Davidsons Incorporated is using Payback Period and Net Present Value (NPV) methods for investment decision making for small projects. The cut-off period will remain at 3 years. The net after tax cash flows of the projects are as follows: Cash Flows Initial Cost Year 1 Year 2 Year 3 Project 1 £10,000 £4,000 £4,000 £4,000 Project 2 £15,000 £7,000 £5,500 £4,000 Project 3 £8,000 £3,000 £3,500 £4,000 Project 4 £18,000 £10,000 £11,000 £0

Davidsons Incorporated is using Payback Period and Net Present Value (NPV) methods for investment decision making for small projects. The cut-off period will remain at 3 years. The net after tax cash flows of the projects are as follows: Cash Flows Initial Cost Year 1 Year 2 Year 3 Project 1 £10,000 £4,000 £4,000 £4,000 Project 2 £15,000 £7,000 £5,500 £4,000 Project 3 £8,000 £3,000 £3,500 £4,000 Project 4 £18,000 £10,000 £11,000 £0

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 22E

See similar textbooks

Similar questions

Net present value method, internal rate of return method, and analysis for a service company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: The wind turbines require an investment of 887,600, while the biofuel equipment requires an investment of 911,100. No residual value is expected from either project. Instructions 1. Compute the following for each project: A. The net present value. Use a rate of 6% and the present value of an annuity table appearing in Exhibit 5 of this chapter. B. A present value index. (Round to two decimal places.) 2. Determine the internal rate of return for each project by (A) computing a present value factor for an annuity of 1 and (B) using the present value of an annuity of 1 table appearing in Exhibit 5 of this chapter. 3. What advantage does the internal rate of return method have over the net present value method in comparing projects?
Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
The management of Ryland International Is considering Investing in a new facility and the following cash flows are expected to result from the investment: A. What Is the payback period of this uneven cash flow? B. Does your answer change if year 6s cash inflow changes to $920,000?
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Porter Company is analyzing two potential investments Initial investment Net cash flow: Year 1 Year 2 Year 3 Year 4 Project X Project Y $ 75,900 $ 64,000 26,000 26,000 26,000 4,400 28,000 28,000 20,000 If the company is using the payback period method, and it requires a payback of three years or less, which project(s) should be selected? 0
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) -$ 15,456 5,225 8,223 13,013 8,705 0 1 234 -$ 276,363 26,400 51,000 57,000 402,000 Whichever project you choose, if any, you require a 6 percent return on your investment. a. What is the payback period for Project A? Payback period b. What is the payback period for Project B? Payback period c. What is the discounted payback period for Project A? Discounted payback period
Question 1 Davidsons Incorporated is using Payback Period and Net Present Value (NPV) methods for investment decision making for small projects. The cut-off period will remain at 3 years. The net after tax cash flows of the projects are as follows: Cash Flows Initial Cost Year 1 Year 2 Year 3 Required: Project 1 £11,000 £5,000 £5,000 £5,000 Project 2 £20,000 £7,000 £5,500 £4,000 Project 3 £8,000 b) Explain the uses, limitations, and merits of the Payback Period compared to Net Present Value in investment appraisal. £3,000 £3,500 £4,000 a) Calculate the NPV of each project at 9% discount rate. Given the above four projects' cash flows and using a 9% discount rate, which projects that would have been accepted under Payback Period will now be rejected under Net Present Value? Project 4 £19,000 £11,000 £12,000 £0
Porter Company is analyzing two potential Investments. Project X $ 75,900 Initial investment Net cash flow: Year 1 Year 2 Year 3 Year 4 Multiple Choice O If the company is using the payback period method, and it requires a payback of three years or ess, which project(s) should be selected? Project Y. 26,000 26,000 26,000 0 Project X. Project Y $ 64,000 Both X and Y are acceptable projects. 4,400 28,000 28,000 20,000 Neither X nor Y is an acceptable project. Project Y because it has a lower Initial Investment.
Using the below informtion answer: 5.1 Payback Period of Project Tan (expressed in years, months and days). 5.2 Net Present Value of Project Tan.5.3 Accounting Rate of Return on average investment of Project Tan (expressed to two decimal places). INFORMATIONThe management of Mastiff Enterprises has a choice between two projects viz. Project Cos and Project Tan, each ofwhich requires an initial investment of R2 500 000. The following information is presented to you: PROJECT COS PROJECT TANNet Profit Net ProfitYear R1 130 000 80 0002 130 000 180 0003 130 000 120 0004 130 000 220 0005 130 000 50 000A scrap value of R100 000 is expected for Project Tan only. The required rate of return is 15%. Depreciation is calculatedusing the straight-line method.
Consider the two mutually exclusive investment projects A and B: Project A -2,000 2,000 Project B -5,000 Cash Flows Year 0 Year 1 Year 2 3,000 10,000 (a) Verify that (yearly) Internal Rate of Return for Projects A and B are approximately 82.2% and 41.4%. (b) Suppose the cost of capital (the interest rate that you can borrow or invest) is 10% p.a. for both projects. Which project would you choose? What is the implication for decision rule in project appraisal by using Internal Rate of Return method?
Consider a project with initial investment of Birr 25,000 generating the following cash flows over 4 years. Year Project cash flow (Birr) 0 (25,000) 1 5,000 2 7,000 3 13,000 4 16,000 ii.1 Based on the above details compute the following: Internal Rate of Investment (IRR) Profitability Index (PI) ii.2 Do you accept this project for investment? Give reason for your answer.
Coffer Company is analyzing two potential investments. Project X Cost of machine Net cash flow: Year 1 Year 2 $ 85,470 Project Y $ 65,000 33,000 33,000 3,000 30,000 Year 3 Year 4 33,000 0 • 30,000 25,000 If the company is using the payback period méthod, and it requires a payback period of three years or less, which project(s) should be selected? Multiple Choice Project Y. Project X. Both X and Y are acceptable projects. Neither X nor Y is an acceptable project.