Accounting
27th Edition
ISBN: 9781337272094
Author: WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher: Cengage Learning,
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 26, Problem 26.7EX
(a)
To determine
Net present value method is the method which is used to compare the initial
To calculate: The net present value of the investment.
(b)
To determine
To explain: whether the management would look with favor on the proposal.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Net Present Value Method
The following data are accumulated by Paxton Company in evaluating the purchase of $90,800 of equipment, having a four-year useful life:
4. The following data are accumulated by Geddes Company in evaluating the purchase of $150,000
of equipment, having a four-year useful life:
Year 1
Year 2
Year 3
Year 4
Year
Net Income
$43,500
26,500
13,500
2,900
Net Cash Flow
$81,000
64,000
50,500
40,000
a. Assuming that the desired rate of return is 15%, determine the net present value for the
proposal. Use the table of the present value of $1 appearing in Exhibit 2 of this chapter.
b. Would management be likely to look with favor on the proposal? Explain.
Assume that a company is considering a capital investment project with a four-year time horizon and the following cash flows:
Cost of new equipment
Working capital required
Annual net cash inflows
Maintenance and repairs in third year
Salvage value of equipment in fourth year
Click here to view Exhibit 14B-1 and Exhibit 148-2. to determine the appropriate discount factor(s) using the tables provided.
Assuming the company's required rate of return is 20%, the profitability index of the project is closest to:
Multiple Choice
$210,000
$ 50,000
$100,000
$ 40,000
$ 30,000
1.05
prog
Chapter 26 Solutions
Accounting
Ch. 26 - What are the principal objections to the use of...Ch. 26 - Discuss the principal limitations of the cash...Ch. 26 - Prob. 3DQCh. 26 - Your boss has suggested that a one-year payback...Ch. 26 - Prob. 5DQCh. 26 - Prob. 6DQCh. 26 - A net present value analysis used to evaluate a...Ch. 26 - Two projects haw an identical net present value of...Ch. 26 - Prob. 9DQCh. 26 - What are the major disadvantages of the use of the...
Ch. 26 - Prob. 11DQCh. 26 - Give an example of a qualitative factor that...Ch. 26 - Prob. 13DQCh. 26 - Average rate of return Determine the average rate...Ch. 26 - Average rate of return Determine the average rate...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Prob. 26.3APECh. 26 - Net present value A project has estimated annual...Ch. 26 - Internal rate of return A project is estimated to...Ch. 26 - Internal rate of return A project is estimated to...Ch. 26 - Prob. 26.5APECh. 26 - Prob. 26.5BPECh. 26 - Prob. 26.1EXCh. 26 - Average rate of returncost savings Midwest...Ch. 26 - Average rate of returnnew product Micro Tek Inc....Ch. 26 - Calculate cash flows Natures Way Inc. is planning...Ch. 26 - Cash payback period for a service company Prime...Ch. 26 - Cash payback method Lily Products Company is...Ch. 26 - Prob. 26.7EXCh. 26 - Prob. 26.8EXCh. 26 - Net present value methodannuity for a service...Ch. 26 - Prob. 26.10EXCh. 26 - Prob. 26.11EXCh. 26 - Prob. 26.12EXCh. 26 - Net present value method and present value index...Ch. 26 - Prob. 26.14EXCh. 26 - Cash payback period, net present value analysis,...Ch. 26 - Internal rate of return method The internal rate...Ch. 26 - Internal rate of return method for a service...Ch. 26 - Internal rate of return methodtwo projects Munch N...Ch. 26 - Prob. 26.19EXCh. 26 - Prob. 26.20EXCh. 26 - Prob. 26.21EXCh. 26 - Prob. 26.22EXCh. 26 - Sustainable energy capital investment analysis...Ch. 26 - Sustainable product capital investment analysis...Ch. 26 - Average rate of return method, net present value...Ch. 26 - Cash payback period, net present value method, and...Ch. 26 - Net present value method, present value index, and...Ch. 26 - Prob. 26.4APRCh. 26 - Alternative capital investments The investment...Ch. 26 - Capital rationing decision for a service company...Ch. 26 - Average rate of return method, net present value...Ch. 26 - Prob. 26.2BPRCh. 26 - Prob. 26.3BPRCh. 26 - Net present value method, internal rate of return...Ch. 26 - Prob. 26.5BPRCh. 26 - Capital rationing decision for a service company...Ch. 26 - Ethics in Action Danielle Hastings was recently...Ch. 26 - Communication Global Electronics Inc. invested...Ch. 26 - Prob. 26.4CPCh. 26 - Qualitative issues in investment analysis The...Ch. 26 - Prob. 26.6CP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Assume Home Garden Inc. in MAD 26-5 assigns the following probabilities to the estimated construction cost of the warehouse and annual net cash flows: a. Compute the expected value of the construction cost. b. Compute the expected value of the annual net cash flows. c. Determine the expected net present value of building the distribution warehouse, assuming a desired rate of return of 14% and using the expected values computed in parts (a) and (b). Use the present value tables provided in Appendix A. Round to the nearest dollar. d. Based on your results in part (c), should Home Garden Inc. build the distribution warehouse?arrow_forwardSan Lucas Corporation is considering investment in robotic machinery based upon the following estimates: a. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of 700,000. Use the present value tables appearing in Exhibits 2 and 5 of this chapter. b. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of 500,000, 700,000, and 900,000. Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer. c. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 10%. Round to the nearest dollar. d. Interpret the results of parts (a), (b), and (c).arrow_forwardSensitivity analysis: Boulder Creek Industries Boulder Creek Industries is considering an investment in equipment based on the following estimates: Line Item Description Value Cost of equipment $3,000,000 Residual value $200,000 Useful life 10 years a. Determine the net present value of the equipment, assuming a desired rate of return of 12% and annual net cash flows of $800,000. Use the present value tables appearing in Exhibits 2 and 5 of this chapter.Net present value fill in the blank 1 of 1$ b. Determine the net present value of the equipment, assuming a desired rate of return of 12% and annual net cash flows of $400,000, $600,000, and $800,000. Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer. If required, use the minus sign to indicate a negative net present value. Annual Net Cash Flow $400,000 $600,000 $800,000 Net present value $fill in the blank 2 $fill in the blank 3 $fill in the blank 4 c. Determine the…arrow_forward
