Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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Chapter 12, Problem 20E
To determine
Identify the errors in the capital investment analysis methods.
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4. Middleton Classics would like to test the sensitivity of the estimates used for the input data to compute the net present value and internal rate of return on this investment. Ignore the payback period and the accounting rate of return. Consider a, b, and c below independently by holding everything else constant:
a. What is the minimum cost of the investment (to the nearest $100) needed for the owner to accept it?
b. Reset cost to $500,000. What is the minimum salvage value (to the nearest $100) needed for the owner to accept it?
c.Reset salvage value to $25,000. What is the minimum annual cash flow (to the nearest $100) needed for the owner to accept it?
How sensitive to changes in the input data is the decision to accept or reject this investment? Do you have to change the estimates a lot or just a little to make the investment acceptable? Comment on the results of each of these analyses.
An investment has an installed cost of $532,800. The cash flows over the four-year life
of the investment are projected to be $216,850, $233,450, $200,110, and $148,820,
respectively.
a. If the discount rate is zero, what is the NPV? (Do not round intermediate
calculations.)
b. If the discount rate is infinite, what is the NPV? (A negative answer should be
indicated by a minus sign.)
c. At what discount rate is the NPV just equal to zero? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
a. NPV
b. NPV
c. IRR
Q
%
l
REQUIRED
Calculate the Payback Period of Machine A (expressed in years, months and days).
Calculate the Net Present Value of both
Calculate the Accounting Rate of Return on initial investment (expressed to two decimal
places) of both machines.
Calculate the Internal Rate of Return of Machine B (expressed to two decimal places).
If the time value of money is taken into account, which machine should be chosen? Why?
INFORMATION
The directors of Lomax Ltd intend expanding the company and they have the choice of purchasing one of two machines at the end of 2022 viz. Machine A or Machine B. Both machines have a five-year life, with only Machine A having a residual value of R300 000. The annual volume of production of each machine is estimated at 6 000 pallets (comprising 500 bricks each), which can be sold at R520 per pallet. Depreciation is calculated on the machines using the…
Chapter 12 Solutions
Managerial Accounting
Ch. 12 - What are the principal objections to the use of...Ch. 12 - Discuss the principal limitations of the cash...Ch. 12 - Prob. 3DQCh. 12 - Your boss has suggested that a one-year payback...Ch. 12 - Prob. 5DQCh. 12 - Prob. 6DQCh. 12 - A net present value analysis used to evaluate a...Ch. 12 - Two projects have an identical net present value...Ch. 12 - Prob. 9DQCh. 12 - What are the major disadvantages of the use of the...
Ch. 12 - Prob. 11DQCh. 12 - Prob. 12DQCh. 12 - Average rate of return Determine the average rate...Ch. 12 - Prob. 2BECh. 12 - Prob. 3BECh. 12 - Internal rate of return A project is estimated to...Ch. 12 - Prob. 5BECh. 12 - Average rate of return The following data are...Ch. 12 - Average rate of returncost savings Maui...Ch. 12 - Average rate of returnnew product Hana Inc. is...Ch. 12 - Determine cash flows Natural Foods Inc. is...Ch. 12 - Cash payback period for a service company Janes...Ch. 12 - Cash payback method Lily Products Company is...Ch. 12 - Prob. 7ECh. 12 - Net present value method for a service company...Ch. 12 - Net present value methodannuity for a service...Ch. 12 - Net present value methodannuity Jones Excavation...Ch. 12 - Prob. 11ECh. 12 - Prob. 12ECh. 12 - Prob. 13ECh. 12 - Prob. 14ECh. 12 - Prob. 15ECh. 12 - Prob. 16ECh. 12 - Prob. 17ECh. 12 - Prob. 18ECh. 12 - Prob. 19ECh. 12 - Prob. 20ECh. 12 - Net present value-unequal lives Bunker Hill Mining...Ch. 12 - Prob. 22ECh. 12 - Average rate of return method, net present value...Ch. 12 - Prob. 2PACh. 12 - Net present value method, present value index, and...Ch. 12 - Net present value method, internal rate of return...Ch. 12 - Prob. 5PACh. 12 - Prob. 6PACh. 12 - Prob. 1PBCh. 12 - Prob. 2PBCh. 12 - Net present value method, present value index, and...Ch. 12 - Prob. 4PBCh. 12 - Prob. 5PBCh. 12 - Prob. 6PBCh. 12 - San Lucas Corporation is considering investment in...Ch. 12 - Prob. 2MADCh. 12 - Prob. 3MADCh. 12 - Prob. 4MADCh. 12 - Prob. 5MADCh. 12 - Assume Home Garden Inc. in MAD 26-5 assigns the...Ch. 12 - Ethics in Action Danielle Hastings was recently...Ch. 12 - Prob. 4TIFCh. 12 - CEO, Worthington Industries (WOR) (a...Ch. 12 - Prob. 6TIFCh. 12 - Prob. 1CMACh. 12 - Staten Corporation is considering two mutually...Ch. 12 - Prob. 3CMACh. 12 - Foster Manufacturing is analyzing a capital...
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