CC 212 Challenge #10 Name: Excerpt from a present value of an annuity table: Present Value of an Annuity of $1 at Compound Interest Period 14% 15% 16% 17% 18% 19% 4 2.91371 2.8550 2.7982 2.7432 2.6901 2.6386 6 3.8887 3.7845 3.6847 3 .5892 3.4976 3.4098 1. Begin your analysis by computing the accounting rate of return AND cash payback period for each of the five proposals. Any project that has an accounting rate of return of less than 20% and a cash payback period of longer than 3.5 years should be eliminated from further consideration and calculations. (When necessary, round 3 spaces to the right of the decimal point.) Projects: To E Accounting rate of return Cash Payback Period 2. After the initial screening, compute the nel present value (using a 15% discount rate), profitability index, and internal rate of return for any projects that were not eliminated after the accounting rate of return AND cash payback calculations. Net Present Value Profitability Index Internal Rate of Return Acceptable? Yes/No Yes/No Yes/No Yes/No Yes/No 3. Rank all 5 projects based on both their profitability (the numbers and the qualitative factors (this information is provided on the first page of the challenge). You must consider the overall ment to the corporation before making a final decision Rank in Order: 1/2/3/4/5 1/2/3/4/5 1/2/3/4/5 1/2/3/4/5 1/2/3/4/5 4. Select one project to support and provide an explanation of why you chose that particular one. Your explanation must mention the impact that the qualitative factors had on your final decision. #1 Why? 108 ACC 212 CHALLENGE #10 Name: CAPITAL BUDGETING Creative Containers Company manufactures glass jars used to package a variety of liquid consumer products (such as fr juice, soft drinks, alcoholic beverages, sauces, and various food items). The containers are manufactured on a job- oluer basis to customer specifications. Creative Containers has received five proposals for capital investment projects. Your job is to evaluate these proposals and determine which one, if any, should be funded. Management requires a minimum 20% accounting rate of return on the investment and a cash payback period of no more than 3.5 years. Project A: This proposal requests funds to purchase hardware and software that will allow the accounting department to process payroll in-house. Paychecks are currently processed by an outside payroll service company. The company expects an annual reduction in costs and increase in cash flows if the payroll function is no longer contracted to an outside company. Cost $192,000 Annual project income $19,500 Life (in years) Annual net cash flows $67,500 Salvage Value Project B: This proposal requests funds for new manufacturing equipment. This equipment will allow Creative Containers to make glass containers as large as 2 gallons. Currently, the company cannot make containers that are larger than 1 gallon and the company thinks there is a market for the larger containers, especially in the alcoholic beverages industry. $270,000 Cost Life (in years) Salvage Value Annual project income Annual net cash flows $26,000 $71,000 Project C: This proposal requests funds for equipment to make stick-on labels that are applied to the bottles. Currently, all stick-on labels are ordered from another company. This label supplier has not proven very reliable in meeting delivery deadlines so the company expects making their own labels will help them satisfy their customers more reliably. Cost $348,000 Annual project income $38,454 Life (in years) Annual net cash flows $96,454 Salvage Value Project D: This proposal requests funds for automated manufacturing equipment that will reduce the cycle time from receipt of a customer order to delivery of that order. Creative Containers' cycle time is currently 7 days. The automated equipment will reduce the cycle time to 4 days while saving costs due to the elimination of seven jobs. It will also make Creative Containers more competitive; the company's major competitor currently has a cycle time of 5 days. Cost $480,000 Annual project income $58,000 Life (in years) Annual net cash flows $138,000 Salvage Value Project E. This proposal requests funds for computerized drafting and design equipment that will allow engineers to complete manufacturing instructions on special orders more quickly. This equipment should reduce Creative Containers time from 7 to 5 days. Currently, about 40% of the company's business is considered to be "special order". Cost $275,000 Annual project income $35,000 Life (in years) Annual net cash flows $103,750 Salvage