Managerial Accounting (5th Edition)
5th Edition
ISBN: 9780134128528
Author: Karen W. Braun, Wendy M. Tietz
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 15, Problem 15.20AE
Sustainability and capital investments (Learning Objective 1)
Mercado Industries is evaluating investing in solar panels to provide some of the electrical needs of its main office building in Boulder, Colorado. The solar panel project would cost $650,000 and would provide cost savings in its utility bills of $50,000 per year. It is anticipated that the solar panels would have a life of 15 years and would have no residual value.
Requirements
- 1. Calculate the payback period in years of the solar panel project.
- 2. If the company uses a discount rate of 12%, what is the
net present value of this project? - 3. If the company has a rule that no projects will be undertaken that have a payback period of more than five years, would this investment be accepted? If not, what arguments could managers make to get approval for the solar panel project?
- 4. What would you do if you were in charge of approving capital investment proposals?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
MAIN PROJECT
Szabist University is considering investing in an online book ordering and information service, which will be managed by 2 employees. The following estimates relate to the costs of starting the service and the subsequent revenues from it.
The initial investment needed to start the service, including the installation of additional phone lines and computer equipment, will be $1,000,000. These investments are expected to have a life of 4 years with 0 salvage value.The investments will be depreciated straight line over the four-year life.The revenues in the first year are expected to be $1500,000, growing 20% in year 2, and 10% in the two years following.The salaries and other benefits for the employees are estimated to be $150,000 in year 1, and grow 10% a year for the following three years.The cost of the books is assumed to be “0.60” of the revenues in each of the four years.The non-cash working capital, which includes the inventory of books needed for the service and the…
MAIN PROJECT
Iqra University is considering investing in an online book ordering and information service, which will be managed by 2 employees. The following estimates relate to the costs of starting the service and the subsequent revenues from it.
The initial investment needed to start the service, including the installation of additional phone lines and computer equipment, will be $1,000,000. These investments are expected to have a life of 4 years with 0 salvage value.The investments will be depreciated straight line over the four-year life.The revenues in the first year are expected to be $1500,000, growing 20% in year 2, and 10% in the two years following.The salaries and other benefits for the employees are estimated to be $150,000 in year 1, and grow 10% a year for the following three years.The cost of the books is assumed to be “0.60” of the revenues in each of the four years.The non-cash working capital, which includes the inventory of books needed for the service and the…
MAIN PROJECT
Iqra University is considering investing in an online book ordering and information service, which will be managed by 2 employees. The following estimates relate to the costs of starting the service and the subsequent revenues from it.
The initial investment needed to start the service, including the installation of additional phone lines and computer equipment, will be $1,000,000. These investments are expected to have a life of 4 years with 0 salvage value.
The investments will be depreciated straight line over the four-year life.
The revenues in the first year are expected to be $1500,000, growing 20% in year 2, and 10% in the two years following.
The salaries and other benefits for the employees are estimated to be $150,000 in year 1, and grow 10% a year for the following three years.
The cost of the books is assumed to be “0.60” of the revenues in each of the four years.
