Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 24
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Problem 24-4B (20 minutes)
Part 1
Project A
Net Cash
Flows
Present Value of
Annuity at 8%*
Present Value of
Net Cash Flows
Years 1-5 ……………….
$90,000
3.9927
$359,343
(300,000)
Project B
Net Cash
Flows
Present Value of
Annuity at 8%*
Present Value of
Net Cash Flows
Years 1-6 ……………….
$80,000
4.6229
$369,832
(300,000)
Part 2
Project A
Project B
Present value of net cash flows ……
$359,343
$369,832
Part 3
Project B. If the company bases investment decisions solely on a higher
profitability index, it will choose Project B.
1476
Problem 24-5B (20 minutes)
Part 1: Payback period
Year
Net Cash Flows
Cumulative Net Cash Flows
Initial investment …
$(800,000)
$(800,000)
2.4 years. Once $150,000 of net cash flow is received in Year 3, the
Part 2: Break-even time
Year
Net
Cash
Flows
Present
Value of 1
at 10%
Present Value
of Net Cash
Flows per Year
Cumulative
Present Value of
Net Cash Flows
Initial
invest. ..
$(800,000)
1.0000
$(800,000)
$(800,000)
Part 3: Net present value
Table in Part 2 shows the net present value of the investment is $369,840.
Part 4
Yes. Invest in the project as it has a positive net present value.
I
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 24
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Problem 24-6B (25 minutes)
Part 1
Alternative 1: Keep old freezer and overhaul it
Net
Cash
Flow
Present
Value Factors
at 10%*
Present
Value of
Cash Flows
Years 1-8 ………………………………………..
$10,000
5.3349
$53,349
Salvage value (year 8) …………………….
0.4665
Total ………………………………………………
Initial investment (overhaul cost) ……….
Part 2
Alternative 2: Sell old freezer and buy new freezer
Net
Cash
Flow
Present
Value Factors
at 10%*
Present
Value of
Cash Flows
Years 1-8 …………………………………………
$40,000
5.3349
$213,396
Salvage value—new freezer (year 8) …….
8,000
0.4665
3,732
Salvage value—old freezer (now) …………
5,000
Total ……………………………………………….
222,128
Initial investment (new freezer cost) …….
Part 3
Sell old freezer and buy new freezer. Alternative 2 has the higher NPV. This
implies that the net benefits of the new freezer outweigh the net benefits of
keeping the old freezer.
SERIAL PROBLEM — SP 24
Serial Problem, Business Solutions (15 minutes)
1.
NET PRESENT VALUE
Net Cash
Flows
Present Value of
Annuity at 8%*
Present Value of
Net Cash Flows
Years 1-6 ……………….
$62,939
4.6229
$290,961
(300,000)
INTERNAL RATE OF RETURN
Present value factor = Initial investment = $300,000 = 4.7665
Annual net cash flows $62,939
2. Do not invest. The payback period is greater than her requirement of four
years or less.
Wild and Shaw, Financial & Managerial Accounting 9e Solutions Manual: Chapter 24
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Company Analysis — AA 24-1
For Apple—$ in millions
1.
Year
Net
Cash Flows
Present value
of 1 at 7%
Present Value of
Net Cash Flows
Cumulative
Present Value of
Net Cash Flows
Initial
invest
$(10,495)
1.0000
$(10,495)
$(10,495)
1………
3,000
0.9346
2,804
(7,691)
2………
3,000
0.8734
2,620
(5,071)
4………
3,000
0.7629
2,289
5………
3,000
0.7130
2,139
6………
3,000
0.6663
1,999
7………
3,000
0.6227
1,868
8………
3,000
0.5820
1,746
9………
3,000
0.5439
1,632
4.2 years.
Apple’s break-even time is 4.2 years. This is computed as 4 years plus
$333/$2,139 years.
2. $10,576 million.
