Connect Access Card For Fundamental Accounting Principles
Connect Access Card For Fundamental Accounting Principles
24th Edition
ISBN: 9781260158526
Author: John J Wild
Publisher: McGraw-Hill Education
Question
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Chapter 26, Problem 18QS

Requirement 1:

To determine

To compute:

Payback period of Investment

Requirement 1:

Expert Solution
Check Mark

Answer to Problem 18QS

Solution:

Payback period of Investment = 5 years

Explanation:

Payback period of the investment is calculated as under −

  Payback period =Initial InvestmentAnnual net cash inflow

Given,

  • Initial investment = $ 80 million
  • Annual net cash flows = $ 16 million
  •   Payback period =Initial InvestmentAnnual net cash inflowPayback period =$80million$16milllionPayback period =5years

Explanation of Solution

Given,

Initial investment = $ 80 million

Total present value of cash inflows will be calculated as under −

  Total present value of cash inflows=Annual net cash inflows X Present value of Annuity (PVAF) at a given rate for a given number of years 

Now, for present value of cash inflows −

Given −

  • Annual net cash inflow = $ 16 million
  • Number of years = 8 years
  • Interest rate or required rate = 8%
  • Total present value of cash inflows =

      Total present value of cash inflows=Annual net cash inflows X Present value of Annuity (PVAF) at a given rate for a given number of years 

  Total present value of cash inflows=$16millionX5.747Total present value of cash inflows=$91.952million  

Net present value of the investment will be calculated as under −

  Net present value =Total present value of cash inflowsInitial Investment

Initial investment = $ 80 million

Total present value of cash inflows = $ 91.952 million

  Net present value = $ 91.952 million - $ 80 millionNet present value =$11.952million

Conclusion

Thus,the payback period of the investment = 5 years.

---->

Requirement 2:

To determine

To compute:

Net present value of the investment.

Requirement 2:

Expert Solution
Check Mark

Answer to Problem 18QS

Solution:

Net present value of the investment = $11.952 million

Explanation of Solution

Given,

Initial investment = $ 80 million

Total present value of cash inflows will be calculated as under −

  Total present value of cash inflows=Annual net cash inflows X Present value of Annuity (PVAF) at a given rate for a given number of years 

Now, for present value of cash inflows −

Given −

  • Annual net cash inflow = $ 16 million
  • Number of years = 8 years
  • Interest rate or required rate = 8%
  • Total present value of cash inflows =

      Total present value of cash inflows=Annual net cash inflows X Present value of Annuity (PVAF) at a given rate for a given number of years 

  Total present value of cash inflows=$16millionX5.747Total present value of cash inflows=$91.952million  

Net present value of the investment will be calculated as under −

  Net present value =Total present value of cash inflowsInitial Investment

Initial investment = $ 80 million

Total present value of cash inflows = $ 91.952 million

  Net present value = $ 91.952 million - $ 80 millionNet present value =$11.952million

Conclusion

Thus, the net present value of the investment = $ 11.952 million.

Note −The following PVAF table has been used for referring PVAF @ 8 % for 8 years.

Connect Access Card For Fundamental Accounting Principles, Chapter 26, Problem 18QS

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Chapter 26 Solutions

Connect Access Card For Fundamental Accounting Principles

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