ACCT 23021 Lecture Notes - Lecture 18: Project A, Smartphone, Vertical Integration

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emmagennaro

2 Aug 2020

School

Kent State University

Department

Accounting

Course

ACCT 23021

Professor

John M Rose

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Document Summary

Npv and irr consider the time value of money. Rely on pv calculations to compare the cost of the initial investment with the expected net cash inflows. Both cost million, have a 5 year expected life, and no residual value. Npv with equal annual net cash inflows (annuity) Allegra expects the smartphone project to generate ,450 of net cash inflows each year for 5 years. Use the present value of annuity of (table b) i = 14%, n = 5. Present value = amount of each cash inflow x pv factor. Npv with unequal annual net cash inflows (1 of 2) The net cash inflows from the speaker are ,000 in year 1, ,000 in year 2, ,000 in year 3, ,000 in year 4, and ,000 in year 5. Use the present value of (table a) i = 14%, n = 1, n = 2, n = 3, n =4, and n = 5.

Related Questions

Using the following information, calculate: 1) Payback period 2)Net Present Value (NPV) 3) IRR Project Expansion: Cost of capital13% Initial investment=$50,000 Cash Inflows: Year 1: $15,000 Year2: $15,000 Year 3: $15,000 Year 4: $15,000 Year 5: $15,000

pinkant321

MandelMandel

âManufacturing, Inc. has a manufacturing machine that needsattention. The company is considering two options. Option 1 is torefurbish the current machine at a cost of $ 2,000,000. Ifârefurbished, Mandel expects the machine to last another 88 yearsand then have no residual value. Option 2 is to replace the machineat a cost of $4,200,000. A new machine would last 1010 years andhave no residual value. Mandel expects the following net cashinflows from the twoâ options:

Year	Refurbish Current	Purchase New
	Machine	Machine
1	$1,300,000	$3,840,000
2	450,000	530,000
3	340,000	420,000
4	230,000	310,000
5	120,000	200,000
6	120,000	200,000
7	120,000	200,000
8	120,000	200,000
9		200,000
10		200,000
Total	$2,800,000	$6,300,000

Compute the payback for both options. Begin by completing thepayback schedule for Option 1â (refurbish).

	Save Accounting Table...		+
	Copy to Clipboard...		+

	Net Cash Outflows	Net Cash Inflows
Year	Amount Invested	Annual	Accumulated
0	$2,000,000
1
2
3
4
5
6
7
8

â(Round your answer to one decimalâ place.)

	Save Accounting Table...		+
	Copy to Clipboard...		+

Now complete the payback schedule for Option 2â (purchase).

	Save Accounting Table...		+
	Copy to Clipboard...		+

	Net Cash Outflows	Net Cash Inflows
Year	Amount Invested	Annual	Accumulated
0	$4,200,000
1
2
3
4
5
6
7
8
9
10

â(Round your answer to one decimalâ place.)

	Save Accounting Table...		+
	Copy to Clipboard...		+

Compute the ARRâ (accounting rate ofâ return) for each of theoptions.

	Save Accounting Table...		+
	Copy to Clipboard...		+

	/	=	ARR
Refurbish	/	=		%
Purchase	/	=		%

Compute the NPV for each of the options. Begin with Option 1â(refurbish). â(Enter the factors to three decimal places. X.XXX.Use parentheses or a minus sign for a negative net presentâvalue.)

	Save Accounting Table...		+
	Copy to Clipboard...		+

		Net Cash	PV Factor	Present
Years		Inflow	(i = 14%)	Value
	Present value of each year's inflow:
1	(n = 1)
2	(n = 2)
3	(n = 3)
4	(n = 4)
5	(n = 5)
6	(n = 6)
7	(n = 7)
8	(n = 8)
	Total PV of cash inflows
0	Initial investment
	Net present value of the project

Now compute the NPV for Option 2â (purchase). â(Enter thefactors to three decimal places. X.XXX. Use parentheses or a minussign for a negative net presentâ value.)

	Save Accounting Table...		+
	Copy to Clipboard...		+

		Net Cash	PV Factor	Present
Years		Inflow	(i = 14%)	Value
	Present value of each year's inflow:
1	(n = 1)
2	(n = 2)
3	(n = 3)
4	(n = 4)
5	(n = 5)
6	(n = 6)
7	(n = 7)
8	(n = 8)
9	(n = 9)
10	(n = 10)
	Total PV of cash inflows
0	Initial investment
	Net present value of the project

Finally, compute the profitability index for each option.â(Round to two decimal placesâ X.XX.)

	Save Accounting Table...		+
	Copy to Clipboard...		+

	/	=	Profitability index
Refurbish	/	=
Purchase	/	=

ultramarineferret614

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
Year	Amount invested	Net Cash Inflows
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!!

tanimpala296

ACCT 23021 Lecture Notes - Lecture 18: Project A, Smartphone, Vertical Integration

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