This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: 199 Solutions to End-of-Chapter Problems Accounting-Based Methods A8-1. a. If the computers are depreciated on a straight-line basis, depreciation will be $5,000 per year for 4 years. Contribution to net income will be: Year 1 Year 2 Year 3 Year 4 2,500 4,100 4,100 4,100 The average net income is = 3,700 b. The average book value of the investment is (20,000 + 0)/2 = $10,000. c. The average accounting rate of return = Average net income/Average book investment .37 or 37%. d. The payback period is 2.4 years. e. This is not an appropriate method for evaluating capital budgeting projects. It does not take time value of money into account, nor does it look at cash flows. It also does not consider the risk of the project and what would be an appropriate discount rate for the project's cash flows. Payback Methods A8-2. a. Payback on this bond is 25 years. A8-3. a. Payback of Alpha = 3.5 years, payback of Beta = 2.5 years, payback of Gamma = 3.3 years b. If the cutoff is 3 years, then only Beta is acceptable. If the cutoff is 4 years, then all of the projects are acceptable. c. Project Beta because its payback of 2.5 years is the shortest. d. If the firm uses discounted payback with a cutoff of 4 years, then Alpha will payback in about 5 years, Beta in just under 4 years and Gamma in just over 4 years. This means only Beta is acceptable....
View Full Document
This note was uploaded on 04/14/2008 for the course FIN 3123 taught by Professor Qayyum during the Spring '08 term at Mississippi State.
- Spring '08