Diff2 terms capitalbudgeting objective 2 aacsb

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Unformatted text preview: l is best? Why? follows: Answer: a. Payback Method Payback for Proposal A: Year 1 Year 2 Payback is 2 years Payback for Proposal B: Year 1 Year 2 Payback is 2 years Payback for proposal C: Year 1 Payback is 1 year Net Present Value: Proposal A: Predicted Cash Flows $(90,000) 80,000 10,000 45,000 PV of Cash Flows $80,000 10,000 $90,000 $45,000 45,000 $90,000 $90,000 Year(s) 0 1 2 3 PV Factor 1.000 0.877 0.769 0.675 Investment Annual operations Year 1 Year 2 Year 3 Net present value Proposal B: Predicted Cash Flows $(90,000) 45,000 45,000 45,000 Year(s) 0 1 2 3 PV Factor 1.000 0.877 0.769 0.675 PV of Cash Flows Investment Annual operations Year 1 Year 2 Year 3 Net present value Proposal C: Predicted Cash Flows $(90,000) 90,000 Year(s) 0 1 PV Factor 1.000 0.877 PV of Cash Flows Investment Annual operations Year 1 Net present value Accrual Accounting Rate of Return: Proposal A: ($80,000 + $10,000 + $45,000) / 3 − ($90,000 / 3) $90,000 = 0.167 Proposal B: ($45,000 - $30,000)/ $90,000 = 0.167 Proposal C: ($90,000 - $90,000)/ $90,000 = 0.0 b. Summary: Proposal A 2.5 1.0 1.5 Proposal B 2.5 2.0 1.5 Proposal C Method Payback method ranks Net present value AARR Even though Proposal C is Number 1 for payback, it comes in last with the other two methods. present value method takes into account the time value of money and the other proposals are less comprehensive, Proposal A would be the best alternative. Diff: 3 Terms: NPV method, required rate of return (RRR), payback, AARR Objective: 3, 4, 5 AACSB: Analytical skills 121) Explain why a corporation's customer base is considered an intangible asset. Answer: A corporation's customer base is considered an intangible asset because if it is handled properly, a corporation's existing customers will be a source of revenues for an indefinite time period. One could make the case that the customer base is like an annuity a steady source of revenues and earnings. Thus it is an asset, although an intangible one. An existing customer usually will stay with a corporation if he or she is hand...
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