tion? (Round to the nearest two decmai places 2. What qualitative factors would
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tion? (Round to the nearest two decmai places 2. What qualitative factors would McDonald's need to consider when deciding to purchase robots to replace some of its food preparation workers? of return 3. Given the payback period, would net present value (NPV) or internal rate (IRR) be likely to be useful tools for analyzing this decision? Support your respo E12-35A Comparing capital budgeting methods (Learning Objective 5) The following table contains information about four projects in which Andrews Corpora- tion has the opportunity to invest. This information is based on estimates that different managers have prepared about their potential project. Investment Net Present Life of Internal Rate Profitability Payback Period Accounting Rate of Return 17% 15% 11% 21% Project Required ValueProject of Return Index 1.30 1.05 in Years 2.77 3.18 2.13 3.03 205,000 61,770 5 24% 420,000 S 19,032 6 $1,010,000 $214,075 3 $1,540,000 2,796 4 19% 12% 1.00 Requirements Rank the four projects in order of preference by using the a. net present value. b. project profitability index. c. internal rate of return. d. payback period. e. accounting rate of return. Which method(s) do you think is best for evaluating capital investment projects in general? Why? 1. 2. EXERCISES Group B E12-36B Compute payback period--equal cash inflows (Learning Objective 2) Rrnductt i considering acquiring a manufacturing plant. The purchase price isExplanation / Answer
1a. The project with the highest net present value will be ranked first and the project with the lowest net present value will be ranked last.
b. The project with the highest profitability index will be ranked first and the project with the lowest profitability index will be ranked last.
c. The project with the highest IRR will be ranked first and one with the lowest IRR will be ranked last:
d. The project with the lowest payback period will be ranked first and one with the highest payback will be ranked last.
e. The project with the highest accounting rate of return will be ranked first and one with the lowest rate will be ranked last.
2. In general NPV (net present value) is the best method. This is because this method focuses on the absolute value and is easy to compute. Even in case of unconventional cash flows this method can be used easily. Unconventional cash flows are those in which an initial investment is followed by further negative cash flows in other years. In such cases IRR computation becomes problematic. There is no such problem, however, with NPV.
Project NPV Rank C 214,075.00 1 A 61,770.00 2 B 19,032.00 3 D 2,796.00 4Related Questions
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