CHAPTER 26 Capital Investment Analysis
Prob. 26–4B
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
…
b.
Present Value Index =
Total Present Value of Net Cash Flow
Amount to Be Invested
a. =2. Present Value Factor for an Annuity of $1 Amount to Be Invested
Annual Net Cash Flow
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…
…
CHAPTER 26 Capital Investment Analysis
Prob. 26–4B (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
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CHAPTER 26 Capital Investment Analysis
Prob. 26–5B
1. Net present value analysis:
Witchita:
Annual net cash flow (at the end of each of 6 years)……………………………
…
$ 310,000
Topeka:
Annual net cash flow (at the end of each of 4 years)……………………………
…
$ 400,000
…
2. Net present value analysis:
Witchita Topeka Witchita
1 $ 310,000 $ 400,000 $ 258,230 $ 333,200
3. To: Investment Committee
Both Witchita and Topeka have a positive net present value. This means
Year
0.833
Net Cash FlowNet Cash Flow
Present Value of
$1 at 20%
Value of
Present
Topeka
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…
…
CHAPTER 26 Capital Investment Analysis
Prob. 26–6B
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
Proposal C: 3-year, 6-month cash payback period, as follows:
Net Cash Cumulative
Year Flow Net Cash Flows
1 $100,000 $100,000
Proposal D: 3-year payback period, as follows:
Net Cash Cumulative
Year Flow Net Cash Flows
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CHAPTER 26 Capital Investment Analysis
Prob. 26–6B (Continued)
2. Proposal A: 5.3% average rate of return, determined as follows:
$12,000
$60,000 ÷ 5 ==
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CHAPTER 26 Capital Investment Analysis
Prob. 26–6B (Continued)
3. Of the four proposed investments, only Proposals B and D meet the company’s
requirements, as the following table indicates:
Cash Payback Average Rate Accept for
Proposal Period of Return Further Analysis Reject
A 4 yrs. 5.3% X
4.
Present Value Net Cash Present Value of
Year of $1 at 12% Flow Net Cash Flow
1 0.893 $100,000 $ 89,300
Present Value Net Cash Present Value of
Year of $1 at 12% Flow Net Cash Flow
1 0.893 $200,000 $178,600
Proposal B
Proposal D
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CHAPTER 26 Capital Investment Analysis
Prob. 26–6B (Concluded)
6. Based on the net present value, the proposals should be ranked as follows:
7. Based on the present value index (the amount of present value per dollar
invested), the proposals should be ranked as follows:
8. The present value indexes indicate that although Proposal D has the larger
net present value, it is not as attractive as Proposal B in terms of the amount
5.
Present Value Index =
Total Present Value of Net Cash Flow
Amount to Be Invested
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CHAPTER 26 Capital Investment Analysis
CP 26–1
The plant manager wants a project to become accepted and places pressure on the
analyst to come up with the “right numbers.” Jerrod is right when he states that the net
present value analysis has many assumptions and room for interpretation. Many use
This very difficult issue revolves around the nature of ethical dilemmas. Danielle has
brief tenure with the organization. She has very little organizational clout and could
easily find her career short-circuited by crossing Jerrod. It might be tempting for Danielle
to slide on this one—after all, who would know? If the project is eventually a failure,
CASES & PROJECTS
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CHAPTER 26 Capital Investment Analysis
CP 26–2
1. Annual salary…………………………………………………………………………
…
$ 50,000
× Present value of $1 annuity for 10 years at 10%………………………………
…
6.145
Note: The present values of parts (1) and (2) must both be determined as of
the beginning of the graduate year in order to be compared. Thus, the present
…
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…
…
…
CHAPTER 26 Capital Investment Analysis
CP 26–3
a. Since all the net cash flows are incurred in the local economy under this
assumption, it is likely that the internal rate of return of the new plant will
b. If the plant produced for export only, then the expenses would be incurred in
local currency, while the revenues would be earned in U.S. dollars. This could
CP 26–4
In all three companies, the executives indicate that financial investment analysis
plays a minor role in the selection of projects. The reason is that all three companies
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CP 26–5
a. All cash flows assumed to occur at the end of the year. All amounts are
2014 cash flow:in millions
Net
p
resent value:
Present Value Net Cash Present Value of
Year of $1 at 20% Flow Net Cash Flow
2014 0.833 $(10) $ (8)
b. Even though the film lost money at the box office, the project was financially
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CP 26–6
This activity could be assigned individually or in groups. This activity has the
student(s) perform a capital investment analysis for a desktop computer, using
information available to them on the Internet and from a local business. The
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