Details Please Complete The Following Exercises And/Or Probl

Detailsplease Complete The Following Exercises Andor Problems From T

Please complete the following exercises and/or problems from the textbook: · E26-19 · E26-20 · E26-21 · E26-24 · E26-25 · CP26-38 Prepare your answers in an Excel workbook, using one worksheet per exercise or problem.

E26-19 Using payback to make capital investment decisions 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 and generate net cash inflows of $300,000 the first year, $270,000 the second year, and $260,000 each year thereafter for eight years. Compute the payback period.

Note: Exercise S26-19 must be completed before attempting Exercise S26-20.

E26-20 Using ARR to make capital investment decisions Refer to the Robinson Hardware information in Exercise E26-19. Assume the project has no residual value. Compute the ARR for the investment. Round to two places.

E26-21 Using the time value of money Janice wants to take the next five years off work to travel around the world. She estimates her annual cash needs at $28,000 (if she needs more, she will work odd jobs). Janice believes she can invest her savings at 8% until she depletes her funds. Requirements 1. How much money does Janice need now to fund her travels? 2. After speaking with a number of banks, Janice learns she will only be able to invest her funds at 4%. How much does she need now to fund her travels?

E26-24 Using NPV and profitability index to make capital investment decisions Use the NPV method to determine whether Kyler Products should invest in the following projects:

• Project A: Costs $260,000 and offers seven annual net cash inflows of $57,000. Kyler Products requires an annual return of 16%.
• Project B: Costs $375,000 and offers 10 annual net cash inflows of $75,000. Kyler Products demands an annual return of 14%.

Requirements:

1. What is the NPV of each project? Assume neither project has a residual value. Round 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 two decimal places.

E26-25 Using IRR to make capital investment decisions Refer to the data regarding Kyler Products in Exercise E26-24. Compute the IRR of each project and use this information to identify the better investment.

P26-38 Using payback, ARR, NPV, and IRR to make capital investment decisions This problem continues the Davis Consulting, Inc. situation from Problem P25-34 of Chapter 25. Davis Consulting is considering purchasing two different types of servers. Server A will generate net cash inflows of $25,000 per year and have a zero residual value. Server A’s estimated useful life is three years and it costs $40,000. Server B will generate net cash inflows of $25,000 in year 1, $11,000 in year 2, and $4,000 in year 3. Server B has a $4,000 residual value and an estimated life of three years. Server B also costs $40,000. Davis’s required rate of return is 14%. Requirements 1. Calculate payback, accounting rate of return, net present value, and internal rate of return for both server investments. Use Microsoft Excel to calculate NPV and IRR. 2. Assuming capital rationing applies, which server should Davis invest in?

Paper For Above instruction

The decision-making process for capital investments is multifaceted, involving various financial evaluation methods to determine the most profitable and viable projects. This paper explores several of these techniques—payback period, accounting rate of return (ARR), net present value (NPV), and internal rate of return (IRR)—through practical examples and analysis. Understanding these methods aids managers in making informed investment choices aligned with organizational goals and financial health.

Payback Period Analysis: Robinson Hardware

The payback period is a straightforward metric that measures the time required for an investment to recover its initial cost from cash inflows. In the case of Robinson Hardware’s new product line, the initial investment is $1,454,000, and the cash flows vary over ten years. First, the cumulative cash inflows are assessed annually. The initial year yields $300,000, reducing the remaining unrecovered amount to $1,154,000. The second year adds $270,000, reducing the outstanding balance to approximately $884,000. From the third year onward, annual cash inflows stabilize at $260,000. Continuing this process, the accumulated cash inflow over years three through ten is summed until it equals or exceeds the initial investment.

Calculations show that the payback period occurs during Year 6, as the cumulative inflows surpass the initial investment slightly before the end of this year. Specifically, by Year 5, the total cash inflows amount to $1,274,000, still short of $1,454,000. In Year 6, an inflow of $260,000 reduces the remaining amount to about $180,000. Since only part of Year 6 is needed to recover the remaining investment, the precise payback period can be interpolated, resulting in approximately 5.7 years. This metric enables managers to evaluate whether the project aligns with acceptable risk timelines and organizational thresholds.

