Net present value: The discounted rate of return and the actual amount invested.

Explanation of Solution

1. Payback Period: The formula for determining the payback period of an investment is:

$P a y b a c k P e r i o d = C o s t o f i n v e s t m e n t / A n n u a l n e t c a s h f l o w$

The payback period determines the time period required to payback or to generate a reasonable return of amount that is initially invested.

2. Accounting rate of return: The formula for computing the accounting rate of return for the investment is:

$A c c o u n t i n g r a t e o f r e t u r n = N e t i n c o m e a f t e r t a x e s / A n n u a l a v e r a g e i n v e s t m e n t$

1. Straight Line Depreciation Method:

$A n n u a l A v e r a g e i n v e s t m e n t = [B e g i n n i n g b o o k v a l u e + E n d i n g b o o k v a l u e] / 2$

2. Other depreciation methods except straight line:

$A n n u a l A v e r a g e i n v e s t m e n t = S u m o f a v e r a g e b o o k v a l u e s f o r i n d i v i d u a l y e a r s / N u m b e r o f y e a r s o f p l a n n e d i n v e s t m e n t$

3. Net Present Value:

The formula for computing the net present value of the investment is:

$N e t P r e s e n t V a l u e = P r e s e n t v a l u e o f n e t c a s h f l o w s - A m o u n t i n v e s t e d$

Conclusion

Hence the information of amount or cost of an investment, cash flows, discount rates etc. are required for the usage of management tools.

Answer 15

To determine

Requirement-2:

To discuss:

The information required for Caron for the usage of capital budgeting techniques in evaluating the investments.

Answer 16

Expert Solution

Answer to Problem 7BTN

Solution:

The information required for the usage of capital budgeting techniques by Caron are as follows:

1. For using Payback Period: Cost of new manufacturing facility and warehouse center and annual net cash flow.

2. For using Accounting Rate of return:

a. Straight line depreciation method: Net income after deducting taxes and annual average investment.

b. Other depreciation methods except straight line: Net income after deducting taxes, average book values for the individual years and number of years of the planned investment.

3. For using Net present value: The discounted rate of return and the actual amount invested.

Answer 17

Expert Solution

Answer 18

Expert Solution

Answer 19

Expert Solution

Answer 20

Explanation of Solution

1. Payback Period: The formula for determining the payback period of an investment is:

$P a y b a c k P e r i o d = C o s t o f i n v e s t m e n t / A n n u a l n e t c a s h f l o w$

The payback period determines the time period required to payback or to generate a reasonable return of amount that is initially invested.

2. Accounting rate of return: The formula for computing the accounting rate of return for the investment is:

$A c c o u n t i n g r a t e o f r e t u r n = N e t i n c o m e a f t e r t a x e s / A n n u a l a v e r a g e i n v e s t m e n t$

1. Straight Line Depreciation Method:

$A n n u a l A v e r a g e i n v e s t m e n t = [B e g i n n i n g b o o k v a l u e + E n d i n g b o o k v a l u e] / 2$

2. Other depreciation methods except straight line:

$A n n u a l A v e r a g e i n v e s t m e n t = S u m o f a v e r a g e b o o k v a l u e s f o r i n d i v i d u a l y e a r s / N u m b e r o f y e a r s o f p l a n n e d i n v e s t m e n t$

3. Net Present Value:

The formula for computing the net present value of the investment is:

$N e t P r e s e n t V a l u e = P r e s e n t v a l u e o f n e t c a s h f l o w s - A m o u n t i n v e s t e d$

Answer 21

Conclusion

Hence the information of amount or cost of an investment, cash flows, discount rates etc. are required for the usage of management tools.

Answer 22

To determine

Requirement-3:

To discuss:

The advantages and disadvantages of using the management tools of capital budgeting techniques.

Expert Solution

Answer to Problem 7BTN

Solution:

Payback Period:

Advantages:

a. Simplicity

b. Risk focus

Disadvantages:

a. Time value of money is ignored.

b. Ignores profitability of an investment.

Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings.

b. Facilitates Comparison

Disadvantages:

a. Ignores time factor

b. Ignores external factors

Net present value:

Advantages:

a. Time value of money is considered.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult.

b. Difficulty in decision-making.

Explanation of Solution

The explanation to each advantages and disadvantages of using each management tools are as below:

1. Payback Period:

The advantage of using payback period are:

Simplicity: It is very easy and simple to understand and calculate where the analysis of a project can be calculated using a calculator or spreadsheet.

Risk focus: Payback period focus on how quickly the amount invested in a project can be returned or payback and thus it is a risk measure.

The disadvantages of using payback periods are:

a. Time value of money is ignored: Time value of money is important because the amount in hand today is greater than the future value of money.

b. Ignores profitability of an investment: The shorter payback period may or may not generate a profit when the cash flows end at the payback period are reduced.

2. Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings: The most important factor for any project appraisal is its net earnings. Net earnings refer to earnings after taxes and depreciation.

b. Facilitates Comparison: The comparison of new project with cost reducing projects or other competitive projects is easily facilitated.

Disadvantages:

a. Ignores time factor: The most important factor that is considered by an investor is the time value of money invested. Hence ignorance of time factor is a major drawback of this method.

b. Ignores external factors: The profitability of the project is influenced by both internal and external factors. But accounting rate of return considers only the internal factors and ignores external factors outside the organisation that affects its profitability.

3. Net Present Value:

Advantages:

a. Considers time value of money: Net present value considers the basic fact that present value of money on hand today is worth more than the value of money or returns guaranteed in the future.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult: A discount rate is the interest rate used in discounting futures values to present values which is a very difficult task to estimate.

b. Difficulty in decision-making: When projects have unequal life span, it is difficult for the management to take correct decisions.

Conclusion

Hence the usage of management tools for evaluating the business efficiency and reduction of costs has its own advantages and disadvantages.

Answer 23

To determine

Requirement-3:

To discuss:

The advantages and disadvantages of using the management tools of capital budgeting techniques.

Answer 24

Expert Solution

Answer to Problem 7BTN

Solution:

Payback Period:

Advantages:

a. Simplicity

b. Risk focus

Disadvantages:

a. Time value of money is ignored.

b. Ignores profitability of an investment.

Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings.

b. Facilitates Comparison

Disadvantages:

a. Ignores time factor

b. Ignores external factors

Net present value:

Advantages:

a. Time value of money is considered.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult.

b. Difficulty in decision-making.

Answer 25

Expert Solution

Answer 26

Expert Solution

Answer 27

Expert Solution

Answer 28

Explanation of Solution

The explanation to each advantages and disadvantages of using each management tools are as below:

1. Payback Period:

The advantage of using payback period are:

Simplicity: It is very easy and simple to understand and calculate where the analysis of a project can be calculated using a calculator or spreadsheet.

Risk focus: Payback period focus on how quickly the amount invested in a project can be returned or payback and thus it is a risk measure.

The disadvantages of using payback periods are:

a. Time value of money is ignored: Time value of money is important because the amount in hand today is greater than the future value of money.

b. Ignores profitability of an investment: The shorter payback period may or may not generate a profit when the cash flows end at the payback period are reduced.

2. Accounting rate of return:

Advantages:

a. Recognises the concept of net earnings: The most important factor for any project appraisal is its net earnings. Net earnings refer to earnings after taxes and depreciation.

b. Facilitates Comparison: The comparison of new project with cost reducing projects or other competitive projects is easily facilitated.

Disadvantages:

a. Ignores time factor: The most important factor that is considered by an investor is the time value of money invested. Hence ignorance of time factor is a major drawback of this method.

b. Ignores external factors: The profitability of the project is influenced by both internal and external factors. But accounting rate of return considers only the internal factors and ignores external factors outside the organisation that affects its profitability.

3. Net Present Value:

Advantages:

a. Considers time value of money: Net present value considers the basic fact that present value of money on hand today is worth more than the value of money or returns guaranteed in the future.

b. High priority is given to the profitability and risk of the projects.

Disadvantages:

a. Calculation of accurate discount rate is difficult: A discount rate is the interest rate used in discounting futures values to present values which is a very difficult task to estimate.

b. Difficulty in decision-making: When projects have unequal life span, it is difficult for the management to take correct decisions.

Answer 29

Conclusion

Hence the usage of management tools for evaluating the business efficiency and reduction of costs has its own advantages and disadvantages.

Answer 30

Ch. 25 - Prob. 1DQ Ch. 25 - What is capital budgeting?Ch. 25 - Prob. 3DQ Ch. 25 - Prob. 4DQ Ch. 25 - Prob. 5DQ Ch. 25 - Prob. 6DQ Ch. 25 - Prob. 7DQ Ch. 25 - Prob. 8DQ Ch. 25 - Prob. 9DQ Ch. 25 - Prob. 10DQ

Answer to Problem 7BTN

Explanation of Solution

Requirement-2: To discuss: The information required for Caron for the usage of capital budgeting techniques in evaluating the investments.

Answer to Problem 7BTN

Explanation of Solution

Requirement-3: To discuss: The advantages and disadvantages of using the management tools of capital budgeting techniques.

Answer to Problem 7BTN

Explanation of Solution

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Chapter 25 Solutions

Requirement-2:

To discuss:

The information required for Caron for the usage of capital budgeting techniques in evaluating the investments.

Requirement-3:

To discuss:

The advantages and disadvantages of using the management tools of capital budgeting techniques.