1 (a)
NPV is a technique used in capital budgeting to see the project is profitable for the company or not. The acceptance of the project is based on the result of NPV as if it is positive then it should be selected and in the case of negative NPV it should be rejected.
Payback period:
It is ascertained when cost of project is divided by the annual
Discounted payback period:
Discounted payback period is the time period in which the company earns back their investment. It is use to determine whether to take this project or not. In this,
IRR is a capital budgeting technique that involves the time value of money concept. The IRR percentage gives the idea about the profitability arises from an investment. The IRR of a project is calculated with the help of NPV calculations.
To compute: The NPV.
1 (b)
To compute: Payback period.
1 (c)
To compute: The discounted payback period
1 (d)
To compute: IRR
2.
To explain: The comparison and contrast the capital budgeting method.
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Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
- Postman Company is considering two independent projects. One project involves a new product line, and the other involves the acquisition of forklifts for the Materials Handling Department. The projected annual operating revenues and expenses are as follows: Required: Compute the after-tax cash flows of each project. The tax rate is 40 percent and includes federal and state assessments.arrow_forwardWalker Inc. is considering the purchase of new equipmentthat will automate production and thus reduce labor costs. Walker made the following estimatesrelated to the new machinery: Cost of the equipment $120,000Reduced annual labor costs $40,000Estimated life of equipment 5 yearsTerminal disposal value $0After-tax cost of capital 8%Tax rate 25%Assume depreciation is calculated on a straight-line basis for tax purposes. Assume all cash flows occur atyear-end except for initial investment amounts. Q. Calculate payback period?arrow_forwardSeyLamb Footwear is considering the purchase of a new leather stitching machine to replace an existing machine. Assumed a required rate of return of 10% and a 50% tax rate. The company has a policy of charging depreciation on straight line method. No capital gain taxes are assumed. The following information relates to the project. Project Kuk Project Kak Initial Cash outlay 100,000 140,000 Salvage value Nil 20,000 Earnings before depreciation and taxes: Year 1 25,000 40,000 2 25,000 40,000 3 25,000 50,000 4 25,000 60,000 5 25,000 20,000 Required For each project calculate: (i) Pay-back Period (ii) Internal Rate of Return (iii)Profitability Indearrow_forward
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