Principles of Accounting Volume 2
19th Edition
ISBN: 9781947172609
Author: OpenStax
Publisher: OpenStax College
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 11, Problem 3TP
Would you rather have $7,500 today or at the end of 20 years after it has been invested at 15%?
Explain your answer.
The following are independent situations. For each capital budgeting project, indicate whether management should accept or reject the project and list a brief reason why.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
A company wants to decide which project to undertake out of two projects A and B. For this purpose, it wants to evaluate each project that have the same initial investment (cost) but different cash flows for the next three years. The following table gives information on these two projects. The discount rate to be used is 8 percent, which is the WACC for the company. Use two methods of capital budgeting: The Net Present Value (NPV) Method and the Internal Rate of Return (IRR) Method, to evaluate and compare the two projects. Based on the outcome of calculations, choose the best project A or B and explain your decision for each method. Show all your work for each method step by step.
Initial Investment and Cash Flows of
Projects A and B in AED
Project A
Project B
Initial Investment
- 150,000
- 150,000
Year 1 Cash flow
20,000
50,000
Year 2 Cash flow
90,000
90,000
Year 3 Cash flow
70,000
60,000
What is the importance of the Technique used for analysis on Capital budgeting cost for a project? .
Need typed answer only.Please give answer within 45 minutes
. Capital budgeting is the process of identifying, analyzing and selecting investment
projects whose returns are expected to extend beyond one year. This capital
budgeting decision for an investment requires the analysis of some factors.
1. List and
explain three (3) of these factors.
2. You have an investment opportunity that requires an initial investment of GH¢5,000
today and will pay GH¢6,000 in a year’s time. If an alternative investment with similar
risk pays 25%, should you invest?
3. You will retire in 18 years and you currently have GH¢250,000 saved, and your plan is
to have GH¢1,000,000 at your retirement. What annual interest rate must you earn to
reach this goal, assuming you do not save any additional funds?
4. With practical example(s), differentiate between compounding and discounting.
5. As a Business Finance student, what is the essence of the valuation principle in your
personal life?
Chapter 11 Solutions
Principles of Accounting Volume 2
Ch. 11 - Capital investment decisions often involve all of...Ch. 11 - Preference decisions compare potential projects...Ch. 11 - The third step for making a capital investment...Ch. 11 - You are explaining time value of money factors to...Ch. 11 - If you are saving the same amount each month in...Ch. 11 - You want to invest $8,000 at an annual Interest...Ch. 11 - Using the information provided, what transaction...Ch. 11 - Grummet Company is acquiring a new wood lathe with...Ch. 11 - The process that determines the present value of a...Ch. 11 - The process of reinvesting interest earned to...
Ch. 11 - The NPV method assumes that cash inflows...Ch. 11 - Which of the following does nor assign a value to...Ch. 11 - Which of the following discounts future cash flows...Ch. 11 - This calculation determines profitability or...Ch. 11 - The IRR method assumes that cash flows are...Ch. 11 - When using the NPV method for a particular...Ch. 11 - What are the steps involved in the process for...Ch. 11 - Why does a company evaluate both the money...Ch. 11 - What is the next thing a company needs to do after...Ch. 11 - What is the screening decision?Ch. 11 - Your supervisor is on the companys capital...Ch. 11 - Ekon owns a small tow-truck business that responds...Ch. 11 - What is the payback method used to determine?Ch. 11 - What are one advantage and one disadvantage of the...Ch. 11 - What are one advantage and one disadvantage of the...Ch. 11 - What is the equation to calculate the payback...Ch. 11 - What is the equation to calculate the accounting...Ch. 11 - What is future value and what is one example where...Ch. 11 - Why do businesses consider time value of money...Ch. 11 - What determines the anticipated interest rate...Ch. 11 - To calculate present value of a lump sum, which...Ch. 11 - What is the definition of present value?Ch. 11 - What is the difference between the discount rate...Ch. 11 - Briefly explain how NPV is