Horngren's Accounting (12th Edition)
12th Edition
ISBN: 9780134486444
Author: Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura
Publisher: PEARSON
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Textbook Question
Chapter 26, Problem P26.31APGA
Using payback, APR,
Learning Objectives 2,4
- Plan A 1.09 profitability index; Plan B $(1,793,250) NPV
Hill Company operates a chain of sandwich shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,700,000. Expected annual net
Requirements
- Compute the payback, the ARR, the NPV, and the profitability index of these two plans.
- What are the strengths and weaknesses of these capital budgeting methods?
- Which expansion plan should Hill Company choose? Why?
- Estimate Plan A's
IRR . How does the IRR compare with the company's requiredrate of return ?
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You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 13 percent. Use Appendix B for
an approximate answer but calculate your final answer using the formula and financial calculator methods.
Project X (Videotapes of
the Weather Report)
($18,000 Investment)
Year
Cash Flow
1
$ 9,000
2
7,000
8,000
7,600
3
4
Profitability index
Project Y (Slow-Motion
Replays of Commercials)
($38,000 Investment)
Cash Flow
$ 19,000
12,000
13,000
15,000
a. Calculate the profitability index for project X.
Note: Do not round intermediate calculations and round your answer to 2 decimal places.
Year
1
2
3
4
Profitability index
b. Calculate the profitability index for project Y.
Note: Do not round intermediate calculations and round your answer to 2 decimal places.
c. Which project would you select based on the profitability index?
O Project X
Project Y
Project Y
Manager Cafe "Blue Sky" is considering investing 2 (two) projects. Project X is an investment of $ 75,000 to replace a working but outdated cooling equipment. Project Y is a $ 1,500,000 investment to expand the dining facilities. Relevant cash flow data for the two projects over the expected 2 years are as follows:
Project X
Year 1
Year 2
Probability
Cash Flow
Probability
Cash Flow
0.16
$0
0.08
$0
0.66
$50000
0.82
$50000
0.18
$100000
0.10
$100000
Project Y
Year 1
Year 2
Probability
Cash Flow
Probability
Cash Flow
0.50
$0
0.13
$0
0.50
$200000
0.74
$100000
0.13
$200000
Calculate: Expected value, standard deviation, and coefficient of variation for cash flows from each project.
Compute: Risk-adjusted NPV for each project using a cost of capital of 15% for riskier projects, and 12%…
Chapter 26 Solutions
Horngren's Accounting (12th Edition)
Ch. 26 - Prob. 1QCCh. 26 - Prob. 2QCCh. 26 - Prob. 3QCCh. 26 - Prob. 4QCCh. 26 - Prob. 5QCCh. 26 - Prob. 6QCCh. 26 - Prob. 7QCCh. 26 - The IRR is Learning Objective 4 the interest rate...Ch. 26 - Prob. 9QCCh. 26 - Ian Corp, is considering two expansion projects....
Ch. 26 - Prob. 1RQCh. 26 - Describe the capital budgeting process.Ch. 26 - Prob. 3RQCh. 26 - Prob. 4RQCh. 26 - Prob. 5RQCh. 26 - Prob. 6RQCh. 26 - What is the payback method of analyzing capital...Ch. 26 - Prob. 8RQCh. 26 - Prob. 9RQCh. 26 - What is the decision rule for payback?Ch. 26 - Prob. 11RQCh. 26 - What is the accounting rate of return?Ch. 26 - How is ARR calculated?Ch. 26 - Prob. 14RQCh. 26 - Prob. 15RQCh. 26 - What is an annuity? How does it differ from a lump...Ch. 26 - Prob. 17RQCh. 26 - Prob. 18RQCh. 26 - Prob. 19RQCh. 26 - Prob. 20RQCh. 26 - Prob. 21RQCh. 26 - Prob. 22RQCh. 26 - Prob. 23RQCh. 26 - Prob. 24RQCh. 26 - Prob. 25RQCh. 26 - Prob. 26RQCh. 26 - Prob. 27RQCh. 26 - Prob. 28RQCh. 26 - Prob. 29RQCh. 26 - Prob. 30RQCh. 26 - Prob. S26.1SECh. 26 - Prob. S26.2SECh. 26 - Prob. S26.3SECh. 26 - Prob. S26.4SECh. 26 - Prob. S26.5SECh. 26 - Prob. S26.6SECh. 26 - Prob. S26.7SECh. 26 - Using the payback and ARR methods to make capital...Ch. 26 - Prob. S26.9SECh. 26 - Prob. S26.10SECh. 26 - Prob. S26.11SECh. 26 - Prob. S26.12SECh. 26 - Prob. S26.13SECh. 26 - Prob. S26.14SECh. 26 - Prob. S26.15SECh. 26 - Prob. E26.16ECh. 26 - Prob. E26.17ECh. 26 - Prob. E26.18ECh. 26 - Prob. E26.19ECh. 26 - Prob. E26.20ECh. 26 - Using ARE to make capital investment decisions...Ch. 26 - Prob. E26.22ECh. 26 - Prob. E26.23ECh. 26 - Prob. E26.24ECh. 26 - Prob. E26.25ECh. 26 - Prob. E26.26ECh. 26 - Prob. E26.27ECh. 26 - Prob. E26.28ECh. 26 - Prob. P26.29APGACh. 26 - Prob. P26.30APGACh. 26 - Using payback, APR, NPV, IPP, and profitability...Ch. 26 - Using payback, ARP, and NPV with unequal cash...Ch. 26 - Prob. P26.33APGACh. 26 - Prob. P26.34BPGBCh. 26 - Prob. P26.35BPGBCh. 26 - Using payback, APR, NPV, IRR, and profitability...Ch. 26 - Prob. P26.37BPGBCh. 26 - Prob. P26.38BPGBCh. 26 - Using Excel for capital budgeting calculations...Ch. 26 - Prob. P26.40CPCh. 26 - Prob. 1CPCh. 26 - Prob. 2CPCh. 26 - Prob. 3CPCh. 26 - Prob. 4CPCh. 26 - Prob. 26.1TIATCCh. 26 - Prob. 26.1EICh. 26 - Prob. 26.1FC
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