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 2PA
1. (a)
To determine
Calculate the cash payback period for the given projects.
1. (b)
To determine
Calculate the net present value of the investment of EA Incorporation.
2.
To determine
Prepare a brief report for advising management on the relative merits of each project.
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Cash payback period, net present value method, and analysis Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows:
Each project requires an investment of $900,000. A rate of 15% has been selected for the net present value analysis.
Instructions
1. Compute the following for each product:
a. Cash payback period.
b. The net present value. Use the present value of $1 table appearing in this chapter (Exhibit 2).
2. Prepare a brief report advising management on the relative merits of each project.
You are asked to evaluate the following two projects for the Norton Corporation. Using the net present value method
combined with the profitability index approach described in footnote 2 of this chapter, which project would you select? Use a
discount rate of 14 percent.
Project X (videotapes of the weather report) ($20,000 investment)
Year
Cash Flow
1.
$10,000
2
8,000
3
9.000
4
8.600
Project X (videotapes of the weather report) ($40,000 investment)
Year
Cash Flow
$20,000
2
13,000
3
14.000
4
16.800
There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,017 and is expected to generate the following cash flows:
First Year
Second Year
Third Year
Total
Alpha Project
$32,000
$22,000
$4,500
$58,500
Beta Project
8,000
24,000
27,106
59,106
A. Calculate the internal rate of return on both projects. Use the IRR spreadsheet function to calculate internal rate of return.
Alpha Project
fill in the blank 1%
Beta Project
fill in the blank 2%
B. Make a recommendation on which one to accept.
.
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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- Assume Home Garden Inc. in MAD 26-5 assigns the following probabilities to the estimated construction cost of the warehouse and annual net cash flows: a. Compute the expected value of the construction cost. b. Compute the expected value of the annual net cash flows. c. Determine the expected net present value of building the distribution warehouse, assuming a desired rate of return of 14% and using the expected values computed in parts (a) and (b). Use the present value tables provided in Appendix A. Round to the nearest dollar. d. Based on your results in part (c), should Home Garden Inc. build the distribution warehouse?arrow_forwardThere are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $34,665 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $31,500 $22,000 $4,500 $58,000 Beta Project 7,500 23,500 29,066 60,066 A. Calculate the internal rate of return on both projects. Use the IRR spreadsheet function to calculate internal rate of return. Alpha Project fill in the blank % Beta Project fill in the blank %arrow_forwardThe most possible values of an investment project are as follows: First cost, $ 300,000 Annual operating cost, $ 10,000 Annual benefit, $ 120,000 Salvage value, $ 80,000 Life, year 30 MARR per year 15% The most uncertain parameters are annual operating cost and annual benefit. Perform a multiparameter sensitivity analysis and write your conclusions. Consider the cash flow given. Calculate the payback period with time value. Calculate the B/C ratios based on both PW and AW.arrow_forward
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