computed and...Ch. 11 - What is the basic benefit of using IRR?Ch. 11 - How is the IRR determined if there are uneven cash...Ch. 11 - A fellow student studying managerial accounting...Ch. 11 - What are the strengths and weaknesses of NPV?Ch. 11 - What are the strengths and weaknesses of IRR?Ch. 11 - How does the size of the initial investment affect...Ch. 11 - Bobs Auto Repair has determined that it needs new...Ch. 11 - In practice, external factors can impact a capital...Ch. 11 - If a copy center is considering the purchase of a...Ch. 11 - Assume a company is going to make an investment of...Ch. 11 - If a garden center is considering the purchase of...Ch. 11 - The management of Kawneer North America is...Ch. 11 - A mini-mart needs a new freezer and the initial...Ch. 11 - You put $250 in the bank for S years at 12%. A. If...Ch. 11 - If you invest $12,000 today, how much will you...Ch. 11 - You have been depositing money into an account...Ch. 11 - How much would you invest today in order to...Ch. 11 - Your friend has a trust fund that will pay her the...Ch. 11 - Jullo Company is considering the purchase of a new...Ch. 11 - How much must be invested now to receive $30,000...Ch. 11 - Project A costs $5,000 and will generate annual...Ch. 11 - Project B cost $5,000 and will generate after-tax...Ch. 11 - Gardner Denver Company is considering the purchase...Ch. 11 - Consolidated Aluminum is considering the purchase...Ch. 11 - Redbird Company is considering a project with an...Ch. 11 - Towson Industries is considering an investment of...Ch. 11 - Cinemar Productions bought a piece of equipment...Ch. 11 - Margos Memories, a company that specializes in...Ch. 11 - Boxer Production, Inc., is in the process of...Ch. 11 - A restaurant is considering the purchase of new...Ch. 11 - Assume a company is going to make an investment in...Ch. 11 - A grocery store is considering the purchase of a...Ch. 11 - The management of Ryland International Is...Ch. 11 - An auto repair company needs a new machine that...Ch. 11 - You put $600 in the bank for 3 years at 15%. A. If...Ch. 11 - If you invest $15,000 today, how much will you...Ch. 11 - You have been depositing money into an account...Ch. 11 - How much would you invest today in order to...Ch. 11 - Your friend has a trust fund that will pay her the...Ch. 11 - Conestoga Plumbing plans to invest in a new pump...Ch. 11 - How much must be invested now to receive $50,000...Ch. 11 - Project X costs $10,000 and will generate annual...Ch. 11 - Project Y cost $8,000 and will generate net cash...Ch. 11 - Caduceus Company is considering the purchase of a...Ch. 11 - Garnette Corp is considering the purchase of a new...Ch. 11 - Wallace Company is considering two projects. Their...Ch. 11 - Taos Productions bought a piece of equipment for...Ch. 11 - Your company is planning to purchase a new log...Ch. 11 - Jasmine Manufacturing is considering a project...Ch. 11 - Use the tables in Appendix B to answer the...Ch. 11 - Ralston Consulting. Inc., has a $25,000 overdue...Ch. 11 - Falkland, Inc., is considering the purchase of a...Ch. 11 - There are two projects under consideration by the...Ch. 11 - There are two projects under consideration by the...Ch. 11 - Pompeiis Pizza has a delivery car that it uses for...Ch. 11 - Pitt Company is considering two alternative...Ch. 11 - The Ham and Egg Restaurant is considering an...Ch. 11 - Gallant Sports s considering the purchase of a new...Ch. 11 - A bookstore is planning to purchase an automated...Ch. 11 - Markoff Products is considering two competing...Ch. 11 - Use the tables in Appendix B to answer the...Ch. 11 - Chang Consulting. Inc., has a $15,000 overdue debt...Ch. 11 - Mason, Inc., is considering the purchase of a...Ch. 11 - There are two projects under consideration by the...Ch. 11 - Use the information from the previous exercise to...Ch. 11 - D**M Pizza has a delivery car that is uses for...Ch. 11 - Joliet Company is considering two alternative...Ch. 11 - Bouvier Restaurant is considering an investment in...Ch. 11 - What is the benefit(s) of the accountants...Ch. 11 - Austins cell phone manufacturer wants to upgrade...Ch. 11 - Would you rather have $7,500 today or at the end...Ch. 11 - Midas Corp. evaluated a potential investment and...Ch. 11 - Giorgio Co. is looking at an investment project...Ch. 11 - Dinaro Inc. is looking at an investment project...Ch. 11 - You begin a new job at Cabrera Medical Supplies....Ch. 11 - Fenton, Inc., has established a new strategic plan...
