# 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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