Financial And Managerial Accounting
15th Edition
ISBN: 9781337902663
Author: WARREN, Carl S.
Publisher: Cengage Learning,
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Textbook Question
Chapter 26, Problem 3PB
First United Bank Inc. is evaluating three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows:
Instructions
- 1. Assuming that the desired
rate of return is 15%, prepare a net present value analysis for each project. Use the present value table appearing in Exhibit 2 of this chapter. - 2. Determine a present value index for each project. (Round to two decimal places.)
- 3. Which project offers the largest amount of present value per dollar of investment? Explain.
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The following table contains information about four projects in which Reynolds Corporation has the opportunity to invest. This information is based on estimates that different
managers have prepared about their potential project.
(Click the icon to view the projects information.)
Requirements
1. Rank the four projects in order of preference by using the
a. net present value.
d. payback period.
b. project profitability index.
e. accounting rate of return.
c. internal rate of return.
2. Which method(s) do you think is best for evaluating capital investment projects in general? Why?
Data table
Requirement 1. Rank the projects in order of preference.
(a)
(b)
Net Present Profitability
Value
Index
(c)
Internal Rate
of Return
(d)
Payback
Period
(e)
Net
Internal
Payback Accounting
Accounting
of Retur
5
Investment Present Life of Rate of Profitability Period in
Project Required Value Project Return
Project A $205,000 $ 61,770
Rate of
Index
Years
Return
24%
1.30
2.77
19%
1st preferred
Project B…
Use the information provided to answer the questions.5.1 Use the information provided below to calculate the following. Where applicable, use the presentvalue tables provided in APPENDICES 1 and 2 that appear after QUESTION 5.5.1.1 Calculate the Payback Period of Project A (expressed in years, months and days). 5.1.2Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to twodecimal places). 5.1.3 Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). 5.1.4 Use your answers from question 5.1.3 to recommend the project that should be chosen. Motivateyour choice.
Note: Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear
after QUESTION 5.
REQUIRED
Use the information given below to calculate the following:
5.1 Payback Period of both projects (expressed in years, months and days)
5.2
Net Present Value of both projects
5.3 Accounting Rate of Return (on average investment) of Project Ron (expressed to two
decimal places)
Internal Rate of Return (IRR) of Project Hob. Your answer must include the calculation
of two net present values as well as the determination of the IRR expressed to two
decimal places.
INFORMATION
5.4
Trendy Manufacturers is investigating the possibility of investing in one of two projects. The net cash flows
for the two competing investment opportunities are as follows:
Year
1
2
3
4
5
Project Ron
R560 000
R500 000
R400 000
R200 000
R50 000
Project Hob
R340 000
R340 000
R340 000
R340 000
R340 000
Each project requires an initial investment of R1 200 000. A scrap value of R50 000 (not included…
Chapter 26 Solutions
Financial And Managerial Accounting
Ch. 26 - What are the principal objections to the use of...Ch. 26 - Discuss the principal limitations of the cash...Ch. 26 - Why would the average rate of return differ from...Ch. 26 - Prob. 4DQCh. 26 - Prob. 5DQCh. 26 - Prob. 6DQCh. 26 - Prob. 7DQCh. 26 - Two projects have an identical net present value...Ch. 26 - Prob. 9DQCh. 26 - What are the major disadvantages of the use of the...
Ch. 26 - Prob. 11DQCh. 26 - Prob. 12DQCh. 26 - Average rate of return Determine the average rate...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Prob. 3BECh. 26 - Internal rate of return A project is estimated to...Ch. 26 - Net present valueunequal lives Project 1 requires...Ch. 26 - Average rate of return The following data are...Ch. 26 - Average rate of returncost savings Maui...Ch. 26 - Average rate of returnnew product Hana Inc. is...Ch. 26 - Determine cash flows Natural Foods Inc. is...Ch. 26 - Prob. 5ECh. 26 - Cash payback method Lily Products Company is...Ch. 26 - Prob. 7ECh. 26 - Prob. 8ECh. 26 - Net present value methodannuity for a service...Ch. 26 - Net present value methodannuity Jones Excavation...Ch. 26 - Prob. 11ECh. 26 - Prob. 12ECh. 26 - Net present value method and present value index...Ch. 26 - Average rate of return, cash payback period, net...Ch. 26 - Prob. 15ECh. 26 - Internal rate of return method The internal rate...Ch. 26 - Prob. 17ECh. 26 - Internal rate of return methodtwo projects Munch N...Ch. 26 - Net present value method and internal rate of...Ch. 26 - Identify error in capital investment analysis...Ch. 26 - Prob. 21ECh. 26 - Prob. 22ECh. 26 - Prob. 1PACh. 26 - Cash payback period, net present value method, and...Ch. 26 - Prob. 3PACh. 26 - Net present value method, internal rate of return...Ch. 26 - Alternative capital investments The investment...Ch. 26 - Capital rationing decision for a service company...Ch. 26 - Prob. 1PBCh. 26 - Prob. 2PBCh. 26 - Net present value method, present value index, and...Ch. 26 - Net present value method, internal rate of return...Ch. 26 - Prob. 5PBCh. 26 - Clearcast Communications Inc. is considering...Ch. 26 - San Lucas Corporation is considering investment in...Ch. 26 - Assume San Lucas Corporation in MAD 26-1 assigns...Ch. 26 - Prob. 3MADCh. 26 - Prob. 4MADCh. 26 - Home Garden Inc. is considering the construction...Ch. 26 - Assume Home Garden Inc. in MAD 26-5 assigns the...Ch. 26 - Ethics in Action Danielle Hastings was recently...Ch. 26 - Prob. 4TIFCh. 26 - Prob. 5TIFCh. 26 - Prob. 6TIFCh. 26 - Foster Manufacturing is analyzing a capital...Ch. 26 - Staten Corporation is considering two mutually...Ch. 26 - Prob. 3CMACh. 26 - Prob. 4CMA
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- Consider the following project-balance profiles for proposed investment projects, where the project-balance figures are rounded to the nearest dollar: (a) Compute the net present worth of each investment.(b) Determine the project balance at the end of period 2 for Project C ifA2 = $500.(c) Determine the cash flows for each project.(d) Identify the net future worth of each project.arrow_forwardPlease answer question 5.3 and 5.4arrow_forwardCalculate the Payback Period of Project A (expressed in years, months and days) Calculate the Accounting Rate of Return on average investment of Project A (expressedto two decimal places). Calculate the Benefit Cost Ratio of both projects (expressed to two decimal places). Which project should be chosen? Why? Calculate the Internal Rate of Return of Project B (expressed to two decimal places). Youranswer must include two net present value calculations (using consecutiverates/percentages) and interpolation.arrow_forward
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