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 1E
To determine
Concept introduction:
ARR:
Accounting
The formula to calculate ARR is as follows:
Requirement-1:
To calculate:
The Accounting rate of return.
To determine
Concept introduction:
Payback Period:
Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual
Requirement-2:
To calculate:
The Payback period
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1. Prepare a differential anaysis comparing present machine (Alt. 1) to new machine (Alt. 2). Analysis should indicate total differential income over the six-year period if the new machine is purchased.
2. Which Alternative would you propose? What other factors should be considered?
3. What if you could invest the funds required to purchase the new equipment (cost less proceeds from sale of old machine) at 4% per year. Does this change your viewpoint? What does this indicate of the limitations of this method for evaluating an investment proposal?
DuraTech Manufacturing is evaluating a process improvement project. The estimated receipts and disbursements associated with the project are shown below. MARR is 6%/year. Solve, a.What is the future worth of this investment?b. What is the decision rule for judging the attractiveness of investments based on future worth? c. Should DuraTech implement the proposed process improvement?
DuraTech Manufacturing is evaluating a process improvement project. The estimated receipts and disbursements associated with the project are shown below. MARR is 6%/year. Solve, a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on present worth? c. Should DuraTech implement the proposed process improvement?
Chapter 11 Solutions
Managerial Accounting
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- Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?arrow_forwardSolve the following three independent scenarios: A grocery store is considering the purchase of a new refrigeration unit with an initial investment of $412,000, and the store expects a return of $100,000 in year one, $72,000 in years two and three, $65,000 in years four and five, and $38,000 in year six and beyond, what is the payback period? Payback period years. Round your Payback Period (PB) answer to two decimal places (i.e. 12.34). An auto repair company needs a new machine that will check for defective sensors. The machine has an initial investment of $224,000. Incremental revenues, including cost savings, are $120,000, and incremental expenses, including depreciation, are $50,000. There is no salvage value. What is the accounting rate of return (ARR)? Accounting Rate of Return (ARR) = Round your ARR answer, in percentage format, to two decimal places (i.e. 12.34%).arrow_forwardDuraTech Manufacturing is evaluating a process improvement project. The estimated receipts and disbursements associated with the project are shown below. MARR is 6%/year. Solve, a. What is the annual worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on annual worth? c. Should DuraTech implement the proposed process improvement?arrow_forward
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