ACCT 001A Lecture Notes - Lecture 22: Net Present Value, Delivery (Commerce), Moe Williams

14 views2 pages

pucemallard867

7 Jan 2021

School

Pasadena City College

Department

Accounting

Course

ACCT 001A

Professor

Hossain

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

All cash flows are assumed to occur at end of each period since this simplifies present value calculations. All cash flows are immediately reinvested in another project or investment which is analogous to immediate reinvesting of dividends in a stock investment. Rate of return assumed to be earned on the reinvested amounts on whether npv or irr is used. Under irr, cash inflows are assumed to be reinvested at internal rate of return of original investment. Under npv, cash inflows are assumed to be reinvested at discount rate used in analysis. Increase in quality of finished product or reduction in defects. Screening decisions decisions about whether an investment meets a predetermined company standard. Preference decisions decision that involve choosing between alternatives. Analysing options involves both quantitative analysis of option with tools recognising time value of money and qualitative analysis. Both npv and irr can be used as screening tools as they identify and eliminate undesirable projects.

Related Questions

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

Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,250,000 and will last 10 years. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $280,000. She estimates that the return from owning her own shop will be $50,000 per year. She estimates that the shop will have a useful life of 6 years. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV. $ Should the company buy the new welding system? Yes 2. Conceptual Connection: Assuming a required rate of return of 8%, calculate the NPV for Evee Cardenas' investment. Round to the nearest dollar. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV. $ Should she invest? No What if the estimated return was $135,000 per year? Calculate the new NPV for Evee Cardenas' investment. Would this affect the decision? What does this tell you about your analysis? Round to the nearest dollar. $ The shop should now be purchased. This reveals that the decision to accept or reject in this case is affected by differences in estimated cash flow 3. What was the required investment for Barker Company's project? Round to the nearest dollar. If required, round all present value calculations to the nearest dollar. $

RozzisRozzis

Construction is analyzing its capital expenditure proposals forthe purchase of equipment in the coming year. The capital budget islimited to

$ 5 comma 000 comma 000$5,000,000

for the year.

LindaLinda

BensonBenson?,

staff analyst at

RozzisRozzis?,

is preparing an analysis of the three projects underconsideration by

ChesterChester

RozzisRozzis?,

the? company's owner.

Requirement 1. Because the? company's cash is?limited,

RozzisRozzis

thinks the payback method should be used to choose between thecapital budgeting projects.

a. What are the benefits and limitations ofusing the payback method to choose between? projects?

Benefits of the payback? method:

Easy to understand and captures uncertainty about expected cashflows in later years of a project

Your answer is correct.

Indicates whether or not the project will earn the? company'sminimum required rate of return

Utilizes the time value of money and computes each? project'sunique rate of return

All of the above

Limitations of the payback? method:

Cannot be used when? management's required rate of return variesfrom one period to the next.

Cannot be used for projects with unequal periodic cash flows

Fails to incorporate the time value of money and does notconsider a? project's cash flows after the payback period

All of the above

Data Table:

Project A

Project B

Project C

Projected cash outflow

Net initial investment

$3,000,000

$2,100,000

$3,000,000

Projected cash inflows

Year 1

$1,200,000

$1,700,000

Year 2

1,200,000

600,000

1,700,000

Year 3

1,200,000

500,000

200,000

Year 4

1,200,000

100,000

Required rate of return

Requirements:

1.	Because the? company's cash is? limited, RozzisRozzis thinks the payback method should be used to choose between thecapital budgeting projects.
	a.	What are the benefits and limitations of using the paybackmethod to choose between? projects?
	b.	Calculate the payback period for each of the three projects. Ignoreincome taxes. Using the payback? method, which projects should RozzisRozzis ?choose?
2.	BensonBenson thinks that projects should be selected based on their NPVs. Assumeall cash flows occur at the end of the year except for initialinvestment amounts. Calculate the NPV for each project. Ignoreincome taxes.
3.	Which? projects, if? any, would you recommend? funding? Brieflyexplain why.

amaranthtrout588

ACCT 001A Lecture Notes - Lecture 22: Net Present Value, Delivery (Commerce), Moe Williams

Document Summary

Get access

Related Documents

ACCT 001A Lecture Notes - Lecture 29: Net Present Value, Cash Flow, Moe Williams

ACCT 001A Lecture Notes - Lecture 21: Moe Williams, Net Present Value, Discount Window

ACCT 001A Lecture Notes - Lecture 28: Moe Williams, Net Present Value

Related Questions