Survey Of Accounting
5th Edition
ISBN: 9781259631122
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Question
Chapter 16, Problem 12E
a.
To determine
Ascertain the payback period for each investment alternative and identify the alternative that Company N should accept based on the payback approach.
b.
To determine
Describe the limitations that the company faces for using the payback method to evaluate the investment opportunities.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Problem 9
A contractor is considering the following three alternatives:
a. Purchase a new microcomputer system for $15,000. The system is expected to last
6 years with salvage value of $1,000.
b. Lease a new microcomputer system for $3,000 per year, payable in advance. The
system should last 6 years.
c. Purchase a used microcomputer system for $8,200. It is expected to last 3
with no salvage value.
Use a common-multiple-of-lives approach. If MARR of 8% is used, which
alternative should be selected using a discounted present worth analysis? If the
MARR is 12%, which alternate should be selected?
years
Exercise 10-12A (Algo) Determining the payback period LO 10-4
Fanning Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different
used airplanes. The first airplane is expected to cost $14,800,000; It will enable the company to Increase its annual cash Inflow by
$3,700,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs
$34,800,000; It will enable the company to increase annual cash flow by $5,800,000 per year. This plane has an eight-year useful life
and a zero salvage value.
Required
*1. Determine the payback period for each Investment alternative.
a2. Identify the alternative Fanning should accept if the decision is based on the payback approach.
Note: Round your answers to 1 decimal place.
a-1. Alternative 1 (First plane)
a-1. Alternative 2 (Second plane)
a-2. Fanning should accept
Payback Period
years
years
Exercise 16-12A (Algo) Determining the payback period LO 16-4
Baird Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used
airplanes. The first airplane is expected to cost $13,020,000, it will enable the company to increase its annual cash inflow by
$6.200,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs
$40,040,000, it will enable the company to increase annual cash flow by $9.100,000 per year. This plane has an eight-year useful life
and a zero salvage value.
Required
o. Determine the payback period for each investment alternative and identify the alternative Baird should accept if the decision is
based on the payback approach. (Round your answers to 1 decimal place.)
Payback Period
a-1. Alternative 1 (First plane)
years
Altenative 2 (Second plane)
years
a-2. Baird should accept
Chapter 16 Solutions
Survey Of Accounting
Ch. 16 - Prob. 1QCh. 16 - Prob. 2QCh. 16 - Prob. 3QCh. 16 - 4. Define the term return on investment. How is...Ch. 16 - Prob. 5QCh. 16 - Prob. 6QCh. 16 - Prob. 7QCh. 16 - Prob. 8QCh. 16 - Prob. 9QCh. 16 - Prob. 10Q
Ch. 16 - 11. Maria Espinosa borrowed 15,000 from the bank...Ch. 16 - Prob. 12QCh. 16 - 13. What criteria determine whether a project is...Ch. 16 - Prob. 14QCh. 16 - Prob. 15QCh. 16 - Prob. 16QCh. 16 - 17. What is the relationship between desired rate...Ch. 16 - Prob. 18QCh. 16 - Prob. 19QCh. 16 - Prob. 20QCh. 16 - Prob. 21QCh. 16 - Prob. 22QCh. 16 - Prob. 23QCh. 16 - Exercise 10-1A Identifying cash inflows and...Ch. 16 - Exercise 10-2A Determining the present value of a...Ch. 16 - Prob. 3ECh. 16 - Prob. 4ECh. 16 - Exercise 10-5A Determining net present value...Ch. 16 - Exercise 10-6A Determining net present value Aaron...Ch. 16 - Exercise 10-7A Using the present value index Rolla...Ch. 16 - Exercise 10-8A Determining the cash flow annuity...Ch. 16 - Prob. 9ECh. 16 - Exercise 10-10A Using the internal rate of return...Ch. 16 - Prob. 11ECh. 16 - Prob. 12ECh. 16 - Exercise 10-13A Determining the payback period...Ch. 16 - Prob. 14ECh. 16 - Prob. 15ECh. 16 - Prob. 16PCh. 16 - Prob. 17PCh. 16 - Problem 10-18A Postaudit evaluation Brett Collins...Ch. 16 - Problem 10-19A Using net present value and...Ch. 16 - Problem 10-20A Using the payback period and...Ch. 16 - Problem 10-21A Using net present value and payback...Ch. 16 - Problem 10-22A Effects of straight-line versus...Ch. 16 - Problem 10-23A Comparing internal rate of return...Ch. 16 - Prob. 1ATCCh. 16 - ATC 10-4 Writing Assignment Limitations of capital...Ch. 16 - Prob. 5ATC
Knowledge Booster
Similar questions
- ts 19 Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 2 years. At the end of the second year, the machine will be sold for $100,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the NPV of the project? O $12.155 O $3,875 O-$9,783 O $19,016 $9.555arrow_forwardExercise 10-13A (Algo) Determining the payback period with uneven cash flows LO 10-4 Baird Company has an opportunity to purchase a forklift to use in its heavy equipment rental business. The forklift would be leased on an annual basis during its first two years of operation. Thereafter, it would be leased to the general public on demand. Baird would sell it at the end of the fifth year of its useful life. The expected cash inflows and outflows follow: Year Year 1 Year 1 Year 2 Year 3. Year 3. Year 4 Year 5 Year 5 Nature of Item Purchase price. Revenue Revenue Revenue Major overhaul Revenue Revenue Salvage value Cash Inflow $31, 000 31, 000 26,000 17,000 15,000 7,000 Cash Outflow $79, 800 a. Payback period (accumulated cash flows) b. Payback period (average cash flows) 8, 200 Required a.&b. Determine the payback period using the accumulated and average cash flows approaches. Note: Round your answers to 1 decimal place. years yearsarrow_forwardThe management of Deitrich Inc., a civil engineering design company, is considering an investment in a high-quality blueprint printer with the following cash flows: Year 1234567890 Investment Cash Inflow $2,000 $3,000 $6,000 QUESTION 6 $28,000 $4,000 $8,000 $9,000 $8,000 $6,000 $5,000 $4,000 $4,000 I Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year was several times larger?arrow_forward
