Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 12, Problem 1PA
Average
The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net
Each project requires an investment of $75,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis.
Instructions
- 1. Compute the following:
- A. The average rate of
return for each investment. - B. The net present value for each investment. Use the present value table appearing in Exhibit 2 of this chapter. (Round present values to the nearest dollar.)
- A. The average rate of
- 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Average Rate of Return Method, Net Present Value Method, and Analysis for a service company
The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows:
Front-End Loader
Year
1
2
3
4
5
Total
Year
1
2
3
4
5
6
7
8
9
10
Required:
Operating
Income
$62,000
62,000
62,000
62,000
62,000
$310,000
Each project requires an investment of $620,000. Straight-line depreciation.will be used, and no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis.
Present Value of $1 at Compound Interest
6%
10%
15%
0.943
0.909
0.870
0.890
0.826
0.756
0.840
0.751
0.658
0.792
0.683
0.636
0.572
0.747
0.621
0.567 0.497
0.705
0.564 0.507 0.432
0.665
0.513
0.452 0.376
0.627
0.467
0.404
0.327
0.592
0.361
0.284
0.558
0.322 0.247
Front-End Loader
Greenhouse
0.424
Net Cash
Flow
$187,000
187,000
187,000
0.386
187,000
187,000
$935,000…
A company is considering three alternative investment projects with different net cash flows. The
present value of net cash flows is calculated using Excel and the results follow.
Potential Projects
Present value of net cash flows (excluding initial investment)
Initial investment
Project A
$ 11,226
(10,000)
Project B
$ 10,568
(10,000)
a. Compute the net present value of each project.
b. If the company accepts all positive net present value projects, which of these will it accept?
c. If the company can choose only one project, which will it choose on the basis of net present value?
Complete this question by entering your answers in the tabs below.
Required A
Required B
Required C
Compute the net present value of each project.
Potential Projects
Project A
Project B
Project C
Present value of net cash flows
Initial investment
Net present value
$
$
$
The company is in search of resources for a new investment of TL 3,000,000. As a financial manager,a) Find the current weighted average cost of capital according to the resource distribution below.b) Discuss, what kind of financing strategy would you propose for the investment project in question.
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...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- 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_forwardClearcast Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated operating income, and net cash flow for each proposal are as follows: The companys capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are met, the net present value method and present value indexes are used to rank the remaining proposals. Instructions 1. Compute the cash payback period for each of the four proposals. 2. Giving effect to straight-line depreciation on the investments and assuming no estimated residual value, compute the average rate of return for each of the four proposals. Round to one decimal place. 3. Using the following format, summarize the results of your computations in parts (1) and (2). By placing the computed amounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should be accepted for further analysis and which should be rejected. 4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 12% and the present value table appearing in Exhibit 2 of this chapter. 5. Compute the present value index for each of the proposals in part (4). Round to two decimal places. 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).arrow_forwardNet present value method, internal rate of return method, and analysis for a service company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: The wind turbines require an investment of 887,600, while the biofuel equipment requires an investment of 911,100. No residual value is expected from either project. Instructions 1. Compute the following for each project: A. The net present value. Use a rate of 6% and the present value of an annuity table appearing in Exhibit 5 of this chapter. B. A present value index. (Round to two decimal places.) 2. Determine the internal rate of return for each project by (A) computing a present value factor for an annuity of 1 and (B) using the present value of an annuity of 1 table appearing in Exhibit 5 of this chapter. 3. What advantage does the internal rate of return method have over the net present value method in comparing projects?arrow_forward
