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ALL YELLOW HIGHLIGHTED CELLS REQUIRE DATA INPUT
DO NOT KEY OVER FORMULAS
E8-12
Use table in Exhibit 8B-1 in Appendix 8B
Amount of the Investment:
Less present value of Yr1 and Yr2 cash inflows:
Year 1:
Year 2:
Present Value of Year 3 Cash Inflow:
Therefore, the expected cash inflow for Year 3 is:
$
$
–
$
–
$
–
$
$
–
CELLS REQUIRE DATA INPUT
VER FORMULAS
ALL YELLOW HIGHLIGHTED CELLS REQUIRE DATA INPUT
FORMULAS
E8-23
Requirement 1.
Product A
Sales Revenues:
Variable Expenses:
Fixed Out-of-pocket operating costs:
Annual Net Cash inflows:
Product B
$
$
$
$
–
$
$
$
$
–
Product A
Investment required (A):
Annual Net Cash Inflow (B):
Payback Period (A / B):
Product B
$
$
–
$
$
–
#DIV/0!
#DIV/0!
Requirement 2.
Net Present Values:
Product A
Now
Purchase of Equipment:
Sales:
Variable Expenses:
Fixed out-of-pocket expenses:
Total Cash Flows (A):
Discount Factor (B):
Present Value (A x B):
Net Present Value:
Net Present Values:
$
$
$
$
1
$
$
$
$
1,000
$
–
–
$
$
$
$
–
–
$
–
Product B
Now
Purchase of Equipment:
Sales:
Variable Expenses:
Fixed out-of-pocket expenses:
Total Cash Flows (A):
Discount Factor (B):
Present Value (A x B):
Net Present Value:
2
$
$
$
$
1
2
$
$
$
$
1,000
$
–
–
$
$
$
$
–
–
$
–
Requirement 3.
Product A
Investment required (A):
$
Product B
–
$
–
Annual Net Cash Inflow (B):
Factor of the Internal Rate of Return (A / B):
$
–
$
–
#DIV/0!
#DIV/0!
Product A
Product B
Requirement 4.
Net Present Value (A):
Investment Required (B):
Project Profitability Index (A / B):
$
$
–
$
$
–
#DIV/0!
#DIV/0!
Product A
Product B
Requirement 5.
Annual Net Cash Inflow:
Depreciation Expense:
Annual Incramental Net Operating Income:
$
$
$
–
$
$
$
Product A
Annual Incramental Net Operating Income (A):
Initial Investment (B):
Simple Rate of Return (A / B):
Requirement 6.
Write your answer to Requirement 6 below:
$
$
Product B
–
#DIV/0!
–
$
$
#DIV/0!
S REQUIRE DATA INPUT
FORMULAS
DO NOT KEY OVER
Product B
Product B
#DIV/0!
3
4
5
$
$
$
$
–
$
$
$
$
–
$
$
$
$
–
$
–
$
–
$
–
3
4
5
$
$
$
$
–
$
$
$
$
–
$
$
$
$
–
$
–
$
–
$
–
Product B
–
#DIV/0!
Product B
#DIV/0!
Product B
Product B
#DIV/0!
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c. Internal rate of return.
Which ranking do you prefer? Why?
QB
EXERCISE 8-12 Uncertain Cash Flows [LO 8-4]
The Cambro Foundation, a nonprofit organization, is planning to invest $104,950 in a project that
will last for three years. The project will produce net cash inflows as follows:
Year 1
Year 2
Year 3
$30,000
$40,000
?
Required:
Assuming that the project will yield exactly a 12% rate of return, what is the expected net cash
inflow for Year 3?
EXERCISE 8-13 Basic Payback Period and Simple Rate of Return Computations [LO 8-1, LO 8-6]
A piece of laborsaving equipment has just come onto the market that Mitsui Electronics, Ltd.,
could use to reduce costs in one of its plants in Japan. Relevant data relating to the equipment
follow:
$432,000
Purchase cost of the equipment
Annual cost savings that will be provided
by the equipment
Life of the equipment
c
$90,000
12 years
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5:24 PM
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PROBLEM 8-23 Comprehensive Problem [LO 8-1, LO 8-2, LO 8-3, LO 8-5, LO 8-6]
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell
one of two new products for a five-year period. His annual pay raises are determined by his divi-
sion’s return on investment (ROI), which has exceeded 18% each of the last three years. He has
computed the cost and revenue estimates for each product as follows:
Product A
Product B
$170,000
$380,000
Initial investment:
Cost of equipment (zero salvage value)
Annual revenues and costs:
Sales revenues
Variable expenses
Depreciation expense
Fixed out-of-pocket operating costs
$250,000
$120,000
$34,000
$70,000
$350,000
$170,000
$76,000
$50,000
The company’s discount rate is 16%.
Required:
1. Calculate the payback period for each product.
2. Calculate the net present value for each product.
3. Calculate the internal rate of return for each product.
4. Calculate the project profitability index for each product.
5. Calculate the simple rate of return for each product.
6. Which of the two products should Lou’s division pursue? Why?
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