ACCT 2230 Chapter Notes - Chapter 13: Cost Of Capital, Current Liability, European Cooperation In Science And Technology

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1 Nov 2017

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Document Summary

The process of planning significant outlays on projects that have long-term implications, such as purchasing new equipment or introducing a new product: screening decisions. Decisions as to whether a proposed investment passes a pre-established profitability hurdle: prefernce decisions. Decisions as to which of several competing acceptable investment proposals is best: net present value. The difference between the present value of the cash inflows and the present value of the cash outflows associated with an investment project: working capital. The excess of current assets over current liabilities: weighted-average cost of capaital (wacc) The average rate of return companies must pay to long-term creditors and shareholders for the use of their funds: out-of-pocket costs. Actual cash outlays for operating costs: internal rate of return (irr) The discount rate at which the net present value of an investment project is zero: required rate of return. The minimum rate of return that an investment project must yield to be acceptable: project profitability index.

Related Questions

Blaine Company is considering four investment proposals, each requiring the same amount of initial cash investment. The excess present value index for each proposal is listed below. Using the index as a selection criterion, identify the index of the most attractive proposal.

a. 90

b. 100

c. 110

d. 115

The primary limitation of the cash payback method is that it

a. Uses before-tax cash flows.

b. Identifies the length of time it will take to recover the investment outlay in cash.

c. Ignores the profitability of one investment project as compared to another.

d. Involves a more sophisticated analysis than the net present value method.

Which of the following is not one of the considerations given to capital budgeting proposals?

Select one:

A. Whether there is an immediate need to replace or repair critical assets

B. Whether the proposal is in compliance with capital budgeting policies

C. Whether the proposal would meet the established minimum return on capital

D. Whether the proposal is congruent with the firm's long-term goals

E. All of the above are considerations given to capital budgeting proposals

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

1 Accounting

The following are 10 technical accounting terms.

Net present value Capital budgeting Incremental analysis Discount rate Payback period Present value Sunk cost Salvage value Return on average investment Capital budget audit Each of the following statements may (or may not) describe one of these technical terms.

For each statement, indicate the accounting term described, or answer âNoneâ if the statement does not correctly describe any of the terms.

a the examination of difference among revenue, costs, and cash flows under alternative courses of actions

b a cost incurred in the past that cannot be changed as a result of future actions

c the process of planning and evaluating proposals for investments in plan assets

d the average annual net income from an investment expresses as a percentage of the average amount invested

e the length of time necessary to recover the entire cost of an investment from resulting annual net cash flows

f the present value of investment's expected future cash flows

g the amount of the money today that is considered equivalent to the cash flows expected to take place in the future

h the required rate of return used by an investor to discount future cash flows to their present value

i often an investment's final cash flows to be considered in discounted cash flow analysis

scarletworm172

ACCT 2230 Chapter Notes - Chapter 13: Cost Of Capital, Current Liability, European Cooperation In Science And Technology

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