Ch_9_solutions

Ch_9_solutions - (5 min.) S 9-2 Payback period = Amount...

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Unformatted text preview: (5 min.) S 9-2 Payback period = Amount invested Expected annual net cash inflow = $1,000,000 $305,450 = 3.27 years (rounded) If the investment had a $100,000 residual value, the payback period would not be affected. The cash inflow from any residual value would occur at the end of the assets useful operating life (after 5 years). Payback of the initial investment occurs well before that point in time. The payback period (3.27 years) is less than 3.5 years, so it passes Allegras initial screening. (5 min.) S 9-3 Year Annual Net Cash Inflow Cumulative Net Cash Inflow 1 $500,000 $ 500,000 2 350,000 850,000 3 300,000 1,150,000 After 2 years, the company will have recovered $850,000 of the $1,000,000 initially invested. The company needs to recover an additional $150,000 ($1,000,000 $850,000) to reach payback. The company anticipates net cash inflows of $300,000 in year 3, so: Payback = 2 years + (150,000 / 300,000) Payback = 2.5 years If the investment had a $100,000 residual value, the payback period would not be affected. The cash inflow from any residual value would occur at the end of the assets useful operating life (after 5 years). Payback of the initial investment occurs well before that point in time. The payback period (2.5 years) is less than 3.5 years, so it passes Allegras initial screening. 1 Chapter 9 Capital Investment Decisions and the Time Value of Money (5-10 min.) S 9-4 Accounting rate of return = Average annual operating income from investment Initial Investment = Average annual net cash Annual depreciation inflow from asset on asset Initial Investment = $305,450 $200,000 * $1,000,000 = $105,450 $1,000,000 = 10.55% ( r o u n d e d ) * Depreciation expense: [$1,000,000 $0] 5 = $200,000 (Solution continued on the next page.) (continued) S 9-4 If the CD-player project had a $100,000 residual value, the ARR would change. Specifically, the residual value would cause the yearly depreciation expense to decrease, which will cause the average annual operating income from the investment to increase: Accounting rate of return = Average annual operating income from investment Initial Investment = Average annual net cash Annual depreciation inflow from asset on asset Initial Investment 2 Managerial Accounting Solutions Manual = $305,450 $180,000 * $1,000,000 = $125,450 $1,000,000 = 12.55% ( r o u n d e d ) * Depreciation expense: [$1,000,000 $100,000] 5 = $180,000 The ARR, in either case, exceeds Allegras minimum required ARR. Therefore, the CD-player project passes the companys screening rule. (5-10 min.) S 9-5 Accounting rate of return = Average annual operating income from investment Initial Investment = Average annual net cash Annual depreciation inflow from asset on asset Initial Investment = $288,000 a $200,000 * $1,000,000 = $88,000 $1,000,000 = 8.8% a Average net cash inflow = $1,440,000 total net cash inflow 5 years = $288,000 3 Chapter 9 Capital Investment Decisions and the Time Value of Money *...
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This note was uploaded on 10/08/2011 for the course ACCT 101 taught by Professor Kang during the Spring '08 term at S.F. State.

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Ch_9_solutions - (5 min.) S 9-2 Payback period = Amount...

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