Concept Introduction:
Capital budgeting is a technique to plan long term investment of funds in long term activities whose benefit released for several years.
Example: - Purchase of machineries, purchase of building for business purpose, setting of factories etc.
Profitability index: - Profitability index or Present value index is the ratio between Present Value of Inflow and Initial
To Calculate:-
Present Value Index.
Concept Introduction:
Capital budgeting is a technique to plan long term investment of funds in long term activities whose benefit released for several years.
Example: - Purchase of machineries, purchase of building for business purpose, setting of factories etc.
Net Present value refers to the difference between the present value of inflows and the present value of outflows associated with the projects.
Profitability index: - Profitability index or Present value index is the ratio between Present Value of Inflow and Initial Cash Outflow associated with Project.
To Recommend
Which Project should be selected for Management.
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Survey of Accounting (Accounting I)
- Net present value method, present value index, and analysis for a service company First United Bank Inc. is evaluating three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows: Instructions 1. Assuming that the desired rate of return is 15%, prepare a net present value analysis for each project. Use the present value table appearing in Exhibit 2 of this chapter. 2. Determine a present value index for each project. (Round to two decimal places.) 3. Which project offers the largest amount of present value per dollar of investment? Explain.arrow_forwardUse the information provided to answer the questions Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to twodecimal places).Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). Use your answers from previous question to recommend the project that should be chosen. Motivateyour choice.arrow_forwardInformation on four investment proposals is given below: Investment required Present value of cash inflows Net present value Life of the project 4 Required: 1. Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.) 2. Rank the proposals in terms of preference. Investment Proposal A BUD C Project Profitability Index Investment Proposal A D $(106,000) $(116,000) $(86,000) $(144,000) 142,040 178,640 118,680 213,120 $36,048 $ 62,640 $ 32,680 $ 69,120 5 years 7 years years 6 years Rank Preference:arrow_forward
- Information on four investment proposals is given below: Investment required. Present value of cash inflows Net present value Life of the project Answer is complete but not entirely correct. Profitability Index Investment Proposal ABCO A В Required: 1. Compute the profitability index for each investment proposal. (Round your answers to 2 decimal places.) 2. Rank the proposals in terms of preference. с D 3 0.41 0.38 0.50 0.33 Rank Preference A $ (240,000) 337,300 $ 97,300 Second Third First Fourth ✓ ✔ 5 years Investment Proposal $ (73,500) 110,250 $36,750 B $ (105,000) 144,900 $ 39,900 7 years 6 years $ (126,000). 168,000 $ 42,000 6 yearsarrow_forwardPresent value index Tasty Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows: Des Moines Cedar Rapids $277,680 (267,000) $10,680 Total present value of net cash flow Amount to be invested Net present value a. Determine the present value index for each proposal. Round your answers for the present value index to two decimal places. Total present value of net cash flow Amount to be invested Present value index $302,100 (318,000) $(15,900) I Des Moines b. Which location does your analysis support? (If both present value indexes are the same, either location will grade as correct.) 1. Cedar Rapids because the net present value index isarrow_forwardConsider the following project-balance profiles for proposed investment projects, where the project-balance figures are rounded to the nearest dollar: (a) Compute the net present worth of each investment.(b) Determine the project balance at the end of period 2 for Project C ifA2 = $500.(c) Determine the cash flows for each project.(d) Identify the net future worth of each project.arrow_forward
- Several proposed capital projects which are economically acceptable may have to be ranked due to constraints in financial resources. In ranking these projects, the least pertinent is this statement. A. A ranking procedure on the basis of quantitative criteria may be established by specifying a minimum desired rate of return, which rate is used in calculating the net present value of each project. B. In selecting the required rate of return, one may either calculate the organization’s cost of capital or use a rate generally acceptable in the industry. C. If the internal rate of return method is used in the capital rationing problem, the higher the rate, the better the project. D. If the net present value method is used, the profitability index is calculated to rank the projects. The lower the index, the better the project.arrow_forwardInformation on four investment proposals is given below: Investment required. Present value of cash inflows Net present value Life of the project Investment Proposal Required: 1. Compute the profitability index for each investment proposal. Note: Round your answers to 2 decimal places. 2. Rank the proposals in terms of preference. A B C D Profitability Index A $ (150,000) 211,500 $ 61,500 Rank Preference 5 years Investment Proposal B $ (200,000) 275,600 $ 75,600 7 years с $ (180,000) 274,100 $ 94,100 6 years D $ (2,600,000) 3,470,500 $ 870,500 6 yearsarrow_forwardPresent value index Tasty Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows: Des Moines Cedar Rapids Total present value of net cash flow $321,300 $342,160 Amount to be invested Net present value (306,000) (364,000) $15,300 $(21,840) a. Determine the present value index for each proposal. Round your answers for the present value index to two decimal places. Des Moines Cedar Rapids Total present value of net cash flow Amount to be invested Present value index b. Which location does your analysis support? (If both present value indexes are the same, either location will grade as correct.) because the net present value index is 1.arrow_forward
- Discuss the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method? Furthermore, the accrual accounting rate of return (AARR) divides an accrual accounting measure of average annual income from a project by an accrual accounting measure of its investment. What are the strengths and weaknesses of the accrual accounting rate-of-return (AARR) method for evaluating long-term projects?arrow_forwardPresent Value Index Tasty Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows: Des Moines Cedar Rapids Total present value of net cash flow $252,720 $274,550 Amount to be invested (243,000) (289,000) Net present value $9,720 $(14,450) a. Determine the present value index for each proposal. Round your answers for the present value index to two decimal places. Des Moines Cedar Rapids Total present value of net cash flow Amount to be invested $ $ Present value index b. Which location does your analysis support? (If both present value indexes are the same, either location will grade as correct.) v, because the net present value index is 1.arrow_forwardOxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows: Life of Net the Internal Project (years) of Return Investment Present Rate Project Required $970,000 $730,000 $670,000 $830,000 Value $176,514 $175,933 $185,782 $129,082 A 6. 16% В 11 15% C 19% 17% The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.arrow_forward
- Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,