1. Capital Investment Decisions
Chapter 26
Exercises

2. Payback Period In-Class Exercises (Form groups and work exercises):
Exercise No. Page
E Payback Period (Even)
E Payback Period (Uneven)

3. Payback Period In-Class Exercise: Exercise No. Page
E Payback Period (Even)

4. Payback Period Exercise E26-18:
Preston Co. is considering acquiring a manufacturing plant.
The purchase price is $1,100,000.
The owners believe the plant will generate net cash inflows of $297,000 annually.
The plant will have to be replaced in six years.
Requirement: Use the payback method to determine whether Preston should purchase this plant. Round answer to one decimal place.

5. Payback Period

6. Payback Period
End of Exercise

7. Payback Period In-Class Exercise: Exercise No. Page
E Payback Period (Uneven)

8. Payback Period Exercise E26-19:
Robinson Hardware is adding a new product line that will require an investment of $1,454,000.
Managers estimate that this investment will have a 10-year life.
The investment will generate the following net cash flows: Year 1……… $ 300, Year 2……… , Years 3-10… ,000 (each of the eight years)
Requirement: Compute the payback period.

9. Payback Period

10. Payback Period
The proposed $1,454,000 investment would be recovered in approximately 5.4 years.

11. Fractional year computation
Payback Period
Fractional year computation

12. Fractional year computation
Payback Period
Fractional year computation

13. Fractional year computation
Payback Period
Fractional year computation

14. Fractional year computation
Payback Period
Fractional year computation

15. Fractional year computation
Payback Period
Fractional year computation

16. Fractional year computation
Payback Period
Fractional year computation

17. Payback Period
End of Exercise

18. Accounting Rate of Return
In-Class Exercise (Form groups and work exercise):
Exercise No. Page
E Accounting Rate of Return

19. Accounting Rate of Return
Exercise E26-20:
Use the information from Exercise E26-19.
Assume that the project has no residual value. Therefore, the project’s investment cost of $1,454,000 will be fully depreciated over its useful life.
The operating (useful) life is 10 years.
Requirement: Compute the Accounting Rate of Return (ARR) for the investment. Round your answer to two decimal places.

20. Accounting Rate of Return Net Cash Outflows from Exercise E26-19

21. Accounting Rate of Return Formulas for Exercise E26-20
Average annual operating Income
Average amount invested =
Average
Investment =
Asset Cost + Residual Value 2

22. Accounting Rate of Return Computation of Annual Operating Income
From Exercise E26-19

23. Accounting Rate of Return Computation of Annual Operating Income

24. Accounting Rate of Return First, calculate the average investment.=
Asset Cost + Residual Value 2
Average
Investment
$1,454, $ 0 2
= $727,000 =

25. Accounting Rate of Return
Next, calculate the accounting rate of return.
Accounting Rate
of Return
Average annual operating Income
Average amount invested =
Accounting Rate
of Return
$119,600
= % =
$727,000

26. Accounting Rate of Return
End of Exercise

27. Net Present Value In-Class Exercise (Form groups and work exercise):
Exercise No. Page
E Net Present Value & Probability Index

28. Net Present Value Exercise E26-24:
Use the NPV method to determine whether Kyler Products should invest in the following projects.
(1) Project A: Costs $260,000 and offers seven annual net cash inflows of $57,000. Kyler requires an annual return of 16% on investments of this nature.
(2) Project B: Costs $375,000 and offers ten annual net cash inflows of $75,000. Kyler demands an annual return of 14% on investments of this nature.
Requirements: (1) What is the NPV of each project? Assume neither project has a residual value. Round your answer to two decimal places. (2) What is the maximum acceptable price to pay for each project? (3) What is the profitability index of each project? Round to 2 places.

29. Net Present Value
Present value of annuity (Table B-2) (Period 7, 16% column)

30. Net Present Value

31. Net Present Value
Present value of annuity (Table B-2) (Period 10, 14% column)

32. Net Present Value

33. Net Present Value
Maximum acceptable price

34. Profitability Index

35. Net Present Value
End of Exercise

36. Internal Rate of Return
In-Class Exercise (Form groups and work exercise):
Exercise No. Page
E Internal Rate of Return

37. Internal Rate of Return
Project A
Computation of the IRR using data from Exercise E26-24.

38. Internal Rate of Return
Investment Amount
Annual Cash Flow
PV Factor =
Calculated PV Factor:
PV Factor
PV Factor
$260,000
$57,000
4.561 = = =
PV Table B-2 - (PV of an Annuity):
7 Years (12% column) >
IRR = Approx. 12%

39. Internal Rate of Return
Investment Amount
Annual Cash Flow
PV Factor =
Calculated PV Factor:
PV Factor
PV Factor
$260,000
$57,000
4.561 = = =
PV Table B-2 - (PV of an Annuity):
7 Years (12% column) >
IRR = Approx. 12%

40. Internal Rate of Return
Investment Amount
Annual Cash Flow
PV Factor =
Calculated PV Factor:
PV Factor
PV Factor
$260,000
$57,000
4.561 = = =
PV Table B-2 - (PV of an Annuity):
7 Years (12% column) >
(Compared to)
IRR = Approx. 12%+
Since Smart Touch requires a 16% return, the project would not be acceptable.

41. Internal Rate of Return
Project B
Computation of the IRR using data from Exercise E26-24.

42. Internal Rate of Return
Investment Amount
Annual Cash Flow
PV Factor =
Calculated PV Factor:
PV Factor
PV Factor
$375,000
$75,000
5.000 = = =
PV Table B-2 - (PV of an Annuity):
10 Years (15% column) >
IRR = Approx. 15%+

43. Internal Rate of Return
Investment Amount
Annual Cash Flow
PV Factor =
Calculated PV Factor:
PV Factor
PV Factor
$375,000
$75,000
5.000 = = =
PV Table B-2 - (PV of an Annuity):
10 Years (15% column) >
IRR = Approx. 15%+

44. Internal Rate of Return
Investment Amount
Annual Cash Flow
PV Factor =
Calculated PV Factor:
PV Factor
PV Factor
$375,000
$75,000
5.000 = = =
PV Table B-2 - (PV of an Annuity):
10 Years (15% column) >
(Compared to)
IRR = Approx. 15%+
Since Smart Touch requires a minimum return of 14%, the project is considered acceptable and is the best investment.

45. Internal Rate of Return
End of Exercise