ACCT 2102 Chapter Notes - Chapter 11: Discounted Cash Flow, Cash Flow, Payback Period
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Capital Budgeting | |||||||||||
Glacier Creek Textiles is planning to purchase new manufacturing equipment. The equipment has an acquisition cost of $100,000, an estimated useful life of five years and no residual value. The company uses a 12% rate of return to evaluate capital projects. The cash flows for the five years: | |||||||||||
Year | Net Cash Outflows | Net Cash Inflows | |||||||||
Amount invested | |||||||||||
0 | ($100,000) | ||||||||||
1 | 25,000 | ||||||||||
2 | 29,000 | ||||||||||
3 | 26,000 | ||||||||||
4 | 28,000 | ||||||||||
5 | 35,000 | ||||||||||
Requirements | |||||||||||
1. Compute the accounting rate of return. | |||||||||||
2. Compute the net present value of the investment using Excel's PV function. | |||||||||||
3. Compute the net present value of the investment using Excel's NPV function. | |||||||||||
4. Compute the profitability index, rounded to two decimal places. | |||||||||||
5. Compute the internal rate of return of the investment using Excel's IRR function. Display to two decimal places, but do not round. | |||||||||||
Excel Skills | |||||||||||
1. Function PV | |||||||||||
2. Function NPV | |||||||||||
3. Function IRR | |||||||||||
Evaluate Glacier Creek Textiles' new manufacturing equipment. | ||||||
Data | ||||||
Annual discount Rate | 0.12 | |||||
Cash Flow Year 0 (Cost) | (100,000) | |||||
Cash Flow Year 1 | 25,000 | |||||
Cash Flow Year 2 | 29,000 | |||||
Cash Flow Year 3 | 26,000 | |||||
Cash Flow Year 4 | 28,000 | |||||
Cash Flow Year 5 | 35,000 | |||||
Useful Life in years | 5 | |||||
Residual value | 0 | |||||
Requirement 1 | Compute the Accounting Rate of Return | |||||
Average annual operating income | Average amount invested | Accounting Rate of Return - ARR | ||||
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx | xxxxxxxxxxxxxx | xxxxxxxxxxxxxxxxx | ||||
Requirement 2 | Compute the net present value of the investment using Excel's PV function. | |||||
Period | Cash Flows | |||||
1 | (22,321) | Note: The first period is shown as an example. | ||||
2 | xxxxxxxx | |||||
3 | xxxxxxxx | |||||
4 | xxxxxxxx | |||||
5 | xxxxxxxx | |||||
Present value of net cash flows | xxxxxxxx | Note: PV calculates the present value as a negative amount. | ||||
Cost of Asset | xxxxxxxx | |||||
Net Present Value | xxxxxxxx | |||||
Requirement 3 | Compute the net present value of the investment using Excel's NPV function | |||||
Present value of net cash flows | xxxxxxxxxx | |||||
Cost of asset | xxxxxxxxxx | |||||
Net Present Value | xxxxxxxxxx | |||||
Requirement 4 | Compute the profitability index, rounded to two decimal places. | |||||
Profitability index | xxxxxxxxxx | |||||
Requirement 5 | Compute the internal rate of return of the investment using Excel's IRR function. | |||||
Display to two decimal places, but do not round. | ||||||
IRR | xxxxxxxxx | Note: IRR requires a negative amount for the investment. |
Places with xxxxx's are what needs to be filled in, and it's for excel so if I could see the references to which numbers and the formula used that would be helpful. Thank you!!
very confused, can you please explain each answer! thanks
ACG 2071 â Comprehensive Problem IV
When submitting the completed project, please show all work andnumber each answer accordingly.
When calculating the NPV use the following five columns (use forALL NPV calculations):
Item | Year(s) | Cash Flow | Discount Factor | Present Value of Cash Flows |
Tony Skateboards is considering building a new plant. JamesBott, the companyâs marketing manager, is an enthusiastic supporterof the new plant. Michele Martinez, the companyâs chief financialofficer, is not so sure that the plant is a good idea. Currentlythe company purchases its skateboards from foreignmanufacturers. The following figures ere estimatedregarding the construction of the new plant.
