FUNDAMENTAL ACCT PRIN CONNECT ACCESS
FUNDAMENTAL ACCT PRIN CONNECT ACCESS
24th Edition
ISBN: 9781266494604
Author: Wild
Publisher: MCG
Question
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Chapter 26, Problem 6BPSB
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 6BPSB

Payback period for the project is 1.9 years

Explanation of Solution

Payback period for the project is calculated as follows;

    Cash Flows Accumulated Cash Flows
    Period 1 $ 450,000 $ 450,000
    Period 2 $ 400,000 $ 850,000
    Period 3 $ 350,000 $1,200,000
    Period 4 $ 300,000 $1,500,000
    Payback Period = 1 Year + (800000-450000)/400000 = 1.9 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 6BPSB

Breakeven time for the investment is 2.2 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 $ 450,000 0.9091 $ 409,095.00 $ 409,095.00
    Period 2 $ 400,000 0.8264 $ 330,560.00 $ 739,655.00
    Period 3 $ 350,000 0.7513 $ 262,955.00 $ 1,002,610.00
    Period 4 $ 300,000 0.6830 $ 204,900.00 $ 1,207,510.00
    Breakeven Time = 2 Years +(800000-739655)/262955 =2.2 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 6BPSB

The Net Present Value of the investment is $407,510

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 $ 450,000 0.9091 $ 409,095
    Period 2 $ 400,000 0.8264 $ 330,560
    Period 3 $ 350,000 0.7513 $ 262,955
    Period 4 $ 300,000 0.6830 $ 204,900
    Total Present value $1,207,510
    Less: Initial investment $(800,000)
    Net Present value $ 407,510
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 6BPSB

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 $ 450,000 0.9091 $ 409,095
    Period 2 $ 400,000 0.8264 $ 330,560
    Period 3 $ 350,000 0.7513 $ 262,955
    Period 4 $ 300,000 0.6830 $ 204,900
    Total Present value $1,207,510
    Less: Initial investment $(800,000)
    Net Present value $ 407,510

The Net Present Value of the investment is $407,510; hence the management should invest in the project.

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-5:

If the reason of differences in answers as compared with the previous situation

Expert Solution
Check Mark

Answer to Problem 6BPSB

The reason of differences in answers as compared with the previous situation is the cash flow pattern.

Explanation of Solution

The reason of differences in answers as compared with the previous situation is the cash flow pattern. In the previous case, the higher cash flows are occurring in later years but in this situation the cash flows are higher in initial years of the project.

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