MANAGERIAL ACCOUNTING FOR MANAGERS AC
MANAGERIAL ACCOUNTING FOR MANAGERS AC
5th Edition
ISBN: 9781265881863
Author: Noreen
Publisher: MCG
Question
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Chapter 7, Problem 7.23P

1

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

To compute: The payback period for both the projects.

1

Expert Solution
Check Mark

Answer to Problem 7.23P

Payback periods for A is 6.53 years and B is 7.03 years

Explanation of Solution

Annual net cash inflow

    ParticularProduct AProduct B
    Sales Revenue250000350000
    Less: Variable Cost(120000)(170000)
    Fixed out of pocket and operating cost(70000)(50,000)
    Annual net cash inflows130

2

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

To compute: The net present value of each project.

2

Expert Solution
Check Mark

Answer to Problem 7.23P

The net present value for A is ($88,750) and B

Explanation of Solution

Net present value for A:

    YearsNet cash inflows (a) $PV of $1 factor (i=16%) (b)Present value of net cash inflow a×b=c $
    1260000.84722022
    2260000.71818668
    3260000.60815808
    4260000.51513390
    5260000.43711362
    Present value of net cash inflows 81250
    Less: initial cost of investment 170000
    Net present value 88750

The net present value for the project is ($88,750) and B is ($211,260).

Net present value for B:

    YearsNet cash inflows (a) $PV of $1 factor (i=16%) (b)Present value of net cash inflow a×b=c $
    154,0000.84745,728
    254,0000.71838,772
    354,0000.60832,832
    454,0000.51527,810
    554,0000.43723,598
    Present value of net cash inflows 168,740
    Less: initial cost of investment 380,000
    Net present value 211,260

The net present value for the project is ($211,260)

3

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

Theinternal rate of return of each project.

3

Expert Solution
Check Mark

Answer to Problem 7.23P

The internal rate of return for A is 11% and B is 13%

Explanation of Solution

Factor of the internet rate of return for A:

  Factorofinternalrateofreturn=InvestmentrequiedAnnualnetcashinflow=$170,000$26,000=6.53

According to exhibit 7B-2, the rate of return closest to the factor 6.53 is 11%

Factor of the internet rate of return for B:

  Factorofinternalrateofreturn=InvestmentrequiedAnnualnetcashinflow=$380,000$54,000=7.03

According to exhibit 7B-2, the rate of return closest to the factor 7.03 is 13%

4.

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

To compute: The profitability index for both the projects.

4.

Expert Solution
Check Mark

Answer to Problem 7.23P

The profitability index for project A is 0.522 and B is 0.55

Explanation of Solution

Net present value for A:

    YearsNet cash inflows (a) $PV of $1 factor (i=16%) (b)Present value of net cash inflow a×b=c $
    1260000.84722022
    2260000.71818668
    3260000.60815808
    4260000.51513390
    5260000.43711362
    Present value of net cash inflows 81250
    Less: initial cost of investment 170000
    Net present value 88750

Profitability index:

  Profitabilityindex=NetpresentvalueoftheprojectInvestementrequired=88750170000=0.522

Net present value for B:

    YearsNet cash inflows (a) $PV of $1 factor (i=16%) (b)Present value of net cash inflow a×b=c $
    154,0000.84745,728
    254,0000.71838,772
    354,0000.60832,832
    454,0000.51527,810
    554,0000.43723,598
    Present value of net cash inflows 168,740
    Less: initial cost of investment 380,000
    Net present value 211,260

Profitability index:

  Profitabilityindex=NetpresentvalueoftheprojectInvestementrequired=211,260380,000=0.55

5

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

Themost preferably ranking methods.

5

Expert Solution
Check Mark

Answer to Problem 7.23P

Net present value is focused only the amount of investment

Explanation of Solution

Net operating income is $400000 and initial investment is $3500000

Simple rate of return A:

  simplerateofreturn=Netprofitinvestmentinvestment=$26,000$170,000=15.29%

Simple rate of return is 15.29%

Simple rate of return B:

  simplerateofreturn=Netprofitinvestmentinvestment=$54,000$380,000=14.21%

Simple rate of return for B is 14.21%

6

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

Theproject which L should pursue.

6

Expert Solution
Check Mark

Answer to Problem 7.23P

Both the project should be rejected

Explanation of Solution

The net present value of both the investment is positive and its internal rate of return is 17%. However the calculated simple rate of return of A is $15.29% and B is 14.21% which is less than the expected return on investment of 18%. Therefore both the project will be rejected.

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