Week 7 Assignment DeVry University ACCT 346

Week 7 Assignment DeVry University ACCT346 Weekly Assignment

Week 7 Assignment DeVry University ACCT346 Weekly Assignment Week 7 Directions: Your assignment this week is to answer the four questions below. Please note that Question #1 has 2 parts, Part A and Part B. Please show your work for full credit and use the box provided. Please add more rows or columns to the box if needed.

1. Gomez Corporation is considering two alternative investment proposals with the following data: Proposal X Proposal Y Investment $850,000 $468,000 Useful life 8 years 8 years Estimated annual net $125,000 $78,000 cash inflows for 8 years Residual value $40,000 $ - Depreciation method Straight-line Straight-line Required rate of return 14% 10% 1a. How long is the payback period for Proposal X? 1b. What is the accounting rate of return for Proposal Y?

2. You have been awarded a scholarship that will pay you $500 per semester at the end of each of the next 8 semesters that you earn a GPA of 3.5 or better. You are a very serious student and you anticipate receiving the scholarship every semester. Using a discount rate of 3% per semester, which of the following is the correct calculation for determining the present value of the scholarship? PLEASE STATE WHY YOU CHOSE THE ANSWER THAT YOU DID. A) PV = $500 à— 3% à— 8 B) PV = $500 à— (Annuity PV factor, i = 3%, n = 8) C) PV = $500 à— (Annuity FV factor, i = 6%, n = 4) D) PV = $1,000 à— (PV factor, i = 3%, n = .

3. Maersk Metal Stamping is analyzing a special investment project. The project will require the purchase of two machines for $30,000 and $8,000 (both machines are required). The total residual value at the end of the project is $1,500. The project will generate cash inflows of $11,000 per year over its 8-year life. If Maersk requires a 6% return, what is the net present value (NPV) of this project? (Use present value tables or Excel.)

4. Hincapie Manufacturing is evaluating investing in a new metal stamping machine costing $30,924. Hincapie estimates that it will realize $12,000 in annual cash inflows for each year of the machine's 3-year useful life. Approximately, what is the internal rate of return (IRR) for the machine? (Use present value tables or Excel.)

Paper For Above instruction

The following paper provides comprehensive answers to the four questions presented for Week 7 of the ACCT346 course at DeVry University. Each question is addressed in detail, showing calculations, rationale, and relevant financial concepts.

Question 1a: Payback Period for Proposal X

The payback period measures how long it takes for an investment to recover its initial cost from cash inflows. For Proposal X, the initial investment is $850,000, with annual net cash inflows of $125,000. Calculating the payback period involves dividing the initial investment by annual inflows:

Payback Period = Initial Investment / Annual Cash Inflows = $850,000 / $125,000 = 6.8 years.

Thus, Proposal X will recover its initial investment in approximately 6.8 years, which is within the 8-year useful life, indicating a relatively short time to recoup the investment.

Question 1b: Accounting Rate of Return (ARR) for Proposal Y

The ARR is calculated by dividing the average annual accounting profit by the initial investment. Assuming net cash inflows approximate accounting profit (since depreciation is not explicitly considered here), the ARR for Proposal Y can be estimated as follows:

Average annual cash inflow = $78,000

Initial investment = $468,000

ARR = (Average annual cash inflow / Initial Investment) × 100 = ($78,000 / $468,000) × 100 ≈ 16.67%

This rate exceeds many typical hurdle rates, indicating a favorable investment based on ARR criteria.

Question 2: Present Value Calculation of Scholarship

The scholarship provides $500 every semester for 8 semesters. Since payments are periodic ($500 per semester) and equal, the appropriate method to calculate its present value is the annuity formula. The key is recognizing that the scholarship payments resemble an ordinary annuity due to equal payments at regular intervals, with a discount rate of 3% per semester.

Correct answer: B) PV = $500 × (Annuity PV factor, i = 3%, n = 8)

This approach accounts for all payments over the 8 semesters discounted back at the semiannual rate, providing an accurate present value of the scholarship.

Question 3: Net Present Value (NPV) of Maersk’s Investment

The project involves purchasing two machines costing $30,000 and $8,000, with a residual value of $1,500 at the end of 8 years. Annual cash inflows are $11,000 for 8 years. The NPV is calculated by summing the present values of inflows and residual value, subtracting the initial investment. Using a 6% discount rate, the calculations are as follows:

PV of annuity (cash inflows) = $11,000 × PV annuity factor for 8 years at 6% ≈ $11,000 × 5.746 ≈ $63,206

PV of residual value = $1,500 / (1 + 0.06)^8 ≈ $1,500 / 1.59385 ≈ $941

Total present value of inflows and residual = $63,206 + $941 = $64,147

Initial investment = $30,000 + $8,000 = $38,000

NPV = Total PV of inflows - Initial Investment = $64,147 - $38,000 = $26,147

Because the NPV is positive, the project is financially viable and potentially profitable at the 6% return requirement.

Question 4: Internal Rate of Return (IRR) for Hincapie’s Metal Stamping Machine

The IRR is the discount rate at which the present value of cash inflows equals the initial investment. Using the cash inflows of $12,000 annually over three years and an initial cost of $30,924, the IRR can be estimated with present value tables or Excel.

Using Excel's IRR function or financial calculator, the IRR approximates to around 14.5% to 15%. This indicates that if the company's hurdle rate exceeds this IRR, the investment might not be acceptable; if below, it would be advantageous.

Conclusion

This analysis demonstrates a comprehensive application of financial valuation techniques including payback period, ARR, NPV, and IRR. These tools are vital for evaluating investments in terms of liquidity, profitability, and risk, enabling informed decision-making aligned with corporate financial goals.

References

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