ARR Calculation for Robinson Hardware

The ARR method evaluates profitability by comparing average annual accounting profits to the initial investment. Assuming the project has no residual value and using typical depreciation methods, the average annual profit is calculated. For simplicity, assuming straight-line depreciation over ten years, the annual depreciation expense is $145,400. The annual cash inflow averages roughly at $260,000, from which profit margins are derived. The ARR is then computed by dividing the average annual accounting profit by the initial investment, expressed as a percentage and rounded to two decimal places.

In this case, the ARR tends to be favorable if it exceeds the company's benchmark return rate. Investors and managers use ARR to assess whether the project’s profitability justifies the initial expenditure based on accounting profits rather than cash flows. This method, however, does not account for the time value of money, which is a limitation compared to other valuation techniques.

Time Value of Money and Investment Planning: Janice’s Travel Funds

Janice illustrates the importance of the time value of money (TVM) in planning personal financial goals. To determine the lump sum required today to fund her travels, we use the present value of an annuity formula, incorporating the expected annual cash needs ($28,000), the investment rate (8% and 4%), and the duration (five years). At an 8% rate, the present value factors are applied to calculate the necessary savings, revealing the amount Janice must invest now to cover her expenses.

When the investment rate drops to 4%, the present value increases because the discounted value of future cash flows decreases more slowly. Consequently, the amount Janice needs now to finance her travels rises, reflecting the inverse relationship between interest rates and present value. These calculations exemplify how varying discount rates influence financial planning and highlight the importance of securing favorable investment returns to meet personal goals.

Investment Appraisal: NPV, Profitability Index, and IRR for Kyler Projects

Using the NPV method, the profitability of projects A and B is evaluated based on their cash inflows, initial costs, and required rates of return. The NPV calculation discounts the future cash inflows at the required rate, subtracting the initial investment. For Project A, with a cost of $260,000 and annual inflows of $57,000, the NPV is positive at 16%, indicating a worthwhile investment. Similarly, Project B, costing $375,000 with $75,000 annual inflows at 14%, also has a favorable NPV.

The maximum acceptable price for each project can be determined by calculating the present value of all future cash inflows at the company's required rate of return, ensuring that the investment’s cost does not exceed this value. The profitability index (PI), computed as the ratio of the present value of cash inflows to initial investment, helps compare projects' relative profitability. A PI greater than 1 signifies a profitable venture, with higher values indicating better investment efficiency.

The IRR is another critical metric, representing the discount rate that equates the present value of inflows to the initial investment. Calculation of IRR allows comparison with the company's required return. When IRR exceeds the required rate, the project is deemed acceptable. Comparing IRRs for Projects A and B reveals which investment offers a higher rate of return, guiding decision-makers toward the most attractive opportunity.

Comprehensive Investment Analysis for Davis Consulting

The evaluation of server investments at Davis Consulting involves multiple financial metrics—payback period, ARR, NPV, and IRR—to provide a comprehensive view of each option’s viability. Server A requires a $40,000 investment with a three-year life cycle and annual cash inflows of $25,000, with no residual value. Its payback period is calculated as the initial investment divided by annual cash inflows, resulting in 1.6 years, well within the useful life. The ARR is derived from the ratio of average annual profit (assuming cash inflows approximate profits) to the initial cost.

NPV calculation discounts its future inflows at a 14% rate, subtracting the initial investment to ascertain net value. The IRR is computed as the discount rate that renders the NPV zero, providing a rate of return estimate. Similarly, Server B, with its residual value and uneven annual inflows, requires a more detailed calculation, often utilizing Excel functions to accurately compute NPV and IRR.

Given the results, which include all four metrics, decision-makers can compare the two servers to select the more financially advantageous option. Typically, the server with the shorter payback, higher ARR, positive NPV, and IRR above the company's required return is the preferred investment, aligning with strategic financial goals and risk tolerance.

In conclusion, utilizing multiple financial evaluation methods enables organizations like Davis Consulting to make well-informed capital investment decisions. Such comprehensive analyses consider both quantitative measures and strategic fit, ultimately optimizing resource allocation and enhancing financial performance.

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