ACG 2071 Lecture 14: Chapter 12 Notes Part 2

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chocolateleopard236

19 Oct 2018

School

University of Florida

Department

Accounting

Course

ACG 2071

Professor

Schadewald

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Document Summary

Payback period: pros and cons: advantages, simple, use as initial screening tool, highlights risk of not recouping investment, short cash recovery period versus long cash recovery period, disadvantages, focuses only on payback time, not overall profitability. Ignores: post-payback cash flows, residual value, time value of money. Annual depreciation expense = (initial cost of asset residual value) / useful life of asset (in years) Accounting rate of return: overview: average a(cid:374)(cid:374)ual a(cid:272)(cid:272)ou(cid:374)ti(cid:374)g rate of retur(cid:374) over asset"s life, measures overall profitability of capital investment, unique feature, based on accrual-basis accounting income, not cash flows. Accounting rate of return: decision rule: accounting rate of return equals or exceeds required rate of return. Invest in project: accounting rate of return less than required rate of return, do not invest. Uneven cash flows and residual value: uneven annual net cash inflows, compute and use average annual net cash inflow to compute arr, residual value, reduces depreciation expense.

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

Exercise 25-14
Average rate of return, cash payback period, net present valuemethod

>> Additional Resources <<

Great Plains Transportation Inc. is considering acquiring equipmentat a cost of $246,000. The equipment has an estimated life of 10years and no residual value. It is expected to provide yearly netcash flows of $61,500. The companyâs minimum desired rate of returnfor net present value analysis is 10%.
Present Value of an Annuity of $1 at Compound Interest
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 1.833 1.736 1.690 1.626 1.528
3 2.673 2.487 2.402 2.283 2.106
4 3.465 3.170 3.037 2.855 2.589
5 4.212 3.791 3.605 3.353 2.991
6 4.917 4.355 4.111 3.785 3.326
7 5.582 4.868 4.564 4.160 3.605
8 6.210 5.335 4.968 4.487 3.837
9 6.802 5.759 5.328 4.772 4.031
10 7.360 6.145 5.650 5.019 4.192

a. Compute the average rate of return, giving effect tostraight-line depreciation on the investment. Do not enter thepercent sign.
30%

b. Compute the cash payback period.
4 years

c. Compute the net present value. Use the above table of thepresent value of an annuity of $1. Round to the nearestdollar.

Present value of annual net cash flows: $ _____________ ?
Amount to be invested: 246000
Net present value: $ ______________?

need the answerrrr/ make sure your round to the nearest dollar...

puceleopard564

Lindaâs Luxury Travel (LLT) is considering the purchase of twoHummer limousines. Various information about the proposedinvestment follows:


Initial investment (2limos)	$	1,140,000
Useful life		10	years
Salvage value	$	130,000
Annual net income generated		101,460
LLTâs cost of capital		16	%

Assume straight line depreciation method isused.

Required:
Help LLT evaluate this project by calculating each of thefollowing:

1. Accounting rate of return. (Round yourpercentage answer to 1 decimal place.)

2. Payback period. (Round your answer to 2decimal places.)

3. Net present value. (Future Value of $1, PresentValue of $1, Future Value Annuity of $1, Present Value Annuity of$1.) (Use appropriate factor(s) from the tables provided.Do not round intermediate calculations. Cash Outflows and negativeamounts should be indicated by a minus sign. Round your "PresentValues" to the nearest whole dollar amount.)

4. Without making any calculations, determinewhether the IRR is more or less than 16%.

	Greater than 16%
	Less than 16%

ACG 2071 Lecture 14: Chapter 12 Notes Part 2

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