University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

29

Pages:

3
Author:

stud_ice13

Problem 24-1B: New Machine Investment for Cortino Company 1. Determine Annual Income and Net Cash Flow: o Depreciation (Straight-Line): Depreciation=Cost−Salvage ValueLife=300,000−20,0004=70,000 o Annual Net Cash Flow: Add back depreciation to net income. 2. Compute Payback Period: o Payback Period Formula: Payback Period=Initial InvestmentAnnual Net Cash Flow 3. Compute NPV: o Use a 7% discount rate to discount each annual cash flow. Subtract the initial investment to find NPV. Problem 24-2B: Project A Evaluation 1. Compute Project A’s Annual Net Cash Flows: o Add non-cash expenses (e.g., depreciation) back to net income to get net cash flows. 2. Determine Payback Period: o Apply the formula to calculate the number of years to recover the initial investment of $240,000. 3. Compute Accounting Rate of Return (ARR): o ARR Formula: ARR=Annual IncomeAverage Investment o The average investment is half of the initial investment (if no salvage value is assumed). 4. Compute NPV Using an 8% Discount Rate: o Discount the cash flows and subtract the initial investment to obtain NPV. Problem 24-3B: Project Comparison for Lopez Co. 1. Compute Each Project’s Annual Net Cash Flows: o Add back non-cash expenses for each project. 2. Calculate Payback Period for Each Project: o Determine the payback period for each project and identify the project with the shorter payback period. 3. Compute ARR for Each Project: o Calculate ARR and choose the project with the higher ARR if it’s the only decision criterion. 4. Compute NPV Using a 9% Discount Rate: o Calculate NPV for each project by discounting cash flows at 9%. Choose the project with the higher NPV if decisions are based solely on NPV. Problem 24-4B: NPV and Profitability Index for Milan Co. 1. Compute NPV for Projects A and B: o Discount cash flows at the required rate of 8% for each project to find NPV. 2. Calculate Profitability Index: o Formula: Profitability Index=Present Value of Cash FlowsInitial Investment o Compare profitability indexes and choose the project with the highest index. Problem 24-5B: Investment Analysis for Aster Company 1. Determine the Payback Period: o Calculate the payback period by accumulating cash flows until the $800,000 investment is recovered. 2. Calculate Break-Even Time (BET): o Apply a 10% discount rate to each year’s cash flow. The BET occurs when the cumulative present value of cash flows equals the initial investment. 3. Compute NPV: o Discount cash flows at 10%, subtract the initial investment, and interpret NPV. 4. Analysis Component: o Recommend investing if the NPV is positive, as it indicates that returns meet the 10% required rate. Problem 24-6B: NPV of Alternate Investments for Archer Foods 1. Compute NPV for Alternative 1 (Overhauling Old Freezer): o Discount the $10,000 annual cash flows over eight years at a 10% rate and include the salvage value in year 8. 2. Compute NPV for Alternative 2 (Replacing with a New Freezer): o Consider the $5,000 sale of the old freezer as an initial cash inflow, discount $40,000 annual cash flows, and include the $8,000 salvage value at the end of eight years. 3. Decision Based on NPV: o Select the alternative with the higher NPV, as it provides the greater financial benefit.