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Ch28 SE1 to SE3 CAPITAL INVESTMENT ANALYSIS Chapter 28, SE 1. The manager's role is to identify and explain the need for capital investments in his or her area of responsibility. In this case, the plant manager must put together a for- mal request for the new machine, including estimates of the machine's anticipated cost and the cost savings resulting from the investment. Chapter 28, SE 2. The weighted-average cost of capital is 4.8 percent, computed as follows: Source of Proportion Cost of Capital Amount of Capital Capital Weighted Cost Debt $3,000,000 60% × 4% = 0.024 Equity 2,000,000 40% × 6% = 0.024 Total $5,000,000 100% 0.048 Chapter 28, SE 3. Requests ranked in order of rate of return: Rate of Capital Cumulative Request Return Investment Investment 3 16% $130,000 $130,000 6 15% 230,000 360,000 2 14% 110,000 470,000 4 13% 160,000 630,000 5 12% 175,000 805,000 1 11% 60,000 865,000 Total $865,000 Requests 1 and 5 are rejected because they do not meet the minimum rate of return of 13 percent. Requests 3, 6, and 2 are accepted because their rates of return exceed the minimum rate of return and the total cost of the three projects is less than the $500,000 available. Project 4 must be rejected even though it meets the minimum rate of return because there will not be sufficient funds for this project after Projects 3, 6, and 2 are funded. Capital investment funds of $30,000 are left for future use. CHAPTER 28 Solutions
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Chapter 12, SE 4. Projected net cash inflows are the balance of increases in projected cash re- ceipts over increases in projected cash payments resulting from a capital invest- ment. Projected net income is the amount remaining after all projected expenses for a period have been subtracted from projected revenues and there is a posi- tive balance. Depreciation of plant and equipment is used as an expense when computing net income. Depreciation, however, is a noncash expense and is not relevant when computing net cash inflows. Therefore, projected net cash inflows will usually be larger than projected net income. Chapter 28, SE 5. Heidi Layne should decide to receive $20,000 at the end of each of the next 20 years. The present value of these payments discounted at 5 percent is: $20,000 × 12.462 * = $249,240 This far exceeds the lump-sum payment of $200,000. *Table 2 in Appendix B on present value tables. Chapter 28, SE 6. The present value of the residual value is: $5,500 × 0.681 * = $3,746 *Table 1 in Appendix B on present value tables. Chapter 28, SE 7. Net Present Value = Present Value of Future Net Cash Inflows = ( $590,000 × 3.605 $2,000,000 = $2,126,950 $2,000,000 = $126,950 The solution is positive, so the piece of equipment should be purchased. A posi- tive answer means that the investment will yield more than the minimum 12 per- cent return required by the company. *Table 2 in Appendix B present value tables.
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This note was uploaded on 11/02/2011 for the course ACCT 210 taught by Professor Mcgonigal during the Spring '11 term at E. Washington.

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