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Quick Study 25-27 (15 minutes)
1. Payback period of investment = €80,000,000 / €16,000,000 = 5 years
EXERCISES
Exercise 25-1 (20 minutes)
Annual Net Cumulative
Cash Flows Cash Flows
Year 1................................................................... $ 60,000 $ 60,000
Cost of investment...........................................................................$180,000
Exercise 25-2 (20 minutes)
Net Cash
Flows
Present
Value of
1 at 10%
Present
Value of Net
Cash Flows
Year 1...................................................................$ 60,000 0.9091 $ 54,546
Year 2...................................................................40,000 0.8264 33,056
The company should accept the investment, as it has a positive net present
value.
Exercise 25-3 (15 minutes)
ANNUAL CASH FLOWS
Net
Income Depreciation*
Net Cash
Flow
Cumulative
Cash Flow
Year 1 $ 10,000 $30,000 $ 40,000 $ 40,000
Year 2 25,000 30,000 55,000 95,000
Exercise 25-4 (30 minutes)
COMPUTATION OF ANNUAL DEPRECIATION EXPENSE
Double-declining balance rate = (100% / 5) x 2 = 40%
Annual Depr.
Beginning (40% of Accum. Depr. Ending
Year Book Value Book Value) at Year-End Book Value
1 $150,000 $60,000 $ 60,000 $90,000
ANNUAL CASH FLOWS
Net
Income Depreciation
Net Cash
Flow
Cumulative
Cash Flow
Year 1 $ 10,000 $60,000 $ 70,000 $ 70,000
Exercise 25-5 (20 minutes)
a.
b.
Exercise 25-6 (20 minutes)
a.
Net present value of investment*
Present value of six $235,000** cash inflows ($235,000 x 4.3553)..........
$1,023,496
*Present value factors from tables at the end of Appendix B:
6
**Cash inflow = net income + straight-line depreciation, $150,000 + $85,000
Exercise 25-6 (continued)
b.
Net present value of investment*
Present value of eight $105,000** cash inflows ($105,000 x 5.3349)........$560,165
*Present value factors from tables at the end of Appendix B:
Exercise 25-7 (15 minutes)
Accounting rate of return = $52,000 / $400,000 = 13.0%
$700,000 + $100,000
Exercise 25-8 (20 minutes)
COMPUTING NET CASH FLOWS FROM NET INCOME
Net income Cash flows
Sales..............................................................................$225,000 $225,000
Materials, labor & overhead.........................................120,000 120,000
*Average investment
Exercise 25-9 (15 minutes)
Annual
Net Cash
Flows
Present
Value of
Annuity
at 8%
Present
Value of
Net Cash
Flows
Years 1 through 6................................................$ 66,750 4.6229 $ 308,579
Amount to be invested....................................... (360,000)
Net present value of investment........................ $ (51,421)
$180,000*
Based on this net present value analysis, the investment is not acceptable.
Exercise 25-10 (20 minutes)
PROJECT A
Net Cash
Flows
Present
Value of
1 at 10%
Present
Value of Net
Cash Flows
Year 1...................................................................$ 40,000 0.9091 $ 36,364
Year 2...................................................................56,000 0.8264 46,278
PROJECT B
Net Cash
Flows
Present
Value of
1 at 10%
Present
Value of Net
Cash Flows
Year 1................................................................... $ 32,000 0.9091 $ 29,091
Year 2...................................................................50,000 0.8264 41,320
Both projects have positive net present values. However, if the company
Exercise 25-11 (25 minutes)
a.
Project X1 Net Cash
Flows
Present
Value of
1 at 4%
Present
Value of Net
Cash Flows
Year 1...................................................................$ 25,000 0.9615 $ 24,038
Project X2 Net Cash
Flows
Present
Value of
1 at 4%
Present
Value of Net
Cash Flows
Year 1...................................................................$ 60,000 0.9615 $ 57,690
b.
Exercise 25-12 (25 minutes)
a.
Project X1 Net Cash
Flows
Present
Value of
1 at 12%
Present
Value of
Net Cash
Flows
Year 1...................................................................$ 25,000 0.8929 $ 22,323
Project X2 Net Cash
Flows
Present
Value of
1 at 4%
Present
Value of Net
Cash Flows
Year 1...................................................................$ 60,000 0.8929 $ 53,574
b.
If the company can only choose one of these projects it would select
Project X1, as it has a higher profitability index.