The non-cash working capital, which includes the inventory of books needed for the service and…
Chapter 15 Solutions
Managerial Accounting (5th Edition)
Ch. 15 - (Learning Objective 1) Which of the following is...Ch. 15 - (Learning Objective 1) Which of the following...Ch. 15 - Prob. 3QCCh. 15 - Prob. 4QCCh. 15 - (Learning Objective 2) What is the current status...Ch. 15 - (Learning Objective 2) Which of the following...Ch. 15 - Prob. 7QCCh. 15 - Prob. 8QCCh. 15 - Prob. 9QCCh. 15 - Prob. 10QC
Ch. 15 - Prob. 15.1SECh. 15 - Identify aspects within each G4 category on a GRI...Ch. 15 - Identify aspects within each G4 Social subcategory...Ch. 15 - Prob. 15.4SECh. 15 - Prob. 15.5SECh. 15 - Prob. 15.6SECh. 15 - Define key sustainability terms (Learning...Ch. 15 - Prob. 15.8SECh. 15 - Prob. 15.9AECh. 15 - Prob. 15.10AECh. 15 - Prob. 15.11AECh. 15 - Prob. 15.12AECh. 15 - Prob. 15.13AECh. 15 - Sustainability and cost behavior (Learning...Ch. 15 - Prob. 15.15AECh. 15 - Prob. 15.16AECh. 15 - Sustainability and budgeting (Learning Objective...Ch. 15 - Prob. 15.18AECh. 15 - Prob. 15.19AECh. 15 - Sustainability and capital investments (Learning...Ch. 15 - Sustainability and the statement of cash flows...Ch. 15 - Prob. 15.22AECh. 15 - Prob. 15.23BECh. 15 - Prob. 15.24BECh. 15 - Prob. 15.25BECh. 15 - Prob. 15.26BECh. 15 - Sustainability and process costing (Learning...Ch. 15 - Prob. 15.28BECh. 15 - Sustainability and CVP concepts (Learning...Ch. 15 - Prob. 15.30BECh. 15 - Prob. 15.31BECh. 15 - Prob. 15.32BECh. 15 - Prob. 15.33BECh. 15 - Sustainability and capital investments (Learning...Ch. 15 - Prob. 15.35BECh. 15 - Prob. 15.36BECh. 15 - Prob. 15.37APCh. 15 - Prob. 15.38APCh. 15 - Prob. 15.39BPCh. 15 - Prob. 15.40BPCh. 15 - Each year for the past six years, Caesars...Ch. 15 - Discussion Questions 1. Pressure to become more...Ch. 15 - Corporate Sustainability Reports Note: In the...Ch. 15 - Sustainability and investment choices...Ch. 15 - Ethics of internal sustainability reporting...Ch. 15 - FirstEnergy and its sustainability report...
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
- Austins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high-tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled in order to complete this recommendation: According to the information, the project will last 10 years and require an initial investment of $800,000, depreciated with straight-line over the life of the project until the final value is zero. The firms tax rate is 30% and the required rate of return is 12%. You believe that the variable cost and sales volume may be as much as 10% higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board, Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation(s).arrow_forwardGina 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_forwardInstalling low thermal emissivity windows (low-e windows) on buildings can contribute to energy conservation. Installing low-e windows on a school building is estimated to cost $10,000. The windows are expected to last 6 years and have no salvage value at that time. The energy savings from the windows are expected to be $2,525 in the 1st year. After the 1st year, the savings are expected to increase by $125 each year due to escalating fossil fuel costs. MARR is 15% per year and annual worth is the preferred measure of economic worth. Which Excel® entry should you use to determine the annual worth of installing the low-e windows? -NPV (15 %,6,10000)+NPV( 15%,6,- NPV ( 15%,2525,25252525,2525,25252525)) O-PMT( 15%,6,10000) + PMT( 15 %,6,- NPV ( 15%, 0,125,2 125,3 125,4 125,5*125))+2525 O-PMT(15,6,10000)+PMT(15,6,PMT(15,0,125,2 125,3 125,4*125,5*125))+2525 -PMT(15%.6.10000)+PMT (15% , 6 , NPV ( 15%, 2525,2 2525,2525,2525,2525))arrow_forward
- Happy Trails Senior Living Community is considering investing in solar panels to save on utility costs. The initial cost of the panels, including installation, is $250,000. The expected reduction in utility costs are noted below. Utility costs savings for the next five years are: Year 1: $65,000 Year 2: $68,250 Year 3: $71,663 Year 4: $75,246 Year 5: $79,008 The current interest rate used to evaluate investment decisions is 6%. The inflation rate is expected to remain constant at 3% for the entire period. Instructions (a) Compute the present value of the expected cash flows (savings). (b) Should Happy Trails move forward with the investment?arrow_forwardMAIN PROJECT lums University is considering investing in an online book ordering and information service, which will be managed by 2 employees. The following estimates relate to the costs of starting the service and the subsequent revenues from it. The initial investment needed to start the service, including the installation of additional phone lines and computer equipment, will be $1,000,000. These investments are expected to have a life of 4 years with 0 salvage value.The investments will be depreciated