Hernandez, Digna C. Mr.

Romel Cayabyab
ACC C309-301T November 15, 2021

WEEK 10 AND 11 ASSIGNMENT

EXERCISE 13–1 Payback Method [LO13–1]

Required:
1. Determine the payback period of the investment.
2. Would the payback period be affected if the cash inflow in the last year were several
times as large?

Answer:

1. The payback period determined as follows:

Year Investment Cash Inflow Unrecovered investment
1 $15,000 $1,000 $ 14,000
2 $ 8,000 $2,000 $ 20,000
3 $2,500 $ 17,500
4 $4,000 $ 13,500
5 $5,000 $ 8,500
6 $6,000 $ 2,500
7 $5,000 $0
To get the exact month for the remaining $2,500 we should divide the remaining
unrecoverable investment for year 6 over to the cash inflow for year 7. Therefore;
2,500/5,000 = 0.5. Hence, the investment in the project is fully recovered in the 7th year.
To be more exact, the payback period is approximately 6.5 years or 6 years and 6
months.

2. No, since the investment is recovered prior to the last year, the amount of the cash
inflow in the last year has no effect on the payback period.

EXERCISE 13–2 Net Present Value Method [LO13–2]

Required:
1. Determine the net present value of the investment in the machine.
2. What is the difference between the total, undiscounted cash inflows and cash
outflows over the entire life of the machine?

Answer:
1.
Years Cashflow PV Factor Present Value
Purchase of machine Current year 27,000 1 $27,000
Machine Purchase year 1 to yr. 5 7,000 3.605 25,235
Net present value $ 1,765

2.
Annual cost savings ($ 7,000 X 5) $ 35,000
Less: Initial investment (27,000)
Net cash flow $ 8,000

EXERCISE 13–4 Uncertain Future Cash Flows [LO13–4]

Required:
What dollar value per year would these intangible benefits have to have to make the
equipment an acceptable investment?

Answer:

Annual Saving Cost $400,000

Multiply by: Present Value Factor (1-(1.12)-15)/0.20 4.675
Present Value of Annual Cost Saving 1,870,189
Less: Initial investment (2,500,000)
Net Present Value 629,811
Divided by: PV Factor 4.68
Acceptable Investment $134,705.30

EXERCISE 13–7 Net Present Value Analysis of Two Alternatives [LO13–2]

(a)Calculate net present value for each project
(b) Which investment alternative (if either) would you recommend that the company
accept?

Answer:
(a)
Project A Years Cashflow PVF @ 14% Present Value
Cost of equipment Curren (100,000) 1 (100,000)
Annual Cash Flow t 21,000 3.889 84,669
Salvage Value of Equip. 1-6 8,000 0.456 3,468
Net Present Value 6 ($14,683)

Project B Years Cashflow PVF @ 14% Present Value

Cost of equipment Curren (100,000) 1 (100,000)
Annual Cash Flow t 16,000 3.889 62,224
Salvage Value of Equip. 1-6 100,000 0.456 45,600
Net Present Value 6 $7,824

(b)
I would recommend that Perit Company should investment their resources to the
project B, as it result a positive income of $7,824 compare to the negative results
provided by the project A.
EXERCISE 13–10 Basic Net Present Value Analysis [LO13–2]
Required:
Using the net present value method, determine whether or not the Malti Company stock
provided a 14% return. Round all computations to the nearest whole dollar.
Answer:

Year PV Factor Present Value

1 (1.14)1 = 0.8772 420 x 0.8772 = 368.42
2 (1.14)2 = 0.7695 420 x 0.7695 = 323.18
3 (1.14)3 = 0.675 420 x 0.675 = 283.50
$975.10
PV of amount received from sold stocks
Selling price $16,000
Multiply by: PV Factor for year 3 0.675
PV received from sales of stock 10,800
Add: Present Value 975
11,775
Less: Purchase price (13,000)
Net Present Value ($1,225)

Malti Company Stock were not able to provide th 14% return due to the negative results
of its Net Present Value.