Net present value, payback, internal rate of return, and accounting rate of re turn Consider the following
Question:
Net present value, payback, internal rate of return, and accounting rate of re¬
turn Consider the following two mutually exclusive projects, each of which re¬ quires an initial investment of $100,000 and has no salvage value. This organization, which has a cost of capital of 15%, must choose one or the other.
(a) Compute the payback period of these projects. Using the payback criterion, which project is more desirable?
(b) Compute the net present value of these two projects. Using the net present value criterion, which project is more desirable?
(c) What do you think about the idea of using the payback period to adjust for risk?
(d) How do you think conventional capital budgeting adjusts for a project's risk?
(e) Compute the internal rate of return for each project.
(f) Assuming that straight-line depreciation is used to compute income, com¬ pute the accounting rate of return for these two projects.
(g) What do you think of the accounting rate of return criterion?
Step by Step Answer:
Management Accounting
ISBN: 9780130101952
3rd Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, S. Mark Young, Rajiv D. Banker, Pajiv D. Banker