Cost of plant | $4,000,000.00 | Estimated useful life | 15 years | |
Annual cash inflows | $4,000,000.00 | Salvage value | $2,000,000.00 | |
Annual cash outflows | $3,550,000.00 | Discount rate | 11% |
James Bott believes that thesefigures understate the true potential value of the plant. Hesuggests that by manufacturing its own skateboards the company willbenefit from a âbuy Americanâ patriotism that he believes is commonamong skateboarders. He also notes that the firm has had numerousquality control problems with the skateboards manufactured by itssuppliers. He suggests that the inconsistent quality has resultedin lost sales, increased warranty claims, and some costly lawsuits.Overall, he believes sales will be $200,000 higher than theprojected above, and that the savings from lower warranty costs andlegal costs will be $80,000 per year. He also believes that theproject is not as risky as assumed above, and that a 9% discountrate is more reasonable.
Compute the Cash Payback period for the project based on theoriginal projections.
Compute the net present value of the project based on theoriginal projections.
Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, but stillusing the 11% discount rate.
Compute the Cash Payback period for the project incorporatingJamesâ estimates of the value of the intangible benefits.
Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, butemploying the 9% discount rate.
Comment on your findings.
2. The partnership of Michele and Mark is considering thefollowing long-term capital investment proposal. Relevant data onthe project is listed below. Salvage value is expected to be zerofor the project. Depreciation is computed by the straight-linemethod. The companyâs rate of return is the companyâs cost ofcapital which 12%.
Brown | |||
Capital Investment | $200,000.00 | ||
Annual Net Income: | |||
Year 1 | $25,000.00 | ||
Year 2 | $16,000.00 | ||
Year 3 | $13,000.00 | ||
Year 4 | $10,000.00 | ||
Year 5 | $8,000.00 | ||
Total | $72,000.00 |
Required:
Compute the cash payback period for the project. (round to twodecimal places)
Compute the net present value for the project (round to thenearest dollar)
Compute the annual rate of return for the project.
Compute the profitability index for the project.
FILL IN THE CORRECT TERMINOLOGIES IN THE BLANK SPACES | ||
_____ 1. | a. A method of internal (managerial accounting) reporting that emphasizes the distinction between variable and fixed costs. | |
_____ 2. | b. A discounted cash flow approach to capital budgeting that computes the present value of all future cash flows. | |
_____ 3. | c. Determination of the maximum cost a company can spend to make a product given a set volume, selling price and desired operating profit. | |
_____ 4. | d. An analysis of the additional costs and benefits of a proposed alternative compared with the current situation. | |
_____ 5. | e. A historical cost that the company has already incurred which is irrelevant to the decision making process. | |
_____ 6. | f. Costs that will not continue if an ongoing operation is changed or deleted. | |
_____ 7. | g. An already owned production site that is not currently in use. | |
_____ 8. | h. The maximum available benefit foregone by using a resource for a particular purpose. | |
_____ 9. | i. The predicted future costs and revenues that will differ among alternative courses of action. | |
_____ 10. | J. The time it will take to recoup, in the form of cash inflows from operations, the initial dollars invested in a project | |
_____ 11. | k. Those costs of facilities and services that are shared by users | |
_____ 12. | l. The juncture of manufacturing where separate products developed in the same process become individually identifiable. | |
_____ 13. | m. A costing approach that considers all indirect manufacturing costs (both variable and fixed) to be product (inventoriable) costs. | |
_____ 14. | n. Purchasing products or services from a supplier outside the company. | |
_____ 15. | o. Capital budgeting models that focus on cash inflows and ouflows while taking into account the time value of money | |
_____ 16. | p. Calculation of a selling price sufficient to cover the cost of producing a product as well as desired operating income | |
_____ 17 | q. The long-term planning for investment commitments with returns spread over multiple years | |
_____ 18. | r. A decision process that compares the differential revenues and costs of alternatives. | |
_____ 19. | s. Costs that will continue even if a company discontinues one of its current operations | |
_____ 20. | t. The increase in expected average annual operating income divided by the original required investment |