Additional Business Textbook Solutions
Find more solutions based on key concepts
Matching graphs with descriptions of cost and revenue behavior. (D. Green, adapted) Given here are a number of ...
Cost Accounting (15th Edition)
E9-15 Identifying and correcting internal control weakness
Learning Objective 1
Suppose The Right Rig Dealers...
Horngren's Accounting (11th Edition)
Zero beginning inventory, materials introduced in middle of process. Dot and Ken Ice Cream uses a mixing depart...
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Prepare income statements (Learning Objective 5) Part One: In 2015, Fran Lexa opened Frans Flowers, a small sho...
Managerial Accounting (5th Edition)
LO 4 (Learning Objective 4: Use ratios to evaluate a stock investment) Comparative financial statement data of ...
Financial Accounting (12th Edition) (What's New in Accounting)
Describe the three steps of the high-low method.
Horngren's Financial & Managerial Accounting, The Managerial Chapters (6th Edition)
Knowledge Booster
Similar questions
- Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided. Relevant information: The firm uses a 3-year cutoff when using the payback method. The hurdle rate used to evaluate capital budgeting projects is 15%. The cash flows for projects A, B and C are provided below. Project A Project B Project C Year 0 -30,000 -20,000 -50,000 Year 1 0 4,000 20,000 Year 2 7,000 5,000 20,000 Year 3 20,000 6,000 20,000 Year 4 20,000 7,000 5,000 Year 5 10,000 8,000 5,000 Year 6 5,000 9,000 5,000 Calculate the net present value (NPV) for each project in excel. Which projects would you accept based on the NPV criterion?arrow_forwardSenior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided. Relevant information: The firm uses a 3-year cutoff when using the payback method. The hurdle rate used to evaluate capital budgeting projects is 15%. The cash flows for projects A, B and C are provided below. Project A Project B Project C Year 0 -30,000 -20,000 -50,000 Year 1 0 4,000 20,000 Year 2 7,000 5,000 20,000 Year 3 20,000 6,000 20,000 Year 4 20,000 7,000 5,000 Year 5 10,000 8,000 5,000 Year 6 5,000 9,000 5,000 Calculate the internal rate of return (IRR) for each project in excel Which projects would you accept based on the IRR criterion?arrow_forwardSenior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided. Relevant information: The firm uses a 3-year cutoff when using the payback method. The hurdle rate used to evaluate capital budgeting projects is 15%. The cash flows for projects A, B and C are provided below. Project A Project B Project C Year 0 -30,000 -20,000 -50,000 Year 1 0 4,000 20,000 Year 2 7,000 5,000 20,000 Year 3 20,000 6,000 20,000 Year 4 20,000 7,000 5,000 Year 5 10,000 8,000 5,000 Year 6 5,000 9,000 5,000 Calculate the payback period for each project. Which project(s) would you accept based on the payback criterion?arrow_forward
- Assume the following information for a capital budgeting proposal with a five-year time horizon: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket costs. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided. If the company's discount rate is 12%, then the net present value for this investment is closest to: Multiple Choice $241,600. $(141,600). $ 530,000 $ 300,000 $ 130,000 $ 50,000 $ 40,000arrow_forwarda. Capital budgeting is the process of identifying, analyzing and selecting investment projects whose returns are expected to extend beyond one year. This capital budgeting decision for an investment requires the analysis of some factors. List and explain three (3) of these factors. b. You have an investment opportunity that requires an initial investment of GH¢5,000 today and will pay GH¢6,000 in a year’s time. If an alternative investment with similar risk pays 25%, should you invest? c. You will retire in 18 years and you currently have GH¢250,000 saved, and your plan is to have GH¢1,000,000 at your retirement. What annual interest rate must you earn to reach this goal, assuming you do not save any additional funds? d. With practical example(s), differentiate between compounding and discounting. e. As a Business Finance student, what is the essence of the valuation principle in your personal life?arrow_forwardWhen evaluating a capital budgeting proposal and reviewing the included costs the consultant that has been helping us with reviewing equipment choices had costs of $60,000 and has been included in the cash outflows in year zero of the project. As the financial analyst evaluating the project how would you treat the $60,000?arrow_forward
