Fundamental Accounting Principles
Fundamental Accounting Principles
23rd Edition
ISBN: 9781259536359
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 25, Problem 29QS
To determine

Concept Introduction:

Capital budgeting is a planning process used to know whether a long term investment or options like to keep the old machine will be profitable or not involving factors like present value factors.

There are many capital budgeting techniques. The two techniques that will be discussed here is –

1. Payback period of the investment

2. Net present value of the investment

1. Payback period –

Payback period of the investment is calculated as under –

Payback period =Initial InvestmentAnnual net cash inflow

This is how we calculate payback period in case of even annual net cash inflows.

2. Net present value –

The net present value is calculated as under –

Net present value =Total present value of cash inflowsInitial Investment

Initial investment can be defined as the cash outlay incurred at the beginning of the product and total present value of cash inflows is computed as under (in case of even cash inflows) –

Total present value of cash inflows=Annual net cash inflows X Present value of Annuity (PVAF) at a given rate for a given number of years 

This is how we calculate net present value of an investment.

Requirement 1

To compute:

Payback period of Investment

Expert Solution
Check Mark

Answer to Problem 29QS

Solution:

Payback period of Investment = 5 years

Explanation of Solution

Payback period of the investment is calculated as under –

Payback period =Initial InvestmentAnnual net cash inflow

Given,

• Initial investment = $ 80 million

• Annual net cash flows = $ 16 million

Payback period =Initial InvestmentAnnual net cash inflowPayback period =$80million$16milllionPayback period =5years

Conclusion

Thus, the payback period of the investment = 5 years.

To determine

Requirement 2

To compute:

Net present value of the investment.

Expert Solution
Check Mark

Answer to Problem 29QS

Solution:

Net present value of the investment = $11.952 million

Explanation of Solution

Given,

Initial investment = $ 80 million

Total present value of cash inflows will be calculated as under –

Total present value of cash inflows=Annual net cash inflows X Present value of Annuity (PVAF) at a given rate for a given number of years 

Now, for present value of cash inflows –

Given –

• Annual net cash inflow = $ 16 million

• Number of years = 8 years

• Interest rate or required rate = 8%

Total present value of cash inflows =

Total present value of cash inflows=Annual net cash inflows X Present value of Annuity (PVAF) at a given rate for a given number of years 

Total present value of cash inflows=$16millionX5.747Total present value of cash inflows=$91.952million  

Net present value of the investment will be calculated as under –

Net present value =Total present value of cash inflowsInitial Investment

Initial investment = $ 80 million

Total present value of cash inflows = $ 91.952 million

Net present value = $ 91.952 million - $ 80 millionNet present value =$11.952million

Conclusion

Thus, the net present value of the investment = $ 11.952 million.

Note – The following PVAF table has been used for referring PVAF @ 8 % for 8 years.

Fundamental Accounting Principles, Chapter 25, Problem 29QS

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Chapter 25 Solutions

Fundamental Accounting Principles

Ch. 25 - Prob. 11DQCh. 25 - Prob. 12DQCh. 25 - Prob. 13DQCh. 25 - Prob. 14DQCh. 25 - Prob. 15DQCh. 25 - Prob. 1QSCh. 25 - Prob. 2QSCh. 25 - Prob. 3QSCh. 25 - Prob. 4QSCh. 25 - Prob. 5QSCh. 25 - Prob. 6QSCh. 25 - Prob. 7QSCh. 25 - Prob. 8QSCh. 25 - Prob. 9QSCh. 25 - Prob. 10QSCh. 25 - Prob. 11QSCh. 25 - Prob. 12QSCh. 25 - Prob. 13QSCh. 25 - Prob. 14QSCh. 25 - Prob. 15QSCh. 25 - Prob. 16QSCh. 25 - Relevant costs C1 Label each of the following...Ch. 25 - Prob. 18QSCh. 25 - Prob. 19QSCh. 25 - Prob. 20QSCh. 25 - Prob. 21QSCh. 25 - Sell or process further Al Holmes Company produces...Ch. 25 - Prob. 23QSCh. 25 - Prob. 24QSCh. 25 - Prob. 25QSCh. 25 - Prob. 26QSCh. 25 - Prob. 27QSCh. 25 - Prob. 28QSCh. 25 - Prob. 29QSCh. 25 - Prob. 30QSCh. 25 - Prob. 31QSCh. 25 - Prob. 32QSCh. 25 - Prob. 1ECh. 25 - Prob. 2ECh. 25 - Prob. 3ECh. 25 - Prob. 4ECh. 25 - Prob. 5ECh. 25 - Prob. 6ECh. 25 - Prob. 7ECh. 25 - Prob. 8ECh. 25 - Prob. 9ECh. 25 - Prob. 10ECh. 25 - Prob. 11ECh. 25 - Prob. 12ECh. 25 - Prob. 13ECh. 25 - Prob. 14ECh. 25 - Prob. 15ECh. 25 - Exercise 25-16 Relevant costs C1 Complete the...Ch. 25 - Prob. 17ECh. 25 - Prob. 18ECh. 25 - Prob. 19ECh. 25 - Prob. 20ECh. 25 - Prob. 21ECh. 25 - Prob. 22ECh. 25 - Prob. 23ECh. 25 - Prob. 24ECh. 25 - Prob. 25ECh. 25 - Prob. 26ECh. 25 - Prob. 27ECh. 25 - Prob. 28ECh. 25 - Prob. 29ECh. 25 - Prob. 1APSACh. 25 - Prob. 2APSACh. 25 - Prob. 3APSACh. 25 - Prob. 4APSACh. 25 - Prob. 5APSACh. 25 - Prob. 6APSACh. 25 - Prob. 1BPSBCh. 25 - Prob. 2BPSBCh. 25 - Prob. 3BPSBCh. 25 - Prob. 4BPSBCh. 25 - Prob. 5BPSBCh. 25 - Prob. 6BPSBCh. 25 - Prob. 25SPCh. 25 - Prob. 1BTNCh. 25 - Prob. 2BTNCh. 25 - Prob. 3BTNCh. 25 - Payback period, accounting rate of return, net...Ch. 25 - Many companies must determine whether to...Ch. 25 - BTN 25-6 Break into teams and identify four...Ch. 25 - Prob. 7BTNCh. 25 - Prob. 8BTNCh. 25 - B TN 25-9 Samsung's 2016 Corporate Sustainability...
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