Any time that multiple measures are used there may be

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critical to the company's operations, then Proposal 4 is probably best. Any time that multiple measures are used there may be confusion because very seldom will one proposal appear to be the best with all models. In this case, payback ranks Proposal 1 the best, NPV ranks Proposal 4 the best, IRR ranks Proposal 2 the best, and AARR ranks Proposal 1 the best. The importance of each ranking will depend upon the circumstances of the organisation and the managers must be attuned as to what is most favourable. The net present value and the internal rate - of - return methods are superior because they consider the time - value of money. 141) What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced? Answer: Using accrual accounting to evaluate the performance of a manager may create conflicts with using discounted cash flow (DCF) methods for capital budgeting because frequently a project using a DCF method will not report strong operating profit results in the early years of the project under accrual accounting. If this is the case, a manager might be tempted not to use DCF methods even though the decisions based on them might be in the best interests of the company over the long run. The conflict can be reduced by evaluating managers on a project - by - project basis and by looking at their ability to achieve the amounts and timing of forecasted cash flows. 50
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142) Retail Outlet is looking for a new location near a shopping centre. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new shopping centre are available but each has its own advantages and disadvantages. The owner of the company has completed an analysis of each location that includes considerations for the time value of money. The information is as follows: Location A Location B Location C Internal rate of return 13% 17% 20% Net present value $25 000 $40 000 $20 000 The owner does not understand how the location with the highest percentage return has the lowest net present value. Required: Explain to the owner what is (are) the probable cause(s) of the comparable differences. Answer: The highest probability is that location C has a much lower initial investment than the other two. Therefore, it can show a higher rate of return with fewer dollars of inflow. Unfortunately, this may cause it to have the lowest net present value since this model is presented in dollar terms. Location C could also have a shorter life which could give it a higher percentage return during its life but fewer dollars overall. 143) Aluminium Casting Company wants to buy a moulding machine that can be integrated into its computerised manufacturing process. It has received three bids, and related manufacturer's specifications, for the machine.
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