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