Chapter 26: Q8RQ (page 1463)
How is payback calculated with equal net cash inflows?
Answer
The payback period calculates by dividing by keeping the original investment amount in the numerator and the annual cash flow in the denominator.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Outlining the capital budgeting process Review the following activities of the capital budgeting process: a. Budget capital investments. b. Project investments’ cash flows. c. Perform post-audits. d. Make investments. e. Use feedback to reassess investments already made. f. Identify potential capital investments. g. Screen/analyze investments using one or more of the methods discussed. Place the activities in sequential order as they occur in the capital budgeting process.
What is the payback method of analyzing capital investments?
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.
Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26- 4. What is the project’s NPV (round to nearest dollar)? Is the investment attractive? Why or why not?
Question: Using the payback and accounting rate of return methods to make capital investment decisions
Consider how Hunter Valley Snow Park Lodge could use capital budgeting to decide whether the \(11,000,000 Snow Park Lodge expansion would be a good investment. Assume Hunter Valley’s managers developed the following estimates concerning the expansion:
Number of additional skiers per day 121 skiers Average number of days per year that weather conditions allow skiing at Hunter Valley 142 days Useful life of expansion (in years) 7 years Average cash spent by each skier per day \) 241 Average variable cost of serving each skier per day 83 Cost of expansion 11,000,000 Discount rate 10% |
Assume that Hunter Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $600,000 at the end of its seven-year life.
Requirements
What do you think about this solution?
We value your feedback to improve our textbook solutions.