- Average Rate of Return, Cash Payback Period, Net Present Value Method Southwest Transportation Inc. is considering a distribution facility at a cost of $195,000. The facility has an estimated life of 10 years and a no residual value. It is expected to provide yearly net cash flows of $39,000. The company's minimum desired rate of return for net present value analysis is 10%. Click here to access the present value tables (Exhibit 2 and Exhibit 5) to use for this problem. a. Compute average rate of return, giving effect to straight-line depreciation on the investment. Round to one decimal place.fill in the blank 1 % b. Compute the cash payback period.fill in the blank 2 years c. Compute the net present value. If required, use the minus to indicate a negative net present value. Total present value of annual net cash flows $fill in the blank 3 Less: amount to be invested fill in the blank 4 Equals: net present value $fill in the blank 5arrow_forwardRequired information A company that manufactures magnetic flow meters expects to undertake a project that will have the cash flows estimated. First cost, $ Equipment replacement cost in year 2, $ Annual operating cost, $/year Salvage value, $ Life, years -880,000 -300,000 -930,000 250,000 14 At an interest rate of 10% per year, what is the equivalent annual cost of the project? Find the AW value using tabulated factors The equivalent annual cost of the project is $- 980,731.95arrow_forwardAssume that a company is considering a capital investment project with a four-year time horizon and the following cash flows: Cost of new equipment $ 210,000 Working capital required $ 50,000 Annual net cash inflows $ 100,000 Maintenance and repairs in third year $ 40,000 Salvage value of equipment in fourth year $ 30,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. Assuming the company’s required rate of return is 12%, the profitability index of the project is closest to:arrow_forward
- Cash payback period, net present value method, and analysis Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows: Each project requires an investment of $900,000. A rate of 15% has been selected for the net present value analysis. Instructions 1. Compute the following for each product: a. Cash payback period. b. The net present value. Use the present value of $1 table appearing in this chapter (Exhibit 2). 2. Prepare a brief report advising management on the relative merits of each project.arrow_forwardB2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $369,600 with a 8-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 147,840 units of the equipment's product each year. The expected annual income related to this equipment follows. Sales Costs Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (30%) Net income If at least an 10% return on this investment must be earned, compute the net present value of this investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Chart Values are Based on: Select Chart n= j= Amount 8 10 % X PV Factor =arrow_forwardGiven the following information about a possible average-risk, new product investment, calculate the investment's net present value. Initial Cost Expected Life Salvage Value Annual Depreciation Incremental Annual Sales Incremental Annual Production Costs $200,000 10yrs 0 $20,000 $200,000 $110,000 Incremental Annual Selling & Admin Costs Tax Rate Expected Inventory Turnover (calculated as production costs / 4 times ending inventory) Average Collection Period Cost of Equity Cost of Debt Target Debt to Equity Ratio $20,000 50% 45 days 13% 8.5% 130% Hint: Assume the company is on a 360-day year. Net Operating Working Capital investment is only necessary at the onset of the project (year O), it is recalled in period 10. Please ignore the Accounts Payables and Accruals in the calculation of NOWCarrow_forward
- Complete the projected income statement for the first five years of the project. Fill in the following details , Determine the PAT of the project as a banker will you finance them on the basis of PAT Year 1 2 3 4 Capacity utilization (%) 55 65 75 85 85 Sales Operating expenses Material Salaries Marketing & other 119 137 155 173 173 expenses PBDIT Depreciation 236.92 180.10 137.38 105.20 80.98 Prelm. Exp. Wloff 10 10 10 10 10 PBIT Int. on TL Int. on WC loan 4.50 4.50 4.50 4.50 4.50arrow_forwardAssume that a company is considering purchasing a machine for $50,500 that will have a five-year useful life and no salvage value. The machine will lower operating costs by $17,000 per year. The company's required rate of return is 18%. The profitability index for this investment is closest to: Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice C O 0.95. 1.01. 1.05. 1.11.arrow_forwardAverage Rate of Return, Cash Payback Period, Net Present Value Method for a Service Company. Can you help with A & C?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Financial And Managerial Accounting
Accounting
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:Cengage Learning,
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning