Connect Access Card For Fundamental Accounting Principles
Connect Access Card For Fundamental Accounting Principles
24th Edition
ISBN: 9781260158526
Author: John J Wild
Publisher: McGraw-Hill Education
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Chapter 26, Problem 6APSA
To determine

Concept Introduction:

Payback Period:

Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:

  Payback Period= Initial InvestmentAnnual Cash inflow

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  NPV = Present value of cash inflows  Present value of cash out flows

Requirement-1:

To Calculate:

Payback period for the project

Expert Solution
Check Mark

Answer to Problem 6APSA

Payback period for the project is 2.4 years

Explanation of Solution

Payback period for the project is calculated as follows;

    Cash Flows Accumulated Cash Flows
    Period 1 $ 125,000 $ 125,000
    Period 2 $94,000 $ 219,000
    Period 3 $75,000 $ 294,000
    Period 4 $52,000 $ 346,000
    Period 5 $47,000 $ 393,000
    Payback Period = 2 Years + (250000-219000)/75000 = 2.4 Years
To determine

Concept Introduction:

Payback Period:

Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:

  Payback Period= Initial InvestmentAnnual Cash inflow

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  NPV = Present value of cash inflows  Present value of cash out flows

Requirement-2:

To Calculate:

Breakeven time for the investment

Expert Solution
Check Mark

Answer to Problem 6APSA

Breakeven time for the investment is 3.1 Years

Explanation of Solution

Breakeven time for the investment is calculated as follows:

    Cash Flows PV of $1 (10%)PV Accumulated PV
    A BC=A*B
    Period 1 $ 125,000 0.9091 $ 113,637.50 $ 113,637.50
    Period 2 $94,000 0.8264 $ 77,681.60 $ 191,319.10
    Period 3 $75,000 0.7513 $ 56,347.50 $ 247,666.60
    Period 4 $52,000 0.6830 $ 35,516.00 $ 283,182.60
    Period 5 $47,000 0.6209 $ 29,182.30 $ 312,364.90
    Breakeven Time = 3 Years +(250000-247666.6)/35516 =3.1 Years
To determine

Concept Introduction:

Payback Period:

Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:

  Payback Period= Initial InvestmentAnnual Cash inflow

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  NPV = Present value of cash inflows  Present value of cash out flows

Requirement-3:

To Calculate:

The Net Present Value of the investment

Expert Solution
Check Mark

Answer to Problem 6APSA

The Net Present Value of the investment is $62,364.90

Explanation of Solution

The Net Present Value of the investment is calculated as follows:

    Cash Flows PV of $1 (10%)PV
    A BC=A*B
    Period 1 $ 125,000 0.9091 $ 113,637.50
    Period 2 $94,000 0.8264 $ 77,681.60
    Period 3 $75,000 0.7513 $ 56,347.50
    Period 4 $52,000 0.6830 $ 35,516.00
    Period 5 $47,000 0.6209 $ 29,182.30
    Total Present value $ 312,364.90
    Less: Initial investment $ (250,000.00)
    Net Present value $ 62,364.90
To determine

Concept Introduction:

Payback Period:

Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:

  Payback Period= Initial InvestmentAnnual Cash inflow

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  NPV = Present value of cash inflows  Present value of cash out flows

Requirement-4:

If the management should invest in the project

Expert Solution
Check Mark

Answer to Problem 6APSA

Yes, the management should invest in the project.

Explanation of Solution

The Net Present Value of the investment is calculated as follows:

    Cash Flows PV of $1 (10%)PV
    A BC=A*B
    Period 1 $ 125,000 0.9091 $ 113,637.50
    Period 2 $94,000 0.8264 $ 77,681.60
    Period 3 $75,000 0.7513 $ 56,347.50
    Period 4 $52,000 0.6830 $ 35,516.00
    Period 5 $47,000 0.6209 $ 29,182.30
    Total Present value $ 312,364.90
    Less: Initial investment $ (250,000.00)
    Net Present value $ 62,364.90

The Net Present Value of the investment is Positive $62,364.90; hence the management should invest in the project.

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Chapter 26 Solutions

Connect Access Card For Fundamental Accounting Principles

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