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Abdul ACT273 K3
Abdul ACT273 K3
First preference………. A C D
Second preference….. B B C
Third preference…….. C A A
Fourth preference…… D D B
Exercise 13-8
1. Computation of the annual cash inflow associated with the new electronic games:
Net operating income………………………………………….. $40,000
Add noncash deduction for depreciation…………….. $35,000
Annual net cash inflow………………………………………… $75,000
Investment required
Payback period =
Annual net cash inflow
$ 300,000
= = 4 years
$ 75,000 per year
Yes, the games would be purchased. The payback period is less than the maximum 5 years
required by the company.
Yes, the games would be purchased. The 13.3% return exceeds 12%.
Exercise 13-7
Project A:
Now 1 2 3 4 5 6
Total cash flows (a)………….. $(100,000) $21,000 $21,000 $21,000 $21,000 $21,000 $29,000
Discount factor (14%) (b)…. 1,000 0.877 0.769 0.675 0.592 0.519 0.456
Present value (a)x(b)……….. $(100,000) $18,417 $16,149 $14,175 $12,432 $10,899 $13,224
Project B:
Now 1 2 3 4 5 6
Working capital released….. ________ _______ ______ ______ ______ _______ 100,000
Total cash flows (a)………….. $(100,000) $16,000 $16,000 $16,000 $16,000 $16,000 $116,000
Discount factor (14%) (b)…. 1,000 0.877 0.769 0.675 0.592 0.519 0.456
Present value (a)x(b)……….. $(100,000) $14,032 $12,304 $10,800 $9,472 $8,304 $52,896
The $100,000 should be invested in Project B rather than Project A. Project B has a positive net present
value whereas Project A has a negative net present value.
Exercise 13-6
This is a cost reducing project, so the simple rate of return would be computed as follows:
$ 6,000
= = 7.5%
$ 80,000
Exercise 13-5
C 0.50
A 0.40
B 0.38
D 0.33
Note that proposal D has the highest net present value, but it ranks lowest in terms of the project
profitability index.
Exercise 13-3
Invewstment required
2. :tor of the internal rate of return =
Annual cash inflow
$ 18,600
= =3.720
$ 5,000
Looking in Exhibit 13B-2, a factor of 3.720 falls closest to the 16% rate of return.
3. The cash flows will not be even over the six-year life of the machine because of the extra $9,125
Inflow in the sixth year. Therefore, the above approach cannot be used to compute the internal
rate of return in this situation. Using trial-and-error or some other method, the internal rate of
22%.
Now 1 2 3 4 5 6
Total cash flows (a)………….. $ (18,600) $5,000 $5,000 $5,000 $5,000 $5,000 $14,125
Discount factor (14%) (b)…. 1,000 0.820 0.672 0.551 0.451 0.370 0.303
Present value (a)x(b)……….. $ (18,600) $18,417 $16,149 $14,175 $12,432 $10,899 $13,224
Exercise 13-4
The equipment’s net present value without considering the intangible benefits would be:
$ 630,000
Required increase in present value factor for 15 years = =¿ $134,759
4.675
Exercise 13-2
1.
Now 1 2 3 4 5
Total cash flows (a)………….. $ (27,000) $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 7,000
Discount factor (12%) (b)…. 1,000 0.893 0.797 0.712 0.636 0.567
Note: The annual reduction in operating costs can also be converted to its present value using the
discount factor of 3,605 as shown in Exhibit 13B-2 in Appendix 13B.
2.
Exercise 13-1
3 $2,000 $17,500
4 $4,000 $13,500
5 $5,000 $8,500
6 $6,000 $2,500
7 $5,000 $0
8 $4,000 $0
9 $3,000 $0
10 $2,000 $0
The investment in the project is fully recovered the 7 th year. To be more exact, the payback period is
approximately 6.5 years.
2. Because 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.