# Managerial Accounting

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|...

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