Managerial Accounting: Creating Value in a Dynamic Business Environment
12th Edition
ISBN: 9781260417074
Author: HILTON, Ronald
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 16, Problem 25E
Refer to the data given in the preceding exercise.
Required: Compute the
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QUESTION 1
The accounts manager of VM Gym & Sports has been asked to evaluate a potential capital
investment of a set of rowing machines. The following data is available for cach project:
Machine 1
Machine 2
RM
RM
Cost (immediate outlay)
500,000
245,000
Expected annual profits (losses)
Year 1
I.
80,000
84,000
Year 2
90,000
136,000
Year 3
116,000
126,000
Year 4
146,000
150,000
Annual running costs
30,000
24,000
Annual service costs
36,000
20,000
Estimated residual value equipment
40,000
30,000
*The total annial running and service costs for Machine 2 in the first year is RM 36,000
The committee has estimated a cost of capital of 30% and employs the straight-line method
of depreciation for all fixed assets when calculating net profit. The following discount factors
are given:
Year
Cost of capital
10%
50%
0.909
0.667
2.
0.826
0.444
3.
0.751
0.296
4.
0.683
0.198
b) Explain what is meant by the internal rate of return (IRR) in the context of project
appraisal. What are the drawbacks of the IRR method?
i) Discuss the pros and cons of the various numerical methods such as the
bisection method, linear interpolation technique, the Newton-Raphson method
and the secant method in determining the IRR. You should also clearly discuss
any methods used in determining the initial iterate.
ii)
Suppose one estimates that they can afford to repay £1200 a month for 25
years on a mortgage. Interest is calculated at 4.3% p.a., payable monthly.
How large a mortgage can the individual afford?
iii)
How much would an investor pay now (beginning of the month) for an
annuity, which pays £1,500 at the end of each month for 10 years, if the
current interest rate is 12% p.a. compounded weekly?
Describe the project-screening tool method used to evaluate the investment projects?
Chapter 16 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
Ch. 16 - Prob. 1RQCh. 16 - Prob. 2RQCh. 16 - Prob. 3RQCh. 16 - Prob. 4RQCh. 16 - Prob. 5RQCh. 16 - Explain the following terms: recovery of...Ch. 16 - List and briefly explain two advantages that the...Ch. 16 - List and briefly explain four assumptions...Ch. 16 - Prob. 9RQCh. 16 - Prob. 10RQ
Ch. 16 - Give an example of a noncash expense. What impact...Ch. 16 - Prob. 12RQCh. 16 - What is a depreciation tax shield? Explain the...Ch. 16 - Prob. 14RQCh. 16 - Why is accelerated depreciation advantageous to a...Ch. 16 - Prob. 16RQCh. 16 - Why may the net-present-value and...Ch. 16 - Prob. 18RQCh. 16 - What is meant by the term payback period? How is...Ch. 16 - Prob. 20RQCh. 16 - How is an investment projects accounting rate of...Ch. 16 - Prob. 22RQCh. 16 - Prob. 23RQCh. 16 - Prob. 24ECh. 16 - Refer to the data given in the preceding exercise....Ch. 16 - Prob. 26ECh. 16 - Prob. 28ECh. 16 - Prob. 29ECh. 16 - Prob. 30ECh. 16 - Prob. 31ECh. 16 - Prob. 32ECh. 16 - Sharpe Machining Company purchased industrial...Ch. 16 - The owner of Atlantic City Confectionary is...Ch. 16 - The management of Niagra National Bank is...Ch. 16 - Allegience Insurance Companys management is...Ch. 16 - Prob. 37ECh. 16 - Prob. 38ECh. 16 - The states Secretary of Education is considering...Ch. 16 - The supervisor of the county Department of...Ch. 16 - Prob. 41PCh. 16 - Prob. 42PCh. 16 - Prob. 43PCh. 16 - Special People Industries (SPI) is a nonprofit...Ch. 16 - Washington Countys Board of Representatives is...Ch. 16 - Prob. 46PCh. 16 - Prob. 47PCh. 16 - Mind Challenge, Inc. publishes innovative science...Ch. 16 - Philadelphia Fastener Corporation manufactures...Ch. 16 - Prob. 50PCh. 16 - Prob. 51PCh. 16 - Prob. 52PCh. 16 - Prob. 53PCh. 16 - Prob. 54PCh. 16 - Prob. 55PCh. 16 - Prob. 56PCh. 16 - Pensacola Cablevision Company provides television...Ch. 16 - Pensacola Cablevision Company provides television...Ch. 16 - The board of education for the Central Catskill...Ch. 16 - Prob. 60C
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- based on information on the image attached, Calculate the initial investment required for the project and then Discuss the significance of each ratio in evaluating the project.arrow_forward(a) Calculate the, the Payback Period, and the net Present Value of for each project.b) For each of the above methods of project appraisal recommend which project should be taken up.c) Using all the information gathered from the above techniques which project would you recommend giving the reasons for this decision.d) Explain the uses, limitations and merits of the Payback Period compared to Net Present Value in investment appraisal.arrow_forwardWhat should be done to calculate accurately a project's true IRR,?arrow_forward
- The TELOS study that determines whether a project can be completed in an acceptable time frame isa. a schedule feasibility study.b. a time frame feasibility study.c. an on-time feasibility study.d. an economic completion feasibility study.e. a length of contract feasibility study.arrow_forwarda. You are requested to assess the projects using payback period method and suggest the director on the selection of the project. b. You are also requested to appraise the management on the limitations of Payback period method.arrow_forwardWhich of the following step is followed before evaluation of proposals under capital budgeting process? a. Final approval b. Screening of available resources c. Fixing Property d. Implementationarrow_forward
- Calculations to determine which – if any – additional investment opportunities should be undertaken. 1. If the projects are divisible 2. If the projects are not divisible .arrow_forwardWill you invest in the new released equipment, yes or no? Prove it with your solution/s.arrow_forwardWhich of the following step is followed immediately after evaluating the proposals under capital budgeting process? a.Screening of available resources b.Final approval c.Fixing Property d.Identification of Various investmentsarrow_forward
- Calculate the accounting rate of return for project A and B.arrow_forwardRequired: (a) Calculate the payback period, accounting rate of return and net present value of each of thepotential projects.(b) Explain which of the three potential investment projects should be undertaken. Yourexplanation should be based on the results of your calculations in part (a).|(c) Critically discuss the approaches to investment appraisal used in part (a). As part of yourcritical evaluation, identify what additional information might be used to improve the approachto investment appraisal.arrow_forwardProject Appraisal and Financing. We have studied the subject under the following headings . Please prepare a flowchart or a table where the features get highlighted. The purpose is to establish that you have understood the concepts in a broad manner. Selection of Project Time Value of Money Investment Criteria Project cash flows Project Risk Analysis Financing of Projectarrow_forward
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