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: P a y b a c k P e r i o d = I n i t i a l I n v e s t m e n t A n n u a l C a s h inf l o w Hence, smaller the payback period better it is. A project with the smaller payback period is chosen first in the capital rationing process. 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: A R R = A v e r a g e A c c o u n t i n g p r o f i t s A v e r a g e I n v e s t m e n t Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process. 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: N P V = P r e s e n t v a l u e o f c a s h i n f l o w s – P r e s e n t v a l u e o f c a s h o u t f l o w s A project should be accepted if it has a positive NPV. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process. Profitability Index: Profitability Index is similar to the NPV method to evaluate a project. It calculates the ratio between the present value cash inflow and present value of cash outflow . A project should be accepted it has a profitability index greater than or equal to 1. The formula to calculate the Profitability Index is a follows: P r o f i t a b i l i t y i n d e x = P r e s e n t v a l u e c a s h i n f l o w P r e s e n t v a l u e o f c a s h o u t f l o w A project should be accepted if it has a PI more than or equal to 1. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process. Requirement-1: To Calculate: The payback, ARR, the NPV, and the profitability index of the two options

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Answer 1

Question

Chapter 26, Problem P26.37BPGB

To determine

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:

$P a y b a c k P e r i o d = \frac{I n i t i a l I n v e s t m e n t}{A n n u a l C a s h \inf l o w}$

Hence, smaller the payback period better it is. A project with the smaller payback period is chosen first in the capital rationing process.

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:

$A R R = \frac{A v e r a g e A c c o u n t i n g p r o f i t s}{A v e r a g e I n v e s t m e n t}$

Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process.

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:

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

A project should be accepted if it has a positive NPV. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Profitability Index: Profitability Index is similar to the NPV method to evaluate a project. It calculates the ratio between the present value cash inflow and present value of cash outflow. A project should be accepted it has a profitability index greater than or equal to 1. The formula to calculate the Profitability Index is a follows:

$P r o f i t a b i l i t y i n d e x = \frac{P r e s e n t v a l u e c a s h i n f l o w}{P r e s e n t v a l u e o f c a s h o u t f l o w}$

A project should be accepted if it has a PI more than or equal to 1. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Requirement-1:

To Calculate: The payback, ARR, the NPV, and the profitability index of the two options

To determine

Requirement -2:

To determine: The selection of investment option

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Answer 2

Question

Chapter 26, Problem P26.37BPGB

To determine

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:

$P a y b a c k P e r i o d = \frac{I n i t i a l I n v e s t m e n t}{A n n u a l C a s h \inf l o w}$

Hence, smaller the payback period better it is. A project with the smaller payback period is chosen first in the capital rationing process.

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:

$A R R = \frac{A v e r a g e A c c o u n t i n g p r o f i t s}{A v e r a g e I n v e s t m e n t}$

Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process.

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:

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

A project should be accepted if it has a positive NPV. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Profitability Index: Profitability Index is similar to the NPV method to evaluate a project. It calculates the ratio between the present value cash inflow and present value of cash outflow. A project should be accepted it has a profitability index greater than or equal to 1. The formula to calculate the Profitability Index is a follows:

$P r o f i t a b i l i t y i n d e x = \frac{P r e s e n t v a l u e c a s h i n f l o w}{P r e s e n t v a l u e o f c a s h o u t f l o w}$

A project should be accepted if it has a PI more than or equal to 1. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Requirement-1:

To Calculate: The payback, ARR, the NPV, and the profitability index of the two options

To determine

Requirement -2:

To determine: The selection of investment option

Expert Solution & Answer

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Check out a sample textbook solution

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Answer 3

Question

Chapter 26, Problem P26.37BPGB

To determine

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:

$P a y b a c k P e r i o d = \frac{I n i t i a l I n v e s t m e n t}{A n n u a l C a s h \inf l o w}$

Hence, smaller the payback period better it is. A project with the smaller payback period is chosen first in the capital rationing process.

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:

$A R R = \frac{A v e r a g e A c c o u n t i n g p r o f i t s}{A v e r a g e I n v e s t m e n t}$

Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process.

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:

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

A project should be accepted if it has a positive NPV. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Profitability Index: Profitability Index is similar to the NPV method to evaluate a project. It calculates the ratio between the present value cash inflow and present value of cash outflow. A project should be accepted it has a profitability index greater than or equal to 1. The formula to calculate the Profitability Index is a follows:

$P r o f i t a b i l i t y i n d e x = \frac{P r e s e n t v a l u e c a s h i n f l o w}{P r e s e n t v a l u e o f c a s h o u t f l o w}$

A project should be accepted if it has a PI more than or equal to 1. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Requirement-1:

To Calculate: The payback, ARR, the NPV, and the profitability index of the two options

To determine

Requirement -2:

To determine: The selection of investment option

Expert Solution & Answer

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Answer 4

Question

Chapter 26, Problem P26.37BPGB

To determine

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:

$P a y b a c k P e r i o d = \frac{I n i t i a l I n v e s t m e n t}{A n n u a l C a s h \inf l o w}$

Hence, smaller the payback period better it is. A project with the smaller payback period is chosen first in the capital rationing process.

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:

$A R R = \frac{A v e r a g e A c c o u n t i n g p r o f i t s}{A v e r a g e I n v e s t m e n t}$

Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process.

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:

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

A project should be accepted if it has a positive NPV. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Profitability Index: Profitability Index is similar to the NPV method to evaluate a project. It calculates the ratio between the present value cash inflow and present value of cash outflow. A project should be accepted it has a profitability index greater than or equal to 1. The formula to calculate the Profitability Index is a follows:

$P r o f i t a b i l i t y i n d e x = \frac{P r e s e n t v a l u e c a s h i n f l o w}{P r e s e n t v a l u e o f c a s h o u t f l o w}$

A project should be accepted if it has a PI more than or equal to 1. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Requirement-1:

To Calculate: The payback, ARR, the NPV, and the profitability index of the two options

To determine

Requirement -2:

To determine: The selection of investment option

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 5

Chapter 26, Problem P26.37BPGB

To determine

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:

$P a y b a c k P e r i o d = \frac{I n i t i a l I n v e s t m e n t}{A n n u a l C a s h \inf l o w}$

Hence, smaller the payback period better it is. A project with the smaller payback period is chosen first in the capital rationing process.

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:

$A R R = \frac{A v e r a g e A c c o u n t i n g p r o f i t s}{A v e r a g e I n v e s t m e n t}$

Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process.

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:

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

A project should be accepted if it has a positive NPV. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Profitability Index: Profitability Index is similar to the NPV method to evaluate a project. It calculates the ratio between the present value cash inflow and present value of cash outflow. A project should be accepted it has a profitability index greater than or equal to 1. The formula to calculate the Profitability Index is a follows:

$P r o f i t a b i l i t y i n d e x = \frac{P r e s e n t v a l u e c a s h i n f l o w}{P r e s e n t v a l u e o f c a s h o u t f l o w}$

A project should be accepted if it has a PI more than or equal to 1. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Requirement-1:

To Calculate: The payback, ARR, the NPV, and the profitability index of the two options

To determine

Requirement -2:

To determine: The selection of investment option

Answer 6

Chapter 26, Problem P26.37BPGB

To determine

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:

$P a y b a c k P e r i o d = \frac{I n i t i a l I n v e s t m e n t}{A n n u a l C a s h \inf l o w}$

Hence, smaller the payback period better it is. A project with the smaller payback period is chosen first in the capital rationing process.

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:

$A R R = \frac{A v e r a g e A c c o u n t i n g p r o f i t s}{A v e r a g e I n v e s t m e n t}$

Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process.

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:

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

A project should be accepted if it has a positive NPV. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Profitability Index: Profitability Index is similar to the NPV method to evaluate a project. It calculates the ratio between the present value cash inflow and present value of cash outflow. A project should be accepted it has a profitability index greater than or equal to 1. The formula to calculate the Profitability Index is a follows:

$P r o f i t a b i l i t y i n d e x = \frac{P r e s e n t v a l u e c a s h i n f l o w}{P r e s e n t v a l u e o f c a s h o u t f l o w}$

A project should be accepted if it has a PI more than or equal to 1. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Requirement-1:

To Calculate: The payback, ARR, the NPV, and the profitability index of the two options

Answer 7

Chapter 26, Problem P26.37BPGB

To determine

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:

$P a y b a c k P e r i o d = \frac{I n i t i a l I n v e s t m e n t}{A n n u a l C a s h \inf l o w}$

Hence, smaller the payback period better it is. A project with the smaller payback period is chosen first in the capital rationing process.

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:

$A R R = \frac{A v e r a g e A c c o u n t i n g p r o f i t s}{A v e r a g e I n v e s t m e n t}$

Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process.

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:

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

A project should be accepted if it has a positive NPV. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Profitability Index: Profitability Index is similar to the NPV method to evaluate a project. It calculates the ratio between the present value cash inflow and present value of cash outflow. A project should be accepted it has a profitability index greater than or equal to 1. The formula to calculate the Profitability Index is a follows:

$P r o f i t a b i l i t y i n d e x = \frac{P r e s e n t v a l u e c a s h i n f l o w}{P r e s e n t v a l u e o f c a s h o u t f l o w}$

A project should be accepted if it has a PI more than or equal to 1. Hence, higher the NPV better it is. A project with the Higher NPV is chosen first in the capital rationing process.

Requirement-1:

To Calculate: The payback, ARR, the NPV, and the profitability index of the two options

Answer 8

To determine

Requirement -2:

To determine: The selection of investment option

Answer 9

To determine

Requirement -2:

To determine: The selection of investment option

Answer 10

Expert Solution & Answer

Answer 11

Expert Solution & Answer

Answer 12

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Answer 13

Ch. 26 - Prob. 1QC Ch. 26 - Prob. 2QC Ch. 26 - Prob. 3QC Ch. 26 - Prob. 4QC Ch. 26 - Prob. 5QC Ch. 26 - Prob. 6QC Ch. 26 - Prob. 7QC Ch. 26 - The IRR is Learning Objective 4 the interest rate...Ch. 26 - Prob. 9QC Ch. 26 - Ian Corp, is considering two expansion projects....

Requirement -2: To determine: The selection of investment option

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Chapter 26 Solutions

Requirement -2:

To determine: The selection of investment option