Chapter 26: Q6RQ (page 1463)
List some common cash outflows from capital investments.
Acquisition cost, cash operating expense, and cash paid for maintenance, repair, and refurbishment.
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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?
Question: Using payback to make capital investment decisions Consider the following three projects. All three have an initial investment of \(800,000.
| Net Cash Inflows | ||||||
| Project L | Project M | Project N | ||||
Year | Annual | Accumulated | Annual | Accumulated | Annual | Accumulated |
1 | \) 100,000 | \( 100,000 | \) 200,000 | \( 200,000 | \) 400,000 | $ 400,000 |
2 | 100,000 | 200,000 | 250,000 | 450,000 | 400,000 | 800,000 |
3 | 100,000 | 300,000 | 350,000 | 800,000 | ||
4 | 100,000 | 400,000 | 400,000 | 1,200,000 | ||
5 | 100,000 | 500,000 | 500,000 | 1,700,000 | ||
6 | 100,000 | 600,000 | ||||
7 | 100,000 | 700,000 | ||||
8 | 100,000 | 800,000 | ||||
Requirements
S26-6 Using the ARR method to make capital investment decisions Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26-4. Calculate the ARR. Round to two decimal places.
Question: Defining capital investments and the capital budgeting process
Match each capital budgeting method with its definition.
Methods
1. Accounting rate of return
2. Internal rate of return
3. Net present value
4. Payback
Definitions
You are planning for a very early retirement. You would like to retire at age 40 and have enough money saved to be able to withdraw \(215,000 per year for the next 40 years (based on family history, you think you will live to age 80). You plan to save by making 10 equal annual installments (from age 30 to age 40) into a fairly risky investment fund that you expect will earn 10% per year. You will leave the money in this fund until it is completely depleted when you are 80 years old.
Requirements
1. How much money must you accumulate by retirement to make your plan work? (Hint:Find the present value of the \)215,000 withdrawals.)
2. How does this amount compare to the total amount you will withdraw from the investment during retirement? How can these numbers be so different?
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