straight line over the four-year life.The revenues in the first year are expected to be $1500,000, growing 20% in year 2, and 10% in the two years following.The salaries and other benefits for the employees are estimated to be $150,000 in year 1, and grow 10% a year for the following three years.The cost of the books is assumed to be “0.60” of the revenues in each of the four years.The non-cash working capital, which includes the inventory of books needed for the service and the…arrow_forwardAllenwood Inc. has provided the following data concerning an investment project that it is considering: Initial investment Annual cash flow Salvage value at the end of the project Expected life of the project Discount rate $ 140,000 O $20,462 O $67,000 O $160,516 O $6.292 $ 54,000 $ 11,000 4 15 per year years % Use Exhibit 7B-1 and Exhibit 78-2 in class videos or in your textbook page 394-395, to determine the appropriate discount factor(s). The net present value of the project is closest to:arrow_forward
- A university's college of engineering would like to determine how much it will cost to keep its computing equipment current. In today's dollars, the college estimates that it will cost $100,000 to replace old computing equipment. Due to decreasing prices on computers, it estimates that this cost will decrease each of the following years by 2%. What would the present worth of computing updates for years 1-5 be, assuming a required 10% real return on its investments? Click here to access the TVM Factor Table calculator. $ Carry all interim calculations to 5 decimal places and then round your final answer to a whole number. The tolerance is ± $10. eTextbook and Media Hint Save for Later Attempts: 0 of 1 used Submit Answerarrow_forwardQ- Hardik Use the following information to answer the next three questions: You are evaluating a project for The Dogs, that involves the purchase of a new dog biscuit making machine. The project has a three year life and you estimate the project will increase revenues by $165,000 and will increase costs by $30,000 each year. The project requires an initial investment of $120,000 which is depreciated on a straight-line basis to zero over the 3 year project life. The machine will be sold at the end of the project for $35,000. The initial net working capital investment required for this project is $14,000 which will be recovered at the end of the project's life. The tax rate is 25% and the required return on the project is 10%. What is the total cash flow for the project in year 3? A. $ 151,500 B. $ 111,250 C. $ 125.250 D. $137,500arrow_forwardLiwayway High School is planning to install solar panels to provide some of the electricity for its groundwater desalting facilty. The project would be done in two phases. The first phase will cost P400 million in year 1 and P500 million in year 2. This investment will result in energy savings (phase 2) of P54,000,000 in year 3, P54,600,000 in year 4, and amounts increasing by P600,000 each year through year 10. Let i = 10% per year.(a) What is the future worth of the savings?(b) Is the cost of the solar project justified by the savings? (Hint: Calculate the difference between savings and cost).arrow_forward
- A university's college of engineering would like to determine how much it will cost to keep its computing equipment current. In today's dollars, the college estimates that it will cost $160,000 to replace old computing equipment. Due to decreasing prices on computers, it estimates that this cost will decrease each of the following years by 4%. What would the present worth of computing updates for years 1-5 be, assuming a required 11% real return on its investments? Click here to access the TVM Factor Table calculator. $ Carry all interim calculations to 5 decimal places and then round your final answer to a whole number. The tolerance is ± $10.arrow_forwardA major equipment purchase is being considered by Metro Atlanta. The initial cost is determined to be $1,000,000. It is estimated that this new equipment will save $100,000 the first year and increase gradually by $50,000 every year for the next 6 years. MARR=10% a. Using Benefit- Cost analysis, what is the Benefit/Cost ratio for this equipment purchase? b. Based on the Benefit/Cost analysis should Metro Atlanta purchase the equipment?arrow_forward"A university wants to utilize a solar energy system to reduce its energy bill. The investment cost 500000$ and the system will have a market value of 10000$ at the end of the estimated lifetime which 25 years. The saving amount in the energy bill will be 105000$ per year. If the university's MARR is 15% per year, what is the Present worth of this investment?" 179035 267432 249753 232073 214394 196714 161355 143676 None of themarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Relevant Costing Explained; Author: Kaplan UK;https://www.youtube.com/watch?v=hnsh3hlJAkI;License: Standard Youtube License