Unformatted text preview: ate of return is greater than 12%. Start by trying any % above 12% and the solution is listed below: Investment Working capital needed Annual operations Working capital returned Salvage value Net present value With a zero net present value, the internal rate of return is 16%. c. Payback period = ($75,000 + $10,000)/$20,000 = 4.25 years. Predicted Cash Flows Year(s) PV Factor $(75,000) 0 1.000 (10,000) 0 1.000 20,000 16 3.685 10,000 6 0.410 17,560 6 0.410 PV of Cash Flows Diff: 3 Terms: NPV method, required rate of return (RRR), IRR method, payback Objective: 3, 4 AACSB: Analytical skills 119) Jensen machine that costs $250,000. It requires working capital of $25,000. Annual cash savings are anticipated to be $103,000 Manufact for five years. The company uses straightline depreciation. The salvage value at the end of five years is expected to be uring is $10,000. The working capital will be recovered at the end of the machine's life. considerin g buying Required: an automated Compute the accrual accounting rate of return based on the initial investment. Answer: Accrual accounting income = $103,000 (($250,000 $10,000)/5) = $103,000 $48,000 = $ 55,000 AARR with initial investment = $55,000/($250,000 + $25,000) = $55,000/$275,000 = 0.20 Diff: 2 Terms: accrual accounting rate of return (AARR) Objective: 5 AACSB: Analytical skills 120) Gavin and Alex, Proposal A Proposal B Proposal C baseball Initial investment in equipment $90,000 $90,000 $90,000 consultant Annual cash increase in operations: s, are in Year 1 80,000 45,000 90,000 need of a Year 2 10,000 45,000 0 microcom Year 3 45,000 45,000 0 puter Salvage value 0 0 0 network Estimated life 3 yrs 3 yrs 1 yr for their staff. The company uses straightline depreciation for all capital assets. They have received Required: three proposals, a. Compute the payback period, net present value, and accrual accounting rate of return with initial investment, for each with proposal. Use a required rate of return of 14%. related facts as b. Rank each proposal 1, 2, and 3 using each method separately. Which proposa...
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 Spring '10
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 Accounting, Cost Accounting, Net Present Value, The Bible, AACSB, Reflective thinking, Capital Budgeting

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