Chapter 26: Q15RQ (page 1464)
Why is it preferable to receive cash sooner rather than later?
Answer
The basic rule is that cash received now can be invested to generate revenue sooner than cash received later.
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Using ARR to make capital investment decisions Refer to the Henry Hardware information in Exercise E26-20. Assume the project has no residual value. Compute the ARR for the investment. Round to two places.
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.
What is the decision rule for IRR?
David is entering high school and is determined to save money for college. David feels he can save $6,000 each year for the next four years from his part-time job. If David is able to invest at 7%, how much will he have when he starts college?
Mountain Manufacturing is considering the following capital investment proposals. Mountain’s requirement criteria include a maximum payback period of five years and a required rate of return of 12.5%. Determine if each investment is acceptable or should be rejected (ignore qualitative factors). Rank the acceptable investments in order from most desirable to least desirable
Project | A | B | C | D | E |
Payback | 3.15 years | 4.20 years | 2.00 years | 3.25 years | 5.00 years |
NPV | \(10,250 | \)42,226 | (\(10,874) | \)36,251 | $0 |
IRR | 13.0% | 14.2% | 8.5% | 14.0% | 12.5% |
Profitability index | 1.54 | 1.92 | 0.75 | 2.86 | 1.00 |
Explain the difference between the present value factor tables—Present Value of \(1 and Present Value of Ordinary Annuity of \)1.
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