- Capital budgeting is an important topic, and there are websites designed to help people understand the methods available. Access TeachMeFinance.com’s capital budgeting web page ( teachmefinance.com/capitalbudgeting.html). This web page contains an example of a capital budgeting case involving a $15,000 initial cash outflow. Required Compute the payback period and the net present value (assuming a 10% required rate of return) of the following investment—assume that its cash flows occur at year-end. Compared to the example case at the website, the larger cash inflows in the example below occur in the later years of the project’s life. Is this investment acceptable based on the application of these two capital budgeting methods? Explain. Period 0 Period 1 Period 2 Period 3 Period 4 Period 5 Cash flow. . . . . . . . . . . . . . $(15,000) $1,000 $2,000 $3,000 $6,000 $7,000arrow_forwardAppelbaum Inc. is comparing several alternative capital budgeting projects as shown below: Projects A B C Initial investment $80,000 $120,000 $160,000 Present value of net cash flows 90,000 110,000 200,000 Using the net present value, how many of the projects are available?? Group of answer choicesarrow_forwardSuppose that you are considering two projects and only have the financial resources to choose one project. Project A has an internal rate of return (IRR) of 14.5% and Project B, an IRR of 23.5%. The cost of capital is 12%. Explain whether the IRR capital budgeting technique is suitable for you to determine your project selection.arrow_forward
- Given the information below, John the CEO needs to make the capital budgeting decision. Which project(s) is (are) most likely to be accepted, if the company's investment budget is $7 million and the required rate of return is 8%? Project A with initial investment of $3 million, NPV of $432,000, payback of 5 years, and IRR of 10%. Project B with initial investment of $2.5 million, NPV of $200,000, payback of 3 years, and IRR of 7%. Project C with initial investment of $3.5 million, NPV of $630,000, payback of 3 years, and IRR of 11%. If the projects are not mutually exclusive, accept A and C.. If the projects are mutually exclusive, accept A. If the projects are not mutually exclusive, accept all. If the projects are mutually exclusive, accept A and C.arrow_forwardYour company wants to determine the feasibility of two capital budgeting projects, and has given you the task of analyzing them. Because the projects are at the early "idea" stage, they are referred to simply as Project A and Project B. Each project has a cost of $50.000. and a cost of capital of 12%. Their expected net cash flows are: Expected Net Cash Flows Year Project A (S) Project B (S) (50.000) (50.000) 26,500 18,500 18.000 17.500 3. 12,000 15,500 4 7.000 15,500 (a) Calculate each project's payback period, (b) Calculate each project's net present value (NPV) (c) Calculate each project's internal rate of return (IRR). (d) Which project(s) should be accepted if they are independent? (e) Which project should be accepted if they are mutually exclusive?arrow_forwardWhat are the acceptance criteria for IRR and NPV? Discuss the steps in capital budgeting. (Kindly note that your handwriting should be clearly visible and readable. You should provide a detailed explanation for this question. If required, feel free to paste multiple pictures in the designed area and increase the designed area to match your answer.).arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT