CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–4A (FIN MAN); Prob. 12–4A (MAN)
1.
a.
Wind Turbines:
Annual net cash flow (at the end of each of 4 years) …………………..
$ 280,000
Present value of an annuity of $1 at 6% for 4 years (Exhibit 5) …….
× 3.465
Present value of annual net cash flows ………………………………………
Amount to be invested ……………………………………………………………..
Net present value ……………………………………………………………………..
Biofuel Equipment:
Annual net cash flow (at the end of each of 4 years) …………………..
$ 300,000
Present value of annual net cash flows ………………………………………
b.
Total Present Value of Net Cash Flow
Present Value Index = Amount to Be Invested
$970,200
Wind turbines : = 1.09 *
$887,600
* Rounded
2. a.
Amount to Be Invested
Present Value Factor for an Annuity of $1= Annual Net Cash Flow
$887,600
Wind turbines : = 3.170
$280,000
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–4A (FIN MAN); Prob. 12–4A (MAN) (Concluded)
3. The net present value, present value index, and internal rate of return all indicate
that the biofuel equipment is a better financial opportunity compared to the wind
turbines, although both investments meet the minimum return criterion of 6%. The
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–5A (FIN MAN); Prob. 12–5A (MAN)
1.
Net present value analysis:
Office Expansion:
Annual net cash flow (at the end of each of 6 years) …………………………..
$ 125,000
Present value of an annuity of $1 at 12% for 6 years (Exhibit 5) …………..
× 4.111
Amount to be invested ……………………………………………………………………..
Server Upgrade:
Annual net cash flow (at the end of each of 4 years) …………………………..
$ 165,000
Present value of an annuity of $1 at 12% for 4 years (Exhibit 5) …………..
× 3.037
Amount to be invested ……………………………………………………………………..
Net present value ……………………………………………………………………………..
2. Net present value analysis:
Present
Present Value of
Value of
Net Cash Flow
Net Cash Flow
Year
$1 at 12%
Expansion
Servers
Expansion
Servers
1
0.893
$125,000
$165,000
$ 111,625
$ 147,345
2
0.797
125,000
165,000
99,625
131,505
4 (residual value)
0.636
*
This amount differs from the net present value calculation in part (1) due to rounding
errors in the present value factors.
3. To: Investment Committee
Both projects have a positive net present value. This means that both projects
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–6A (FIN MAN); Prob. 12–6A (MAN)
1. Proposal A: 3-year, 6-month cash payback period, as follows:
Net Cash
Cumulative
Year
Flow
Net Cash Flows
1
$200,000
$200,000
* The cash flow required is $80,000out of $160,000 in Year 4. Thus, 1/2 of 12 months
is 6 months.
Proposal B: 4-year cash payback period, as follows:
Net Cash
Cumulative
Year
Flow
Net Cash Flows
1
$90,000
$ 90,000
Proposal C: 2-year cash payback period, as follows:
Net Cash
Cumulative
Year
Flow
Net Cash Flows
$ 55,000
Proposal D: 2-year, 3-month cash payback period, as follows:
Net Cash
Cumulative
Year
Flow
Net Cash Flows
1
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–6A (FIN MAN); Prob. 12–6A (MAN) (Continued)
2. Proposal A: 14.1% average rate of return, determined as follows:
Proposal B: 2.5% average rate of return, determined as follows:
$20,000 ÷ 5 $4,000
= = 2.5%
($320,000 + $0) ÷ 2 $160,000
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–6A (FIN MAN); Prob. 12–6A (MAN) (Continued)
3. Of the four proposed investments, only Proposals C and D meet the company’s
requirements, as the following table indicates:
Proposal
Cash Payback
Period
Average Rate
of Return
Accept for
Further Analysis
Reject
A
3 yrs., 6 mos.
14.1%
✓*
D
2 yrs., 3 mos.
30.0%
4.
Proposal C
Present Value
Net Cash
Present Value of
Year
of $1 at 15%
Flow
Net Cash Flow
1
0.870
$ 55,000
$ 47,850
2
0.756
53,000
40,068
Proposal D
Present Value
Net Cash
Present Value of
Year
of $1 at 15%
Flow
Net Cash Flow
1
0.870
$180,000
$ 156,600
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–6A (FIN MAN); Prob. 12–6A (MAN) (Concluded)
5.
Total Present Value of Net Cash Flow
Present Value Index = Amount to Be Invested
* Rounded
6. Based on the net present value, the proposals should be ranked as follows:
Proposal D: $94,920
Proposal C: $62,067
7. Based on the present value index (the amount of present value per dollar invested),
8. The analysis indicates that although Proposal D has the larger net present value, it
is not as attractive as Proposal C in terms of the amount of present value per dollar
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–1B (FIN MAN); Prob. 12–1B (MAN)
1. a. Average annual rate of return for both projects:
$172,000 ÷ 5 $34, 400
= = 18.7%
($368,000 + $0) ÷ 2 $184,000
b. Net present value analysis:
Present Value of
Present
Net Cash Flow
Net Cash Flow
Value of
Tracking
Tracking
Year
$1 at 15%
Warehouse
Technology
Warehouse
Technology
1
0.870
$135,000
$108,000
$ 117,450
$ 93,960
2
0.756
125,000
108,000
94,500
81,648
2. The report to the capital investment committee can take many forms. The report
should, as a minimum, present the following points:
a. Both projects offer the same average annual rate of return.
