Managerial Accounting Chapter 13 Garison

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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%
ItemYears
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%
ItemYears Amount of cash flow 16% factor Present Value of Cash flow Cash flow (a) 10$6,000 0.227$1,362
Initial Investment (b)Now $15,000 1$15,000
Net Present Value (a-b)($13,638)

Bases on the same minimum required rate of return I would recommend that Sharp Company should invest in project A

Question 13-12
1.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 $22,500

Simple rate of return = Annual incremental net operating income / Initial Investment = $22,500/$180,000
= 12.50%

Since the simple rate of return (12.50%) is less than the required rate of return (14%), the equipment should not be bought.

Problem 13-19...
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