Managerial Accounting
BE12-1, BE12-4, BE12-5, BE12-6
Exercise: E12-5
BE 12-1
$450,000 ÷ $50,000 = 9 years
BE 12-4
| | CashFlows | X | 9% DiscountFactor | = | PresentValue | | | | | | | | Present value of net annual cash flowsPresent value of salvage valueCapital investmentNet present value | | $34,000 0 | XX | 5.53482 .50187 | == | ($188,184)( 0)( 188,184)( 200,000)($ (11,816) |
The reduction in downtime would have to have a present value of at least $11,816 in order for the project to be acceptable.
BE12-5
Project A | | CashFlows | X | 9% DiscountFactor | = | PresentValue | | | | | | | | Present value of net annual cash flowsPresent value of salvage valueCapital investmentNet present value | | $70,000 0 | XX | 6.41766 .42241 | == | $449,236 0 449,236 400,000$ 49,236 |
Profitability index = $449,236/$400,000 = 1.12
Project B | | CashFlows | X | 9% DiscountFactor | = | PresentValue | | | | | | | | Present value of net annual cash flowsPresent value of salvage valueCapital investmentNet present value | | $50,000 0 | XX | 6.41766 .42241 | == | $320,883 0 320,883 280,000$ 40,883 |
Profitability index = $320,883/$280,000 = 1.15
Project B has a lower net present value than Project A, but because of its lower capital investment, it has a higher profitability index. Based on its profitability index, Project B should be accepted.
BE12-6
Original estimate | | CashFlows | X | 10% DiscountFactor | = | PresentValue | | | | | | | | Present value of net annual cash flowsPresent value of salvage valueCapital investmentNet present value | | $46,000 0 | XX | 5.75902 .42410 | == | $264,915 0 264,915 250,000$ 14,915 |
Revised estimate | | CashFlows | X | 10% DiscountFactor | = | PresentValue | | | | | | | | Present value of net annual cash flowsPresent value of salvage valueCapital investmentNet present value | | $39,000 0 | XX | 6.49506
Exercise: E12-5
BE 12-1
$450,000 ÷ $50,000 = 9 years
BE 12-4
| | CashFlows | X | 9% DiscountFactor | = | PresentValue | | | | | | | | Present value of net annual cash flowsPresent value of salvage valueCapital investmentNet present value | | $34,000 0 | XX | 5.53482 .50187 | == | ($188,184)( 0)( 188,184)( 200,000)($ (11,816) |
The reduction in downtime would have to have a present value of at least $11,816 in order for the project to be acceptable.
BE12-5
Project A | | CashFlows | X | 9% DiscountFactor | = | PresentValue | | | | | | | | Present value of net annual cash flowsPresent value of salvage valueCapital investmentNet present value | | $70,000 0 | XX | 6.41766 .42241 | == | $449,236 0 449,236 400,000$ 49,236 |
Profitability index = $449,236/$400,000 = 1.12
Project B | | CashFlows | X | 9% DiscountFactor | = | PresentValue | | | | | | | | Present value of net annual cash flowsPresent value of salvage valueCapital investmentNet present value | | $50,000 0 | XX | 6.41766 .42241 | == | $320,883 0 320,883 280,000$ 40,883 |
Profitability index = $320,883/$280,000 = 1.15
Project B has a lower net present value than Project A, but because of its lower capital investment, it has a higher profitability index. Based on its profitability index, Project B should be accepted.
BE12-6
Original estimate | | CashFlows | X | 10% DiscountFactor | = | PresentValue | | | | | | | | Present value of net annual cash flowsPresent value of salvage valueCapital investmentNet present value | | $46,000 0 | XX | 5.75902 .42410 | == | $264,915 0 264,915 250,000$ 14,915 |
Revised estimate | | CashFlows | X | 10% DiscountFactor | = | PresentValue | | | | | | | | Present value of net annual cash flowsPresent value of salvage valueCapital investmentNet present value | | $39,000 0 | XX | 6.49506