b. The warehouse net present value exceeds the selected rate established for
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–2B (FIN MAN); Prob. 12–2B (MAN)
1. a. Cash payback period for both projects: 2 years (the year in which accumulated
net cash flows equal $125,000), shown as follows:
Sound Cellar
Pro Gamer
Net Cash
Cumulative
Net Cash
Cumulative
Year
Flow
Net Cash Flow
Year
Flow
Net Cash Flow
1
$65,000
$ 65,000
1
$70,000
$ 70,000
b. Net present value analysis:
Present Value of
Present
Net Cash Flow
Net Cash Flow
Value of
Sound
Pro
Sound
Pro
Year
$1 at 10%
Cellar
Gamer
Cellar
Gamer
1
0.909
$ 65,000
$ 70,000
$ 59,085
$ 63,630
2
0.826
60,000
55,000
49,560
45,430
3
0.751
25,000
35,000
18,775
26,285
5
0.621
2. The report can take many forms and should include, as a minimum, the following
points:
a. Both projects offer the same total net cash flow.
b. Both projects offer the same cash payback period.
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–3B (FIN MAN); Prob. 12–3B (MAN)
1.
Branch Office Expansion
Present Value
Net Cash
Present Value of
Year
of $1 at 15%
Flow
Net Cash Flow
1
0.870
$200,000
$ 174,000
Computer System Upgrade
Present Value
Net Cash
Present Value of
Year
of $1 at 15%
Flow
Net Cash Flow
1
0.870
$190,000
$ 165,300
2
0.756
180,000
136,080
ATM Kiosk Expansion
Present Value
Net Cash
Present Value of
Year
of $1 at 15%
Flow
Net Cash Flow
1
0.870
$275,000
$ 239,250
2
0.756
250,000
189,000
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–3B (FIN MAN); Prob. 12–3B (MAN) (Concluded)
2.
Total Present Value of Net Cash Flow
Present Value Index = Amount to Be Invested
$400,240 = 0.95 *
3. The computer system upgrade has the largest present value index. Although the
ATM kiosk expansion has the largest net present value, it returns less present
value per dollar invested than does the computer system upgrade, as revealed by
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–4B (FIN MAN); Prob. 12–4B (MAN)
1.
a.
After Hours:
Annual net cash flow (at the end of each of 4 years) ……………………..
$ 320,000
Sun Fun:
Annual net cash flow (at the end of each of 4 years) ……………………..
$ 290,000
Present value of annual net cash flows ………………………………………..
$ 919,300
b.
Total Present Value of Net Cash Flow
Present Value Index = Amount to Be Invested
After Hours:
$1,014,400 = 1.11*
$913,600
Sun Fun:
$919,300 = 1.04 *
$880,730
* Rounded
2. a.
Present Value Factor Amount to Be Invested
=Annual Net Cash Flow
for an Annuity of $1
Sun Fun: 12%
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–4B (FIN MAN); Prob. 12–4B (MAN) (Concluded)
3. The net present value, present value index, and internal rate of return all indicate
that After Hours is a better financial opportunity compared to Sun Fun, although
both investments meet the minimum return criterion of 10%. The present value
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–5B (FIN MAN); Prob. 12–5B (MAN)
1. Net present value analysis:
Wichita:
Annual net cash flow (at the end of each of 6 years) ………………………..
$ 310,000
Present value of an annuity of $1 at 20% for 6 years (Exhibit 5)………..
× 3.326
2. Net present value analysis:
Present
Present Value of
Value of
Net Cash Flow
Net Cash Flow
Year
$1 at 20%
Wichita
Topeka
Wichita
Topeka
1
0.833
$ 310,000
$ 400,000
$ 258,230
$ 333,200
2
0.694
310,000
400,000
215,140
277,600
4
0.482
310,000
400,000
149,420
192,800
factors.
3. To: Investment Committee
Both Wichita and Topeka have a positive net present value. This means that both
projects meet our minimum expected return of 20% and would be acceptable
investments. However, if funds are limited and only one of the two projects can be
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–6B (FIN MAN); Prob. 12–6B (MAN)
1. Proposal A: 4-year cash payback period, as follows:
Net Cash
Cumulative
Year
Flow
Net Cash Flows
1
$120,000
$120,000
Proposal B: 2-year, 4-month cash payback period, as follows:
Net Cash
Cumulative
Year
Flow
Net Cash Flows
1
$100,000
$100,000
2
80,000
180,000
4 months*
20,000
200,000
*
The net cash flow required is $20,000 out of $60,000 in Year 3 or 1/3. Thus, 1/3 of 12 months
is 4 months.
Proposal C: 3-year, 6-month cash payback period, as follows:
Net Cash
Cumulative
Year
Flow
Net Cash Flows
$100,000
90,000
CHAPTER 26 (FIN MAN); CHAPTER 12 (MAN) Capital Investment Analysis
Prob. 26–6B (FIN MAN); Prob. 12–6B (MAN) (Continued)
2. Proposal A: 5.3% average rate of return, determined as follows:
( )
$60,000 ÷ 5 $12,000
= = 5.3% rounded
($450,000 + $0) ÷ 2 $225,000