
a.
Ascertain the payback period for the given proposals.
a.

Explanation of Solution
Capital budgeting:
Capital budgeting is a process by which the management can plan and evaluate the investment proposal of plant assets.
Payback period: Payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the proposal of long-term investment (fixed assets) of the business.
Ascertain the payback period for the given proposals as follows:
When the estimated annual net cash is equal, the cash payback period is calculated as below:
Memory sticks equipment:
Therefore, the payback period for the Memory sticks equipment is 2.08 years.
Working note:
Calculate the
Calculate the incremental annual
Particulars | $ |
Incremental annual revenue of investment | 400,000 |
Less: Incremental annual expenses of investment | 260,000 |
Incremental annual income of investment | 140,000 |
Add: Depreciation expense (1) | 100,000 |
Incremental annual cash flow of investment | 240,000 |
Table (1)
(2)
Program bank installation:
Therefore, the payback period for the Program bank installation is 1.84 years.
Working note:
Calculate the depreciation expense incurred during the current year
Calculate the incremental annual cash flow of investment
Particulars | $ |
Incremental annual revenue of investment | 260,000 |
Less: Incremental annual expenses of investment | 140,000 |
Incremental annual income of investment | 120,000 |
Add: Depreciation expense (3) | 70,000 |
Incremental annual cash flow of investment | 190,000 |
Table (2)
(4)
b.
Ascertain the return on average investment for the given proposals.
b.

Explanation of Solution
Ascertain the return on average investment for the given proposals as follows:
Memory sticks equipment:
Therefore, the return on average investment for Memory sticks equipment is 56%.
Program bank installation:
Therefore, the return on average investment for Program bank installation is 68.6%.
c.
Ascertain the
c.

Explanation of Solution
Net present value method:
Net present value method is the method which is used to compare the initial
Ascertain the net present value for the given proposal, and assume annual discount rate is 12% as follows:
Memory sticks equipment:
Particulars | $ |
Total present value of annual net cash flows (5) | 865,200 |
Less: Amount to be invested | 500,000 |
Net present value of the project | 365,200 |
Table (3)
Therefore, the net present value for the computer ship equipment is $365,200.
Working note:
Calculate the present value of cash flow at the end of the 5th year
Particulars | Amount ($) |
Cash flow of the investment (a) | $240,000 |
PV at $1 annuity at discount rate of 12% for 5 years (b) | 3.605 |
Present value of cash flow after 5 years | $865,200 |
Table (4)
(5)
Note: The Present value of an ordinary annuity of $1 for 5 years at 12% is 3.605 (refer present value table in Exhibit 4).
Program bank installation:
Particulars | $ |
Total present value of annual net cash flows (6) | 684,950 |
Less: Amount to be invested | 350,000 |
Net present value of the project | 334,950 |
Table (5)
Therefore, the net present value for the computer ship equipment is $334,950.
Working note:
Calculate the present value of cash flow at the end of the 5th year
Particulars | Amount ($) |
Cash flow of the investment (a) | $190,000 |
PV at $1 annuity at discount rate of 12% for 5 years (b) | 3.605 |
Present value of cash flow after 5 years | 684,950 |
Table (6)
(6)
Note: The Present value of an ordinary annuity of $1 for 5 years at 12% is 3.605 (refer present value table in Exhibit 4).
d.
Identify the non-financial factors that the Company B should consider in the decision making.
d.

Explanation of Solution
Identify the non-financial factors that the Company B should consider in the decision making as follows:
- Determine the customer preference and demand of the product
- Industry trend regarding software distribution
- Evaluate the medium which provides the most protection against piracy and theft
- Evaluate the risk regarding Program bank installation
- Adopting or changes in the federal and state government legislations
- Legal considerations related to the formation and operation of the business
- Types of alternative investment opportunities
e.
Explain the reason that the Company B’s employees would most likely underestimates the benefits of investing in software bank.
e.

Explanation of Solution
Explain the reason that the Company B’s employees would most likely underestimates the benefits of investing in software bank as follows:
If Company B invests in the software bank, this will not use the employees to load the following programs,
- Process orders
- Employee efficiency
- Packaging and shipping
- Quality of the product, and
- Other non-financial factors
These types (above) of disadvantages would underestimate the employees to invest in the software bank.
f.
Evaluate the proposal and recommend which proposal is best for the investment.
f.

Explanation of Solution
Evaluate the proposal and recommend which proposal is best for the investment as follows:
Both proposals are best for the investment purpose, because memory stick equipment is best in the case of net present value, at the same time program bank installation is best in the case of average return on investment. Hence, both proposals are best for the investment purpose.
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Chapter 26 Solutions
Financial & Managerial Accounting
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