Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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Textbook Question
Chapter 12, Problem 4DQ
Your boss has suggested that a one-year payback period is the same as a 100% average
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You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from
now, $1,500 two years from now, and $10,000 ten years from now.
a. What is the NPV of the investment opportunity if the interest rate is 8% per year? Should you take the opportunity?
b. What is the NPV of the investment opportunity if the interest rate is 4% per year? Should you take the opportunity?
a. What is the NPV of the investment opportunity if the interest rate is 8% per year?
The NPV of the investment opportunity if the interest rate is 8% per year is $. (Round to the nearest dollar.)
Should you take the investment opportunity (Select the best choice below.)
A. Reject it because the NPV is less than 0.
B. Take it because the NPV is equal to or greater than 0.
b. What is the NPV of the investment opportunity if the interest rate is 4% per year?
The NPV of the investment opportunity if the interest rate is 4% per year is $
(Round to the nearest dollar.)
Should…
Suppose you invest $3,000 today and receive $10,000 in 25 years.
a. What is the internal rate of return (IRR) of this opportunity?
b. Suppose another investment opportunity also requires $3,000 upfront, but pays an equal amount at the end of each year for the next 25 years. If this investment has the same IRR as the first one, what is the
amount you will receive each year?
a. What is the internal rate of return (IRR) of this opportunity?
The IRR of this opportunity is%. (Round to two decimal places.)
b. Suppose another investment opportunity also requires $3,000 upfront, but pays an equal amount at the end of each year for the next 25 years. If this investment has the same IRR as the first one, what is the
amount you will receive each year?
The periodic payment that gives the same IRR is $
(Round to the nearest cent.)
Your CEO insists that all projects should have a payback period of four or less. As a result attractive long lived projects are being turned down. The CEO is willing to switch to a discounted payback with same four year cutoff period. Would this be an improvement and which method you would suggest or emphasize more?
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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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
- Thank you for calculating the IRR. Could you also answer the question "If the required return is 11 percent, should the firm accept the following project?". An explanation would also be extremely helpful. Thank you!arrow_forwardWhat is the payback period on each of the above projects? Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? Why? If you use a cutoff period of three years, which projects would you accept? Why? If the opportunity cost of capital is 10%, which projects have positive NPVs? How do you know? “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” Is this statement true or false? How do you know? If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know?arrow_forwardYou are considering a project that requires a $1000 investment today and returns $550 at the end of the first year and $726 at the end of the second year. If your discount rate is 10%, then the Net Present Value (NPV) of the investment is $ type your answer... In this case, the Internal Rate of Return is choose your answer... than 10%.arrow_forward
- Answer the following: 1 What is the payback period on each of the above projects? 2 Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? Why? 3 If you use a cutoff period of three years, which projects would you accept? Why?arrow_forwardSuppose you invest $2,000 today and receive $11,000 in five years. a. What is the internal rate of return (IRR) of this opportunity? b. Suppose another investment opportunity also requires $2,000 upfront, but pays an equal amount at the end of each year for the next five years. If this investment has the same IRR as the first one, what is the amount you will receive each year?arrow_forwardYou are looking at an investment that will pay you $22,995 in year 2, $43,270 in year 4 and $41,525 in year 6. If your required return is 8.73%, what is the most you should pay for the investment? (In other words, how much is the project worth today?)arrow_forward
- You have an investment opportunity that requires an initial investment of $3,600 today and will pay $5,900 in one year. What is the rate of return of this opportunity?arrow_forwardSuppose a project with a 6% discount rate yields R5000 for the next three years. Annual operating costs amount to R1000 for each year, and the one time initial investment cost is R8000. a. Calculate the Net Present Value (NPV) of this project.b. Calculate the cost-benefit ratio for the project. c. Is the project acceptable? Motivate your answer.arrow_forwardYou have the opportunity to make an investment that costs $1.000,000. If you make this investment now, you will receive $250,000 one year from today, $200,000, $150,000 and $ 400,000 two and three years from today, respectively. The appropriate discount rate for thisinvestment is 11 percent. .a. Should you make the investment?b. What is the net present value (NPV) of this opportunity?c. If the discount rate is 10 percent, should you invest? Compute the NPV to support youranswer.arrow_forward
- If you are promised a nominal return of 16%, on a one-year investment, and you expect the rate of inflation to be 2%, what real rate do you expect to earn? Use the Fisher equation, NOT the approximation.arrow_forwardSuppose you are considering a project has an initial cost of $500 that has an ongoing benefit of $250. Further, there is an ongoing cost that is equal to $90, which increases by 10% each year (compounding). Assume the project lasts 6 years. If the appropriate discount rate is 6%. Calculate: a) the Net Present Value = $Blank 1 b) the Benefit Cost Ratio = Blank 2 c) should the project be accepted or rejected? Explain your answer using the information from part a) and b). Answer =Blank 3 (accept/reject) Provide your answers to two decimal places. Do not include any commas (,) "$" or "%" in your answers. Ensure you show all your working in your spreadsheet.arrow_forwardYou have an investment opportunity that requires an initial investment of $5,000 today and will pay $6,000 in one year. What is the rate of return of this opportunity? The rate of return for this opportunity is ____%.arrow_forward
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