Question

are the best for your equip Section Alphabetical Number Weeknd - Chapter 10 Homework Assignment Problem I (Textbook Reference: P16-5)-Rank proposals using the payback period, unadjusted rate of return, profitability index, and time-adjusted rate of return Merry L Inc. is considering three different investments inching depreciable assets with no salvage value. The following data relate to these imestments: Expected Before Expected After Initial Cash Tax Cash Inflow Tax Cash Inflow Life of Proposal Investment Outlay e rYear Mr Year per Year 140.000 $ 37,333 $ 28.000 240,000 $ 72,000 $ 48.000 160.000 $ 89,313 5 68,000 The income tax rate is 106. Management requires a minimum return on investment of 12%. Required: Rank these proposals using the following selection techniques. Round each answer two decimal places (years) 10 (1) Payback period rankings a. Payback period calculation - Investment 1: _ b. Payback period calculation - Investment 2: C. Payback period calculation - Investment 3: (2) Unadjusted rate of retum rankings: a. Unadjusted rate of retum calculation - Investment 1: b. Unadjusted rate of retum calculation - Investment 2: c. Unadjusted rate of retum calculation - Investment 3: (3) Profitability index a. Profitability index calculation - Investment 1: _ b. Profitability index calculation - Investment 2 c. Profitability index calculation - Investment 3: (4) Time-adjusted rate or retum (IRR) rankings: 2. IRR calculation - Investment 1: b. IRR calculation - Investment 2: C. IRR calculation - Investment 3: *** Template provided on next page**

Answer 1

1) Payback Period:

The first step in calculating the payback period is determining the initial capital investment and The next step is calculating/estimating the annual expected after-tax net cash flows over the useful life of the investment.

  Formula :

Payback Period = Initial Investment / Net annual cash flow

Initial Investment Net Cash flow Life Payback Period

140000 28000 10 5 (i.e 140000/28000)  

240000 48000 20 5 (i.e 240000/48000)

360000 68000 10 5.29(i.e 360000/68000)

Note: The payback method does not take into account the time value of money

2) Adjusted Rate of return:

Unadjusted rate of return is commonly used capital budgeting technique

It is also known as simple rate of return or accounting rate of return.

Does not ocus on cash flows--rather it focuseson accounting net operating income

= Annual Incremental net operating income/initial investment

a) 28000/140000*100 = 20%

b) 48000/240000*100 = 20%

c) 68000/360000*100 = 18.88%

3)Profitability Index

Formula: Pv of future cash flow/Intial Investment

Cash flow PVAF PV cash inflow Initial Investment Profitability Index

a) 28,000 5.6502 ( i.e 10 year,12%) 158206 140000 1.13

b) 48000 7.4694 (i.e 20 year,12%) 358531 240000 1.49

c) 68000 5.6502 (i.e 10 year,12%) 384214 360000 1.07

4) Time Adjusted rate of return (IRR): Assuming rate of return: 20% IRR

a) 28000 4.1925(i.e 10 year,20%) 117390 12 + [140000-117390] / [158206-117390] 12.55

b) 48000 4.8696(i.e 20 year,20%) 233741 12 + [240000-233741]/[358531-233741] 12.05

c) 68000 4.1925(i.e 10 year,10%) 285090 12 + [ 360000-285090]/[384214-285090] 12.76