Chapter 26: Q12RQ (page 1464)
What is the accounting rate of return?
Answer
ARR is calculated using accrual accounting rather than net cash inflows.
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What are post-audits? When are they conducted?
Henry Hardware is adding a new product line that will require an investment of \(1,512,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of \)310,000 the first year, \(270,000 the second year, and \)240,000 each year thereafter for eight years. Compute the payback period. Round to one decimal place.
Hudson Manufacturing is considering three capital investment proposals. At this time, Hudson only has funds available to pursue one of the three investments.
Equipment A | Equipment B | Equipment C | |
Present value of net cash inflows | \(1,647,351 | \)1,969,888 | \(2,064,830 |
Initial investment | (1,484,100) | (1,641,573) | (1,764,812) |
NPV | \)163,251 | \(328,315 | \)300,018 |
Which investment should Hudson pursue at this time? Why?
What is the profitability index? When is it used?
Match the following business activities to the steps in capital budgeting process.
Steps in the capital budgeting process:
a. Develop strategies
b. Plan
c. Direct
d. Control
Business activities:
1. A manager evaluates progress one year into the project.
2. Employees submit suggestions for new investments.
3. The company builds a new factory.
4. Top management attends a retreat to set long-term goals.
5. Proposed investments are analyzed.
6. Proposed investments are ranked.
7. New equipment is purchased.
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