- QUESTION 10 Georgia Mills Company (GMC) purchase a milling machine, which it intends to use for the next five years, for $180,000. This machine is expected to save GMC $35,000 during the first operating year. Then, the annual savings are expected to decrease by 3% each subsequent year over the previous year due to increased maintenance costs. Assuming that GMC would operate the machine for an average of 5,000 hours per year and that the machine would have no appreciable salvage value at the end of the five year period, determine the equivalent dollar savings per operating hour at 15% interest compounded annually. OA $3.24 lost per hour OB. $4.09 lost per hour OC $6.74 lost per hour D.$5.92 lost per hourarrow_forwardQuestion 7 Warehouse A with a life of 10 years can be constructed now for $100,000 with no repair costs and a salvage value of $10,000. Alternatively, warehouse B with a life of 12 years can be constructed for $70,000 now with a salvage value of $5000, but requires $18,000 worth of repairs every 3 years. Both have equal usefulness and are needed indefinitely. Assuming the cost of money is 6%, which warehouse is a better deal and by most nearly how much per year? Full explain this question very fast solution sent me step by step Not:- Text typing work onlyarrow_forwardQuestion 4 Neptune company plans to purchase a new machine for the expansion project. The machine's price is RM200,000 and it would cost another RM20,000 for installation and RM 15,000 for net working capital. The company is planning to finance the machine's cost through bank loan with an interest rate of 8% per year. The machine has an expected life of 10 years and will be depreciated using simplified straight line depreciation method. However, the project is expected to be ended in year seven. The company expect that this new machine would increase the company's annual income of RM40,000 per year. The maintenance cost for the machine will be RM10,000 per year. Additionally, the use of this new machine is expected to reduce the defect cost by RM2,000 per year. At the end of year 7, this machine is expected to be sold at RM30,000. Assuming the tax rate is 28% and the required rate of return is 10%, find whether ABC should proceed with this planning. Justify your answer.arrow_forward
- View Policies Current Attempt in Progress Culver Company is considering investing in a new facility to extract and produce salt. The facility will increase revenues by $240,900, but it will also increase annual expenses by $181,215. The facility will cost $999,000 to build, and it will have a $39,000 salvage value at the end of its useful life. Calculate the annual rate of return on this facility. (Round answer to 2 decimal places, e.g. 52.75.) Annual rate of return eTextbook and Media Save for Later % Attempts: 0 of 3 used Submit Answerarrow_forward#34 Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $15.00 million fully installed and will be fully depreciated over a 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.96 million per year and increased operating costs of $689,148.00 per year. Caspian Sea Drinks' marginal tax rate is 28.00%. The internal rate of return for the RGM- 7000 is Submit Answer format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434)) unanswered not_submitted Attempts Remaining: Infinityarrow_forwardQuestion 1 The M&N company is considering a new manufacturing facility plan for its new venture. The plan suggests an initial investment of 5600.000 and is expected to have a salvage value of $50,000 after the end of its 6-year life period. The selling price of the product is decided fo be $70 per unit, against an estimated variable cost of $40 per unit. How many units should the company sell each year for breakaven at an interest rate of 8%?arrow_forward
- Question 13 Mack Company has a machine with a book value of $80,000 and a remaining four-year useful life. A new machine is available at a cost of $110,000, and Mack can also receive $50,000 for trading in its old machine. The new machine will reduce variable manufacturing costs by $15,000 per year over its four-year useful life. Show the computations as to whether the machine should be replaced or kept.arrow_forwardQUESTION 10 Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $679,000 that would be depreciated on a straight-line basis to zero over the 4-year life of the project. The equipment will have a market value of $183,000 at the end of the project. The project requires $53,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $202,900 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 21 percent? O-$19,708 O-$7,306 O-$25,952 -$27,949 O-$23,357 1arrow_forwardQuestion 17 Koda Agriculture is doing a CBA (cost benefit analysis) on a investment project renewing the machinery used on the farm. The old machinery is sold in the beginning of the project for 33.000 euro. The investment must have positive NPV (net present value) within 5 years. In the end of the period (5 years) the planned reselling value (scrap value) of the equipment is 100.000 euro. The rates used are 8% and inflation is estimated to be 3% a year. List of cost items and benefit items are listed below: What is the NPV? New equipment Initial investment Quantity Cost/item (€) Benefits/year (C) improved yield better products Total 23.000 tractors 3- 50.000 25.000 conveyor belt threshing machine grain separator irrigation system 1- 25.000 labor cost reduction 23.000 2- 7.000 2- 1- 19.000 60.000 Cost per year Quantity Cost/item (€) operation cost facility cost insurance cost 6.000 1- 3.000 12- 700arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781285867977Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781285867977
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning