Survey Of Accounting
5th Edition
ISBN: 9781259631122
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 16, Problem 6E
Exercise 10-6A Determining
Aaron Heath is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Aaron expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected
| Year of Operation | ||
| 2019 | $25,000 | $12,000 |
| 2020 | 29,000 | 16,000 |
| 2021 | 32,000 | 18,000 |
| 2022 | 32,000 | 18,000 |
In addition to these cash flows, Aaron expects to pay $25,000 for the equipment. He also expects to pay $4,000 for a major overhaul and updating of the equipment at the end of the second year of operation. The equipment is expected to have a $4,000 salvage value and a four-year useful life. Aaron desires to earn a
Required
Round your computations to two decimal points.
- a. Calculate the net present value of the investment opportunity.
- b. Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return and whether it should be accepted.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Aaron Heath is seeking part-time employment while he attends school. He is considering
purchasing technical equipment that will enable him to start a small training services company that
will offer tutorial services over the Internet. Aaron expects demand for the service to grow rapidly in
the first two years of operation as customers learn about the availability of the Internet assistance.
Thereafter, he expects demand to stabilize. The following table presents the expected cash flows:
Year of
Operation
Year 1
Cash Inflow Cash Outflow
$14,400
Year 2
19,200
Year 3
Year 4
21,100
21,100
$ 9,100
11,400
12,900
12,900
In addition to these cash flows, Aaron expects to pay $21,500 for the equipment. He also expects
to pay $2,900 for a major overhaul and updating of the equipment at the end of the second year of
operation. The equipment is expected to have a $1,700 salvage value and a four year useful life.
Aaron desires to earn a rate of return of 9 percent. (PV of $1 and PVA of $1) (Use…
Aaron Heath is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will
enable him to start a small training services company that will offer tutorial services over the Internet. Aaron expects demand for the
service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter,
he expects demand to stabilize. The following table presents the expected cash flows:
Year of
Operation
Year 1
Cash Inflow Cash Outflow
$13,100
Year 2
19,200
Year 3
Year 4
22,000
22,000
$ 8,700
11,700
12,800
12,800
In addition to these cash flows, Aaron expects to pay $20,800 for the equipment. He also expects to pay $3,600 for a major overhaul
and updating of the equipment at the end of the second year of operation. The equipment is expected to have a $1,500 salvage value
and a four-year useful life. Aaron desires to earn a rate of return of 10 percent. (PV of $1 and PVA of $1) (Use…
Homework, Chapter 26
Determine Cash Flows
Natural Foods Inc. is planning to invest in new manufacturing equipment to make a new
garden tool. The new garden tool is expected to generate additional annual sales of
5,600 units at $38 each. The new manufacturing equipment will cost $91,000 and is
expected to have a 10-year life and a $7,000 residual value. Selling expenses related to
the new product are expected to be 4% of sales revenue. The cost to manufacture the
product includes the following on a per-unit basis:
Direct labor
$6.50
Direct materials
21.00
Fixed factory overhead-depreciation
1.50
Variable factory overhead
3.30
Total
$32.30
Determine the net cash flows for the first year of the project, Years 2-9, and for the last
year of the project. Use the minus sign to indicate cash outflows. Do not round your
intermediate calculations but, if required, round your final answers to the nearest dollar.
Natural Foods Inc.
Net Cash Flows
Year 1 Years 2-9 Last Year
Initial investment…
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
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
- Homework, Chapter 26 Cash Payback Period for a Service Company Jane's Clothing Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of $150,000 and each with an eight-year life and expected total net cash flows of $240,000. Location 1 is expected to provide equal annual net cash flows of $30,000, and Location 2 is expected to have the following unequal annual net cash flows: Year 1 $68,000 Year 2 51,000 Year 3 31,000 Year 4 29,000 Year 5 22,000 Year 6 16,000 Year 7 13,000 Year 8 10,000 Determine the cash payback period for both location proposals. Location 1 years Location 2 yearsarrow_forwardView Policies Current Attempt in Progress Linda is hoping that an investment of $30,000 will provide additional revenue to the store of $18,000 per year for 3 years. Her partner in crime, Robert, is confident that a larger investment of $40,200 will be required to bring in a steady flow of $22,800 in new revenue per year for 3 years. Determine the discounted payback period for each investment (using before-tax cash flows). The company's required rate of return is 8%. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answers to 2 decimal places e.g. 15.25.) Click here to view the factor table Discounted payback period Linda years Whose investment appears to better use the company's resources? Robert yearsarrow_forwardEconomics GO GREEN Recycling Company starts its recycling business today. It recycles paper, cardboard, aluminum, and glass. The initial investment for this business is $510,000. The net cash flow at the end of the first year of business is forecast to be only $10,000. But it is expected that the net cash flow will increase at a rate of $40,000 per year starting from the end of Year 2. (а) Draw a cash flow diagram for the first 5 years. (b) What is the present worth of ALL the cashflows for the first 5 years at an interest rate of 10% per year? Round off your final answer to the nearest integer. (c) If GO GREEN sells its business for $710,000 at the end of Year 5, can we say this business has achieved an internal rate of return greater than 20% per year? Why?arrow_forward
- Question 10 Teal's business is growing and she is considering expansion. There are two possible options for expanding the business. The first is to build an extension to the existing business premises. The second is to open an additional premises. Research into these two options has resulted in the following estimates for the next 5 years: Projected Cash Flows Year O (At start) Extension £000 New Premises £000 Cash outflow (175) (269) 1 Cash inflow 52 62 2 Cash inflow 55 67 3 Cash inflow 64 73 4 Cash inflow 65 80 5 Cash inflow 70 82 5 Extra proceeds on sale of business 100 170 Teal requires a return of at least 10% from any project undertaken and whichever option is chosen, she plans to sell the entire business in 5 years' time. Assume that the cash flows arise at the end of each year and ignore cash flows arising after this five- year period. Calculate: (i) The payback period for each of the two options. (ii) The net present value for each of the two options. (ii) Based on your…arrow_forwardQuestion 6 Compute the payback period for the following data: Jones Co. is considering an investment that requires immediate payment of $28,000 and provides expected cash inflows of $7,000 annually for four years. Show your work.arrow_forwardQUESTION 15 Ahmed has recently invested his money and is expecting the following cash flows at the end of each of the next three years, 550, 712 and 521 respectfully. This will be followed with a constant return of 681 from year 4 till 6. Using a discount rate of 5% find the PV of this cash flow. Click Save and Submit to save and submit, Click Save All Answers to save all answers.arrow_forward
- View Policies Current Attempt in Progress Pharoah's Soft Lemonade is starting to develop a new product for which the cash fixed costs are expected to be $90,000. The projected EBIT is $100,000, and the Accounting DOL is expected to be 2.1. What is the Cash Flow DOL? (Round answer to 2 decimal places, e.g. 15.25.) Cash Flow DOL eTextbook and Media Save for Later Attempts: 0 of 3 used Submit Answer G.. étvarrow_forwardProblem 6 - Shirt Corporation is considering purchasing equipment that costs $60,000 and is expected to provide the following cash inflows over its five-year useful life: Year Cash Inflow 1 $18,000 2 $22,000 3 $24,000 4 $16,000 5 $ 9,000 Calculate the payback period for this investment.arrow_forwardProblem 5-7 Calculating Profitability Index Vince plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $425,000, to be paid immediately. Vince expects aftertax cash Inflows of $92,000 annually for eight years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash Inflow occurs at the end of the first year. Assume the required return is 12 percent. What is the project's PI? (Do not round Intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)arrow_forward
- Problem 5-7 Calculating Profitability Index Vince plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $480,000, to be paid immediately. Vince expects aftertax cash inflows of $103,000 annually for eight years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 13 percent. What is the project's Pl? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) IPIarrow_forwardProblem 13-21 Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Windy Acres Yearly Aftertax Cash Inflow 20,000 25,000 40,000 55,000 60,000 Coefficient of Variation 0-0.35 0.35-0.40 0.40-0.50 Over 0.50 Probability 0.2 0.2 0.2 Windy Acres Hillcrest Apartments 0.2 0.2 Mr. Backster is likely to hold the apartment complex of his choice for about 20 years and will use this period for decision-making purposes. Either apartment can be purchased for $140,000. Mr. Backster uses a risk-adjusted discount rate approach when evaluating Investments. His scale is related to the coefficient of variation (for other types of investments, he also considers other measures). O Windy Acres O Hillcrest O Both O None Discount Rate 7% 10 14 not considered Hillcrest Apartments Yearly Aftertax Cash Inflow…arrow_forwardQuestion content area top Part 1 Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars): LOADING... . a. What are the incremental earnings for this project for years 1 and 2? (Note: Assume any incremental cost of goods sold is included as part of operating expenses.) b. What are the free cash flows for this project for years 1 and 2?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License