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Answers%208 - Solutions to End-of-Chapter Problems...

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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.
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