Cost Accounting - CHAPTER 21 CAPITAL BUDGETING AND COST...

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Unformatted text preview: CHAPTER 21 CAPITAL BUDGETING AND COST ANALYSIS 21-21 (30 min.) Comparison of projects, no income taxes. 1. Total Present Value Year Present Discount Value Factors at 12% 1 2 3 Plan I $ (200,000) 1.000 $ (200,000) (2,391,000 ) 0.797 $(3,000,000) $(2,591,000 ) Plan II $(1,000,000) 1.000 $(1,000,000) (893,000) 0.893 $(1,000,000) (797,000 ) 0.797 $(1,000,000) $(2,690,000 ) Plan III $ (100,000) 1.000 $ (100,000) (893,000) 0.893 $(1,000,000) (797,000) 0.797 $(1,000,000) (712,000 ) 0.712 $(1,000,000) $(2,502,000 ) 2. Plan III has the lowest net present value cost. Plan III is the preferred one on financial criteria. 3. Factors to consider, in addition to NPV, are: a. Financial factors including: • Competing demands for cash. • Availability of financing for project. b. Nonfinancial factors including: • Risk of building contractor not remaining solvent. Plan II exposes Fox Valley most if Vukacek becomes bankrupt before completion because it requires more of the cash to be paid earlier. • Ability to have leverage over Vukacek if quality problems arise or delays in construction occur. Plans I and III give Fox more negotiation strength by being able to withhold sizable payment amounts if, say, quality problems arise in Year 1....
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This note was uploaded on 05/18/2010 for the course BUSS 210 taught by Professor Paejinhan during the Spring '09 term at Korea University.

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Cost Accounting - CHAPTER 21 CAPITAL BUDGETING AND COST...

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