- A company is considering three alternative investment projects with different net cash flows. The present value of net cash flows is calculated using Excel and the results follow. Potential Projects Present value of net cash flows (excluding initial investment) Initial investment Project A $ 8,328 (10,000) Project B $ 10,809 (10,000) Project C $ 10,685 (10,000) a. Compute the net present value of each project. b. If the company accepts all positive net present value projects, which of these will it accept? c. If the company can choose only one project, which will it choose on the basis of net present value? Complete this question by entering your answers in the tabs below. Required A Required B Required C Compute the net present value of each project. Potential Projects Project A Project B Project C Present value of net cash flows Initial investment Net present valuearrow_forwardAndrew Oxnard, chief financial officer, has been asked by Harry Pendel, chief executive officer and co-founder of Pendel & Braithwaite, Ltd. (P&B), to analyze two capital investment projects (projects A and B), which are expected to generate the following profit (p)streams: Profit Streams for Projects A and B period ?? ($) ?? ($) 1 100,000 350,000 2 200,000 300,000 3 250,000 200,000 4 300,000 100,000 5 325,000 100,000 Total 1,175,000 1,050,000 Profits are realized at the end of each period. Assuming that P&B is a profit maximizer if the discount rate for both projects is 12%, which of the two projects should be adopted?arrow_forwardAverage rate of return method, net present value method, and analysisThe capital investment committee of Nature's Portrait LandscapingCompany is considering two capital investments. The estimated incomefrom operations and net cash flows from each investment are as follows: Each project requires an investment of $75,000. Straight-linedepreciation will be used, and no residual value is expected. Thecommittee has selected a rate of 12% for purposes of the net presentvalue analysis. Instructions1. Compute the following:a. The average rate of return for each investment. Round to onedecimal place.b. The net present value for each investment. Use the present valueof $1 table appearing in this chapter (Exhibit 2). Round present values to the nearest dollar.2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.arrow_forward
- The capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Year Robotic AssemblerOperating Income Robotic AssemblerNet Cash Flow WarehouseOperating Income WarehouseNet Cash Flow 1 $35,000 $65,000 $21,000 $51,000 2 25,000 55,000 21,000 51,000 3 20,000 50,000 21,000 51,000 4 15,000 45,000 21,000 51,000 5 10,000 40,000 21,000 51,000 Total $105,000 $255,000 $105,000 $255,000 Each project requires an investment of $150,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627…arrow_forwardas follows: Year 1 2 3 4 5 Total Year 1 2 Investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are 3 4 5 6 7 8 Front-End Loader 9 10 Operating Income Each project requires an investment of $520,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis. Present Value of $1 at Compound Interest 10% 0.909 0.826 $52,000 52,000 52,000 52,000 52,000 $260,000 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.751 0.683 0.621 0.564 0.513 0.467 Net Cash Flow 0.424 0.386 $157,000 157,000 157,000 157,000 157,000 $785,000 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 Greenhouse Operating Income $109,000 83,000 42,000 18,000 8,000 $260,000 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279…arrow_forwardThe company is in search of resources for a new investment of TL 3,000,000. As a financial manager, a) Find the current weighted average cost of capital according to the resource distribution below. b) What kind of financing strategy would you suggest for the investment project in question?arrow_forward
- Required: 1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate of Return Greenhouse Front-End Loader 1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar. Front-End Loader Greenhouse Present value of net cash flow Amount to be invested Net present value 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments. The front-end loader has a net present value because would be the more attractive. cash flows occur earlier in time compared to the greenhouse. Thus, if only one of the two projects can be accepted, thearrow_forwardital investment committee of Iguana Inc. is considering two capital investments. The estimated ig income and net cash flows from each investment are as follows: Year Robotic Assembler ng Income Robotic Assembler Net Cash Flow Warehouse Operating Income Warehouse Net Cash 35,000 $65,000 $21,000 $ 25,000 55,000 21,000 51,000 3 20,000 50,000 21,000 51,000 4 15,000 45,000 21,000 51,000 5 10,000 40,000 21,000 51,000 05,000 $255,000 $105,000 $255,000 Each project requires an investment of $150,000. Straight-line ation will be used, and no residual value is expected. The committee has selected a rate of 12% for s of the net present value analysis. Present Value of $1 at Compound Interest Year 12% 15% 20% 10.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.68: d: 1a. Compute the average rate of return for each investment. If required, round your answer to one place. Investment Committee Average Rate of Return Robotic Assembler % Warehouse %…arrow_forwardAverage rate of return method, net present value method, and analysis for a service company The capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Year Robotic AssemblerOperating Income Robotic AssemblerNet Cash Flow WarehouseOperating Income WarehouseNet Cash Flow 1 $34,200 $105,000 $72,000 $168,000 2 34,200 105,000 55,000 142,000 3 34,200 105,000 27,000 100,000 4 34,200 105,000 12,000 68,000 5 34,200 105,000 5,000 47,000 Total $171,000 $525,000 $171,000 $525,000 Each project requires an investment of $360,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis. Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Financial And Managerial Accounting
Accounting
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:Cengage Learning,
Profitability index; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Md5ocNqKHq8;License: Standard Youtube License