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Comparative Analysis — AA 24-2
1. For Google—$ millions
Year
Net Cash
Flows
Present Value
of 1 at 6%
Present Value of Net
Cash Flows
Cumulative Present Value
of Net Cash Flows
Initial
invest
$(23,548)
1.0000
$(23,548)
$(23,548)
1 ………
4,000
0.9434
3,774
(19,774)
2 ………
4,000
0.8900
3,560
(16,214)
3 ………
4,000
0.8396
3,358
(12,856)
4 ………
(9,688)
5 ………
4,000
0.7473
2,989
6 ………
4,000
0.7050
2,820
7 ………
8 ………
4,000
0.6274
2,510
9 ………
4,000
0.5919
2,368
4,000
0.5584
2,234
6.5 years. Google’s break-even time is 6.5 years (rounded),
computed as 6 years plus $1,219/$2,510 years.
For Apple—$ millions
Year
Net
Cash Flows
Present value
of 1 at 7%
Present Value of
Net Cash Flows
Cumulative Present
Value of Net Cash Flows
Initial
invest
$(10,495)
1.0000
$(10,495)
$(10,495)
1 …….
3,000
0.9346
2,804
(7,691)
2 …….
3 …….
4 …….
0.7629
2,289
5 …….
6 …….
7 …….
8 …….
0.5820
1,746
9 …….
4.2 years. Apple’s break-even time is 4.2 years (rounded),
computed as 4 years plus $333/$2,139 years.
2. Apple. Because Apple’s break–even time is shorter than Google’s, we can
expect Apple’s investment to more quickly yield positive net cash flows.
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Extended Analysis — AA 24-3
For Samsung—$ millions
Year
Net Cash
Flows
Present Value
of 1 at 7%
Present Value of Net
Cash Flows
Cumulative Present Value
of Net Cash Flows
Initial
invest
$(21,766)
1.0000
$(21,766)
$(21,766)
1 ………
4,000
0.9346
3,738
(18,028)
3 ………
3,265
4 ………
3,052
5 ………
2,852
7 ………
2,491
8 ………
2,328
7.1 years. Samsung break-even time is 7.1 years (rounded),
computed as 7 years plus $209/$2,328 years.
DISCUSSION QUESTIONS
1. Capital budgeting is the process of planning the purchase or sale of plant assets.
2. Capital budgeting decisions are risky because: (1) the outcomes are uncertain,
(2) large amounts of money are usually involved, (3) the investment involves a
3. The cash inflows of a typical capital expenditure are the revenues from using the
asset and the proceeds upon disposing of the asset for its salvage value. The
4. The payback period ignores both the time value of money and all cash flows after
the payback period.
5. A shorter payback period is attractive it reduces the risk that the investment might
not be profitable over the long run. Assets with shorter payback periods are both
6. The average investment is the original cost plus the salvage value, divided by 2.
7. When the present value of net cash flows, discounted at 10%, exceeds the Initial
investment, the internal rate of return on the investment is greater than 10 percent.
8. Receiving $100 one year from today is worth less than $100 today because a return
can be earned on a $100 investment during the year.
9. The internal rate of return is the rate that produces a net present value of zero. If
10. An investment of this nature in technology is risky for many reasons: (1) Samsung
cannot be 100% certain of the costs and benefits of such a system; (2) there is a great
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11. Some of the cash outflows are: cost of the new equipment; cost savings from
operating the new equipment over the life of the equipment; training costs for workers.
12. Apple management could use one of the following common methods to evaluate the
potential investment in the expansion: payback period, accounting rate of return, net
present value, or internal rate of return.
13. The advantage of break-even time is that it considers the time value of money. This
1484
Ethics Challenge — BTN 24-1
Your dilemma is whether to abide by rules designed to prevent abuse or
Communicating in Practice — BTN 24-2
Instructor note: Answers will vary, but responses should include some discussion
of the following points.
• The payback period is limited because it ignores the time value of money and it
Teamwork in Action — BTN 24-3
The new, improved baggage handling system is expected to increase both
customer satisfaction and the likelihood of repeat business. Qualitative
factors that could be considered include:
• Increased customer demand for a new system because of special
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Entrepreneurial Decision — BTN 24-4
1. Jake could use payback period, accounting rate of return, net present
2. For these tools, Jake needs estimates of how much the manufacturing
facility and warehouse will cost, both upfront and for recurring (e.g.
3.
Payback Period
Accounting Rate
of Return
Net Present
Value
Internal Rate
of Return
Strengths
• Uses cash flows
• Easy to
compute
• Easy to
compute
• Uses cash
flows
• Reflects
time value
of money
• Uses cash
flows
• Reflects
time value
of money
