Chapter 12

# Chapter 12 - Exercise 12-8 (30 minutes) 1. The formula for...

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Exercise 12-8  (30 minutes) 1. The formula for the project profitability index is: Net present value Project profitability index =  Investment required The index for the projects under consideration would be: Project 1: \$87,270 ÷ \$480,000 = 0.18 Project 2: \$73,400 ÷ \$360,000 = 0.20 Project 3: \$66,140 ÷ \$270,000 = 0.24 Project 4: \$72,970 ÷ \$450,000 = 0.16 2. a. and b. Net Present  Value Project  Profitability  Index First preference. ........ 1 3 Second preference. ... 2 2 Third preference. ....... 4 1 Fourth preference. ..... 3 4 3. The net present value is inferior to the project profitability index as a  ranking device because it does not properly consider the amount of  investment. For example, it ranks project #3 as fourth because of its low  net present value; yet this project is the best in terms of the amount of  cash inflow generated for each dollar of investment (as shown by the  project profitability index). Exercise 12-9  (20 minutes) 1. The payback period would be: Investment required Payback Period =  Net annual cash inflow \$180,000  = 4.8 years \$37,500 per year

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No, the equipment would not be purchased, since the 4.8-year payback  period exceeds the company’s maximum 4-year payback period. 2. The simple rate of return would be computed as follows:
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## This note was uploaded on 06/01/2008 for the course ACCT 606 taught by Professor Huh during the Spring '08 term at CSU San Bernardino.

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Chapter 12 - Exercise 12-8 (30 minutes) 1. The formula for...

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