Cash payback period, net present value method, and analysis for a service compan
ID: 2431515 • Letter: C
Question
Cash payback period, net present value method, and analysis for a service company
Each product requires an investment of $125,000. A rate of 10% has been selected for the net present value analysis.
Instructions
Compute the following for each product:
Cash payback period.
The net present value. Use the present value of $1 table appearing in this chapter (Exhibit 2).
Answer
Check Figure: Pro Gamer, $49,465
PR 25-3B
Net present value method, present value index, and analysis for a service company
Instructions
Assuming that the desired rate of return is 15%, prepare a net present value analysis for each project. Use the present value of $1 table appearing in this chapter (Exhibit 2).
Determine a present value index for each project. (Round to two decimal places.)
Answer
Check Figure: Branch office expansion, 0.95
Branch Office Expansion Computer System Upgrade ATM Kiosk Expansion Amount to be invested $420,000 $350,000 $520,000 Annual net cash flows: ??Year 1 200,000 190,000 275,000 ??Year 2 160,000 180,000 250,000 ??Year 3 160,000 170,000 250,000Explanation / Answer
Solution Obj 2:
Cash payback period:
Sound Cellar = 2 Years
Pro Gamer = 2 Years
Merits of two methods:
Cash Payback period:
This method is very simple to calculate as cumulative cash flows is compared with intital investment and it determines that at what time project will recover its investment. Project with lowest cash payback period is selected. However this method does not consider time value of money, therefore considered in appropriate in decision making.
Net present value method:
In this method, time value of money is considered and present value of all future cash inflows compared with present value of cash outflows. If present value of cash inflows are higher than present value of cash outflows then project is selected. This is an appropriate method for decision making.
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Computation of Cumulative Cash flows Period Sound Cellar Pro Gamer Cash inflows Cumulative Cash Inflows Cash inflows Cumulative Cash Inflows 1 $65,000.00 $65,000.00 $70,000.00 $70,000.00 2 $60,000.00 $125,000.00 $55,000.00 $125,000.00 3 $25,000.00 $150,000.00 $35,000.00 $160,000.00 4 $25,000.00 $175,000.00 $30,000.00 $190,000.00 5 $45,000.00 $220,000.00 $30,000.00 $220,000.00Related Questions
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