Connect Access Card for Fundamental Accounting Principles
Connect Access Card for Fundamental Accounting Principles
23rd Edition
ISBN: 9781259693878
Author: John J Wild
Publisher: McGraw-Hill Education
Question
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Chapter 25, Problem 2BPSB
To determine

Introduction:

Net Cash Flows:

The difference between the cash inflows and outflows of the company over a period of time refers to net cash flows.

Payback Period:

The time required to cover the cost of investment refers to payback period. The company prefers shorter payback period that has less risks compared to longer payback period.

Requirement-1:

To compute:

The annual expected net cash flows of Project A and Project B of Aikman Company that indicates the financial stability of the company.

Expert Solution
Check Mark

Answer to Problem 2BPSB

Solution:

Net cash flows for Project A: $99,900

Net cash flows for Project B: $105,900

Explanation of Solution

The annual expected cash flows is computed by using the below formula:

Net Cash Flow=Net income+Depreciation Expense

Therefore the annual net cash flow of each project is calculated as below:

Project A:

Net income: $39,900

Depreciation Expense: $60,000

Net Cash Flow =$39,900+$60,000=$99,900

Depreciation for Project A:

Given,

Cost of Machinery/Investment: $240,000

Useful life of an Asset: 4 years

Annual Depreciation= $240,000=$0/4=$60,000

Project B:

Net income: $25,900

Depreciation Expense: $80,000

Net Cash Flow =$25,900+$80,000=$105,900

Depreciation for Project B:

Given,

Cost of Machinery/Investment: $240,000

Useful life of an Asset: 3 years

Annual Depreciation= $240,000=$0/3=$80,000

Depreciation expense is calculated by using the formula:

Annual Depreciation=Machinery CostSalvage Value/Useful life of Assets 

Conclusion

Hence the net cash flow for Project A is $99,900 and Project B is $105,900. Project B has the higher net cash flows compared to Project A that indicates Project B is financially sound than Project B. However Project A also has equally good cash flows.

To determine

Requirement-2:

To determine:

The payback period of Project A and Project B of Aikman Company to determine the investment risk of projects.

Expert Solution
Check Mark

Answer to Problem 2BPSB

Solution:

Payback period of Project A: 2.4 years

Payback period of Project B: 2.3 years

Explanation of Solution

The payback period is derived using the formula:

Payback period= Cost of Investment/Net Cash Flow 

Calculation of Payback Period for Project A:

Given,

Cost of Investment: $240,000

Net Cash Flow (As calculated): $99,900

Payback period =$240,000/$99,900=2.4 years

Calculation of Payback Period for Project B:

Given,

Cost of Investment: $240,000

Net Cash Flow (As calculated): $105,900

Payback period =$240,000/$105,900=2.3 years

Conclusion

The shortest payback period has less risk and longer payback period has high risk. Hence from the computation of payback period of both the projects, Project B has shorter period compared to Project A. However there is no much difference in the payback periods of both the projects that indicates both has less risk of investment.

To determine

Requirement-3:

To compute:

The accounting rate of return of Aikman Company for Project A and Project B to decide whether the company has to proceed with which project investment.

Expert Solution
Check Mark

Answer to Problem 2BPSB

Solution:

The accounting rate of return for Project A is 33.3%

The accounting rate of return for Project B is 21.6%

Explanation of Solution

Explanation:

The accounting rate of return is calculated using the formula:

Accounting rate of return=Average Net Profit or income/Average Investment*100 

Average investment of asset=Cost of Investment/2 

Project A:

Given,

Net income: $39,900

Average investment: $240,000/2=$120,000

Accounting rate of return= $39,900/$120,000*100=33.3%

Project B:

Given,

Net income: $25,900

Average investment: $240,000/2=$120,000

Accounting rate of return= $25,900/$120,000*100=21.58%

Conclusion

From the computation of accounting rate of return Project A has higher accounting rate of return compared to Project B. Hence the company can proceed with investment in Project A.

To determine

Requirement-4:

To determine:

The net present value of Project A and Project B using the discounted rate at 8% for the Aikman Company to analyse the profitability of a projected project.

Expert Solution
Check Mark

Answer to Problem 2BPSB

Solution:

The net present value at discounted rate of 8% of Project A is $90,879.

The net present value at discounted rate of 8% of Project B is $32,915.

Explanation of Solution

The present value of net cash flows at discounted rate is calculated by using the formula:

Net cash flows*Present value of $1 at 8% annuityAmount Invested

Project A:

Net cash flow as calculated for Project A is $99,900

Cost of investment is $240,000

Present value of 1 at 8% Annuity for 4 years is 3.3121 (Taken from the Annuity table)

The below table shows the calculation of net present value for Project A:

Connect Access Card for Fundamental Accounting Principles, Chapter 25, Problem 2BPSB , additional homework tip  1

Project B:

Net cash flow as calculated for Project A is $105,900

Cost of investment is $240,000

Present value of 1 at 8% Annuity for 3 years is 2.5771(Taken from the Annuity table)

The below table shows the calculation of net present value for Project B:

Connect Access Card for Fundamental Accounting Principles, Chapter 25, Problem 2BPSB , additional homework tip  2

Conclusion

From the computation of net present value of cash flows, Project A has the higher present value of $90,879 compared to Project B that indicates Project A is highly profitable.

To determine

Requirement-5:

To discuss:

The project that would be recommended to the management and the explanation for the recommendation.

Expert Solution
Check Mark

Answer to Problem 2BPSB

Solution:

Project A is recommended to the management.

Explanation of Solution

Project A has higher present value of cash flows of $90,879 and accounting rate of return

of 33.3% when compared to Project B.

Conclusion

Hence comparing the net present value and accounting rate of return of both the projects, the Project A is highly profitable to proceed with.

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Chapter 25 Solutions

Connect Access Card for 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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