AC505 Chap 14 Hmwk Solutions - Chapter14...

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Chapter 14 Capital Budgeting Decisions Exercise 14-1  (10 minutes) 1. Item Year(s) Cash  Flow 12%  Factor Present  Value of  Cash  Flows Annual cost savings. 1-8 $7,000 4.968 $ 34,776 Initial investment. ..... Now $(40,000) 1.000   (40,000     ) Net present value. .... $      (5,224     ) 2. Item Cash Flow Yea rs Total  Cash  Flows Annual cost savings. $7,000 8 $ 56,000 Initial investment. ..... $(40,000) 1   (40,000     ) Net cash flow. ........... $      16,000    
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Exercise 14-4  (10 minutes) 1. The project profitability index for each proposal is: Proposal  Number Net Present  Value  (a) Investment  Required  (b) Project Profitability  Index  (a)  ÷  (b) A $36,000 $90,000 0.40 B $38,000 $100,000 0.38 C $35,000 $70,000 0.50 D $40,000 $120,000 0.33 2. The ranking is: Proposal  Number Project Profitability  Index C 0.50 A 0.40 B 0.38 D 0.33 Note that proposal D has the highest net present value, but it ranks  lowest in terms of the project profitability index.
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AC505 Chap 14 Hmwk Solutions - Chapter14...

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