Managerial Accounting
Managerial Accounting
3rd Edition
ISBN: 9780077826482
Author: Stacey M Whitecotton Associate Professor, Robert Libby, Fred Phillips Associate Professor
Publisher: McGraw-Hill Education
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Chapter 11, Problem 12E
To determine

(a)

Introduction:

Payback period is the time period required to cover the cost of an investment or it is the duration of time needed to recover the initial cost of an investment.

To compute:

The payback period of the given investments and rank them in order of their payback period.

Expert Solution
Check Mark

Answer to Problem 12E

Payback period (project X) = 1.6 years (Rank 1)

Payback period (Project Y) = 2 years (Rank 3)

Payback period (Project Z) = 1.9 years (Rank 2)

Explanation of Solution

To calculate the payback period:

Formula used:

Paybackperiod=InititalinvestmentAnnualcashflows

Paybackperiod(ProjectX)=$40,000$25,000=1.6years

Paybackperiod(ProjectY)=$20,000$10,000=2years

Paybackperiod(ProjectZ)=$50,000$25,400=1.9years

To determine

(b)

Introduction:

Net present value is calculated as the difference between present cash inflows and present cash outflows. A positive value of NPV states that the investment is profitable and negative value of NPV states that the investment will result in a loss.

To compute:

The net present value of the given investments and rank them in order of their Net present value.

Expert Solution
Check Mark

Answer to Problem 12E

Net present value (Project X) = $5,000 (Rank 3)

Net present value (Project Y) = $13,000 (Rank 2)

Net present value (Project Z) = $20,000 (Rank 1)

Explanation of Solution

To calculate NPV:

Formula used:

Net present value = PV of cash inflows − Initial investment

Net present value (Project X) = $45,000 - $40,000

= $5,000

Net present value (Project Y) = $33,000 - $20,000

= $13,000

Net present value (Project Z) = $70,000 - $50,000

= $20,000

To determine

(c)

Introduction:

Profitability index is the ratio of the benefits of a project to its costs. There is a directly proportional relationship between profitability index and the attractiveness of a project.

To compute:

The Profitability index of the given investments and rank them in order of their Net present value.

Expert Solution
Check Mark

Answer to Problem 12E

Profitability Index

  1. Project X = 1.12 (Rank 3)
  2. Project Y = 1.65 (Rank 1)
  3. Project Z = 1.40 (Rank 2)

Explanation of Solution

Formula used to calculate profitability index:

Profitabilityindex=PresentvalueofcashinflowsInitialInvestment

Projects Profitability index
Project X =$45,000$40,000 = 1.12
Project Y =$33,000$20,000 = 1.65
Project Z =$70,000$50,000 = 1.40
To determine

(d)

Introduction:

Profitability index is the ratio of the benefits of a project to its costs. There is a directly proportional relationship between profitability index and the attractiveness of a project.

To state:

In case of limited availability of funds, which investment should be opted by the manager.

Expert Solution
Check Mark

Answer to Problem 12E

As per the profitability index, investment in project Y should be opted by the manager.

Explanation of Solution

In case of limited availability of funds, it will be better for the company to prioritize the projects depending upon their profitability index. The profitability index will make the comparison a lot easier as it is expressed as a ratio and not as the dollar value.

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Chapter 11 Solutions

Managerial Accounting

Ch. 11 - Why is the net present value method generally...Ch. 11 - Briefly explain how the profitability mdcx is...Ch. 11 - Prob. 13QCh. 11 - Prob. 14QCh. 11 - Prob. 15QCh. 11 - When would you use the PV of annuity table instead...Ch. 11 - Prob. 17QCh. 11 - Which of the following requires managers to...Ch. 11 - Prob. 2MCCh. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Prob. 5MCCh. 11 - Prob. 6MCCh. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 9MCCh. 11 - Prob. 10MCCh. 11 - Matching Key Terms and Concepts to DefinitionsCh. 11 - Prob. 2MECh. 11 - Prob. 3MECh. 11 - Prob. 4MECh. 11 - Prob. 5MECh. 11 - Prob. 6MECh. 11 - Prob. 7MECh. 11 - Prob. 8MECh. 11 - Computing Present Value of Complex Contract As a...Ch. 11 - Prob. 11MECh. 11 - Prob. 12MECh. 11 - Prob. 1ECh. 11 - Prob. 2ECh. 11 - Prob. 3ECh. 11 - Prob. 4ECh. 11 - Prob. 5ECh. 11 - Prob. 6ECh. 11 - Prob. 8ECh. 11 - Prob. 9ECh. 11 - Using NPV to Evaluate Mutually Exclusive Projects...Ch. 11 - Prob. 12ECh. 11 - Prob. 13ECh. 11 - Prob. 1.1GAPCh. 11 - Prob. 1.2GAPCh. 11 - Prob. 1.3GAPCh. 11 - Prob. 1.4GAPCh. 11 - Prob. 1.5GAPCh. 11 - Prob. 2.1GAPCh. 11 - Prob. 2.2GAPCh. 11 - Prob. 2.3GAPCh. 11 - Prob. 2.4GAPCh. 11 - Prob. 2.5GAPCh. 11 - Making Automation Decision Beacon Company is...Ch. 11 - Prob. 3.1GAPCh. 11 - Prob. 3.2GAPCh. 11 - Prob. 3.3GAPCh. 11 - Prob. 3.4GAPCh. 11 - Prob. 4.1GAPCh. 11 - Prob. 4.2GAPCh. 11 - Prob. 4.3GAPCh. 11 - Prob. 4.4GAPCh. 11 - Prob. 4.5GAPCh. 11 - Prob. 5.1GAPCh. 11 - Prob. 5.2GAPCh. 11 - Prob. 6.1GAPCh. 11 - Evaluating Sustainability Projects Citco Company...Ch. 11 - Evaluating Sustainability Projects Citco Company...Ch. 11 - Evaluating Sustainability Projects Citco Company...Ch. 11 - Prob. 1.1GBPCh. 11 - Prob. 1.2GBPCh. 11 - Prob. 1.3GBPCh. 11 - Prob. 1.4GBPCh. 11 - Prob. 1.5GBPCh. 11 - Prob. 2.1GBPCh. 11 - Prob. 2.2GBPCh. 11 - Prob. 2.3GBPCh. 11 - Prob. 2.4GBPCh. 11 - Prob. 2.5GBPCh. 11 - Prob. 2.6GBPCh. 11 - Prob. 3.1GBPCh. 11 - Comparing, Prioritizing Multiple Projects Harmony...Ch. 11 - Prob. 3.3GBPCh. 11 - Prob. 3.4GBPCh. 11 - Prob. 4.1GBPCh. 11 - Prob. 4.2GBPCh. 11 - Prob. 4.3GBPCh. 11 - Prob. 4.4GBPCh. 11 - Prob. 4.5GBPCh. 11 - Prob. 5.1GBPCh. 11 - Prob. 5.2GBPCh. 11 - Prob. 6.1GBPCh. 11 - Prob. 6.2GBPCh. 11 - Prob. 6.3GBPCh. 11 - Prob. 6.4GBP
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