Accounting Poblem 4

Chapter 13:
1) E13-14 (5 points);
2) E13-16 (5 points);
3) E13-18 (5 points);
4) E13-19 (1 point);
5) P13-23A (8 points);
6) P13-25A (8 points);
7) P13-33A parts a, b and c only (8 points);
8) P13-39B (8 points);
9) P13-42B (7 points)

Solutions:

E13-14 (5 points):

(a) The cash payback period is: $48,000 ÷ $8,000 = 6 years The net present value is: | | Time Period | | CashFlows | × | 9% DiscountFactor | = | PresentValue | Present value of net annual cash flows | | 1–8 | | $8,000 | | 5.53482 | | $44,279 | Present value of salvage value | | 8 | | 20,000 | | 0.50187 | | 10,037 | | | | | | | | | 54,316 | Capital investment | | | | | | | | 48,000 | Net present value | | | | | | | | $6,316 |

Using financial calculator:
CF0=-48,000; C01=8,000; F01=7; C02 = 28,000; F02 = 1; I = 9; CPT NPV = 6,315.88

(b) In order to meet the cash payback criteria, the project would have to have a cash payback period of less than 5.6 years (8 × 70%). It does not meet the criteria. However, the net present value is positive, suggesting the project should be accepted. The reason for the difference is that the project’s high estimated salvage value increases the present value of the project. The net present value is a better indicator of the project’s worth.

E13-16 (5 points): Project A: | | Time Period | | CashFlows | × | 10% DiscountFactor | = | PresentValue | Present value of net annual cash flows | | 1–8 | | $20,000 | | 5.33493 | | $106,699 | Present value of salvage value | | 8 | | — | | — | | — | | | | | | | | | $106,699 | Capital investment | | | | | | | | 98,000 | Net present value | | | | | | | | $8,699 |

Using financial calculator:
CF0=-98,000; C01=20,000; F01=8; I = 10; CPT NPV = 8,698.52
Total PV of net cash flows = NPV + Initial Investment = 8,698.52 + 98,000 = 106,698.52

Profitability index = $106,699 ÷ $98,000 = 1.089

Project B: | |