Question

Can you please solve P16-54?

Please don't send the solution from the solution manuel, my professor is strict

728 Chapter 16 Capital Expenditure Decisions Required: 1. Compute the payback period for the proposed expansion of the theater's seating capacity. 2. Compute the project's accounting rate of return using the project's initial investment. 3. Compute the project's accounting rate of retum using the project's average investment. 4. Explain why many managerial accountants believe that discounted-cash-flow methods of evaluat- ing investment proposals are superior to the payback and accounting-rate-of-return methods. 5. Suppose the chairperson of the theater's board, who was formerly a managerial accountant, has calculated the seating expansion project's internal rate of return to be lower than the project's accounting rate of return. Moreover, the theater's cost of acquiring expansion capital is above the expansion project's internal rate of return but below its accounting rate of return. As a champion of the theater, and a strong proponent of the expansion, the board chairperson has decided to present only the project's accounting rate of return to the board for its approval of the project. Is this ethi- cal on the part of the board's chairperson? Explain.

Answer 1

Answer:-

1.         Payback period = 3 years*

*Initial investment = $120,000 = (3)($40,000) = sum of net incremental cash flows during first 3 years.

2.         Accounting rate of return (ARR) using initial investment:

ARR = ($74,000* - $59,000†) / $120,000 = .125

*$74,000 = ($70,000 + $72,000 + $74,000 + $76,000 + $78,000) / 5

†$59,000 = [$30,000 + $32,000 + $34,000 + $38,000 + $41,000 + (5)($24,000)] / 5

3.         Accounting rate of return (ARR) using average investment:

ARR = ($74,000* - $59,000*) / $60,000† = .25

*See requirement (2).

†Average investment using straight-line depreciation = ($120,000 + 0) / 2 = $60,000

4.         Discounted-cash-flow methods take into account the time value of money, whereas the payback and accounting-rate-of-return methods do not.

5.         No, this would not be ethical.  The theater's board is entitled to fair and objective information about the project.  (Refer to the ethical standards for managerial accountants listed in Chapter 1 of the text, particularly the section entitled Credibility.)