Concept Introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual
ARR:
Accounting
The formula to calculate ARR is as follows:
NPV:
Requirement-1:
To Calculate:
The Annual net cash flows for each project
Answer to Problem 2BPSB
The Annual net cash flows for each project are as follows:
| Project A | Project B | |
| Annual Expected Net Cash Flows | $ 99,900 | $ 105,900 |
Explanation of Solution
The Annual net cash flows for each project are calculated as follows:
| Project A | Project B | |
| Net Income | $ 39,900 | $ 25,900 |
| Add: Depreciation Expense | $ 60,000 | $ 80,000 |
| (240000/4) | (240000/3) | |
| Annual Expected Net Cash Flows | $ 99,900 | $ 105,900 |
Concept Introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
ARR:
Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.
The formula to calculate ARR is as follows:
NPV:
Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
Requirement-2:
To Calculate:
The Payback period for each project
Answer to Problem 2BPSB
The Payback period for each project is as follows:
| Project A | Project B | |
| Payback period | 2.40 | 2.27 |
Explanation of Solution
The Payback period for each project is calculated as follows:
| Project A | Project B | |
| Cost of Investment (A) | $ 240,000 | $ 240,000 |
| Annual Expected Net Cash Flows (B) | $ 99,900 | $ 105,900 |
| Payback period (A/B) | 2.40 | 2.27 |
Concept Introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
ARR:
Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.
The formula to calculate ARR is as follows:
NPV:
Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
Requirement-3:
To Calculate:
The Accounting rate of return for each project
Answer to Problem 2BPSB
The Accounting rate of return for each project is as follows:
| Project A | Project B | |
| Accounting rate of Return | 33.3% | 21.6% |
Explanation of Solution
The Accounting rate of return for each project is calculated as follows:
| Project A | Project B | |
| Annual Net income (A) | $ 39,900 | $ 25,900 |
| Average Cost of Investment (B) (240000+0)/2 | $ 120,000 | $ 120,000 |
| Accounting rate of Return (A/B) | 33.3% | 21.6% |
Concept Introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
ARR:
Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.
The formula to calculate ARR is as follows:
NPV:
Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
Requirement-4:
To Calculate:
The Net present value for each project
Answer to Problem 2BPSB
The Net present value for each project is as follows:
| Project A | Project B | |
| Net Present value | $ 90,879 | $ 32,915 |
Explanation of Solution
The Net present value for each project is calculated as follows:
| Project A | Project B | |
| Annual Expected Net Cash Flows (A) | $ 99,900 | $ 105,900 |
| Number of years | 4 | 3 |
| Present value of $1 annuity (8%, years) (B) | 3.31210 | 2.57710 |
| Present value of Cash flows (C) = A*B = | $ 330,879 | $ 272,915 |
| Cost of Investment (D) | $ 240,000 | $ 240,000 |
| Net Present value (C-D) | $ 90,879 | $ 32,915 |
Concept Introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:
ARR:
Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.
The formula to calculate ARR is as follows:
NPV:
Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:
Requirement-5:
In which project the company should make the investment
Answer to Problem 2BPSB
The company should make the investment in Project A
Explanation of Solution
The Net present value for each project is calculated as follows:
| Project A | Project B | |
| Annual Expected Net Cash Flows (A) | $ 99,900 | $ 105,900 |
| Number of years | 4 | 3 |
| Present value of $1 annuity (8%, years) (B) | 3.31210 | 2.57710 |
| Present value of Cash flows (C) = A*B = | $ 330,879 | $ 272,915 |
| Cost of Investment (D) | $ 240,000 | $ 240,000 |
| Net Present value (C-D) | $ 90,879 | $ 32,915 |
Project A has the highest Net present value; hence, company should make the investment in Project A.
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Chapter 26 Solutions
Fundamental Accounting Principles
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