Chapter 14 Homework

Chapter 14 Homework - Accounting 225 Managerial Accounting...

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Acc ! nting 225 M. Novack Accounting 225 Managerial Accounting Fall 2008 Michael Novack Homework Chapter 14
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Acc ! nting 225 M. Novack Exercise 14-2 Continued 1 ........ Annual savings over present method of delivery $5400 Added contribution margin from expanded deliveries ................................. (1,800 pizzas × $2 per pizza) 3600 ................................................. Annual cash inflows $9000 2. Factor of Interntal Rate of Return = Investment Required Internal Cash Flow = 45000 9000 = 5000 Looking in Exhibit 14B-2, and scanning along the six-year line, we can see that the factor computed above, 5.000, is closest to 5.076, the factor for the 5% rate of return. Therefore, to the nearest whole percent, the internal rate of return is 5%.
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Acc ! nting 225 M. Novack Exercise 14-2 3. The cash flows are not even over the six-year life of the truck because of the extra $13,000 cash inflow that occurs in the sixth year. Therefore, the approach used above cannot be used to compute the internal rate of return. Using trial-and-error or some other method, the internal rate of return turns out to be about 11%: Year(s) Amount of Cash Flows 11% Factor Present Value of Cash Flows ...... Initial investment Now ($45000) 1.000 ($45000) .. Annual cash inflows 1-6 $9000 4.231 38079 ........... Salvage value 6 $13000 0.535 6955 ...... Net present value $34 As expected, the extra cash inflow in the sixth year increases the internal rate of return.
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Acc ! nting 225 M. Novack Exercise 14-4 1. The project profitability index for each proposal is: Proposal Net Present Value (a) Investment Required (b) Project Profitability Index (a) ÷ (b) A $34000 $85000 0.40 B $50000 $200000 0.25 C $45000 $90000 0.50 D $51000 $170000 0.30 2. The ranking would be: Proposal Project Profitability Index C 0.50 A 0.40 D 0.30 B 0.25 Note that proposals D and B have the highest net present values of the four proposals, but they rank at the bottom of the list in terms of the project profitability index.
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Acc ! nting 225 M. Novack
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This note was uploaded on 01/27/2009 for the course BA 213 taught by Professor Michaelnovack during the Spring '09 term at Pepperdine.

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Chapter 14 Homework - Accounting 225 Managerial Accounting...

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