Managerial Accounting Chapter 10

Managerial accounting chapter 13 garison

Question 13-11
Project A
Initial Cost = $15,000
Life of the project = 10 years
Annual net cash inflow = $4,000
Salvage Value = $0
Required rate of return = 16%
Item Years Amount of cash flow 16% factor Present Value of Cash flow
Annual net cash flow 1 to 10 $4,000 4.833 $19,332
Intial Investment Now $15,000 1 $15,000
Net Present Value (a-b) $4,332

Project B
Initial Cost = $15,000
Life of the project = 10 years
Cash inflow = $6000 (60,000/10 years)
Salvage Value = $0
Required rate of return 16%
Item Years Amount of cash flow 16% factor Present Value of Cash flow
Cash flow (a) 10 $6,000 0.227 $1,362
Payback period
Purchase Cost = $180,000
Annual cost saving that will be provided by the equipment = $37,500
Life of the equipment = 12 years
Payback period = Investment required / Annual net cash inflow = $180000 / $37500 = 4.8
Since all proposals with a payback period of more than 4 years have been rejected, the equipment would not be purchased 2. Simple rate of return
Annual Incremental revenue $37,500
Annual depreciation ($180,000 - 0 )/12 ($15,000)
Annual incremental net operating