Value CC 212 Challenge #10 Name: Excerpt from a present value of an annuity table: Present Value of an Annuity of $1 at Compound Interest Period 14% 15% 16% 17% 18% 19% 4 2.91371 2.8550 2.7982 2.7432 2.6901 2.6386 6 3.8887 3.7845 3.6847 3 .5892 3.4976 3.4098 1. Begin your analysis by computing the accounting rate of return AND cash payback period for each of the five proposals. Any project that has an accounting rate of return of less than 20% and a cash payback period of longer than 3.5 years should be eliminated from further consideration and calculations. (When necessary, round 3 spaces to the right of the decimal point.) Projects: To E Accounting rate of return Cash Payback Period 2. After the initial screening, compute the nel present value (using a 15% discount rate), profitability index, and internal rate of return for any projects that were not eliminated after the accounting rate of return AND cash payback calculations. Net Present Value Profitability Index Internal Rate of Return Acceptable? Yes/No Yes/No Yes/No Yes/No Yes/No 3. Rank all 5 projects based on both their profitability (the numbers and the qualitative factors (this information is provided on the first page of the challenge). You must consider the overall ment to the corporation before making a final decision Rank in Order: 1/2/3/4/5 1/2/3/4/5 1/2/3/4/5 1/2/3/4/5 1/2/3/4/5 4. Select one project to support and provide an explanation of why you chose that particular one. Your explanation must mention the impact that the qualitative factors had on your final decision. #1 Why? 108 ACC 212 CHALLENGE #10 Name: CAPITAL BUDGETING Creative Containers Company manufactures glass jars used to package a variety of liquid consumer products (such as fr juice, soft drinks, alcoholic beverages, sauces, and various food items). The containers are manufactured on a job- oluer basis to customer specifications. Creative Containers has received five proposals for capital investment projects. Your job is to evaluate these proposals and determine which one, if any, should be funded. Management requires a minimum 20% accounting rate of return on the investment and a cash payback period of no more than 3.5 years. Project A: This proposal requests funds to purchase hardware and software that will allow the accounting department to process payroll in-house. Paychecks are currently processed by an outside payroll service company. The company expects an annual reduction in costs and increase in cash flows if the payroll function is no longer contracted to an outside company. Cost $192,000 Annual project income $19,500 Life (in years) Annual net cash flows $67,500 Salvage Value Project B: This proposal requests funds for new manufacturing equipment. This equipment will allow Creative Containers to make glass containers as large as 2 gallons. Currently, the company cannot make containers that are larger than 1 gallon and the company thinks there is a market for the larger containers, especially in the alcoholic beverages industry. $270,000 Cost Life (in years) Salvage Value Annual project income Annual net cash flows $26,000 $71,000 Project C: This proposal requests funds for equipment to make stick-on labels that are applied to the bottles. Currently, all stick-on labels are ordered from another company. This label supplier has not proven very reliable in meeting delivery deadlines so the company expects making their own labels will help them satisfy their customers more reliably. Cost $348,000 Annual project income $38,454 Life (in years) Annual net cash flows $96,454 Salvage Value Project D: This proposal requests funds for automated manufacturing equipment that will reduce the cycle time from receipt of a customer order to delivery of that order. Creative Containers' cycle time is currently 7 days. The automated equipment will reduce the cycle time to 4 days while saving costs due to the elimination of seven jobs. It will also make Creative Containers more competitive; the company's major competitor currently has a cycle time of 5 days. Cost $480,000 Annual project income $58,000 Life (in years) Annual net cash flows $138,000 Salvage Value Project E. This proposal requests funds for computerized drafting and design equipment that will allow engineers to complete manufacturing instructions on special orders more quickly. This equipment should reduce Creative Containers time from 7 to 5 days. Currently, about 40% of the company's business is considered to be "special order". Cost $275,000 Annual project income $35,000 Life (in years) Annual net cash flows $103,750 Salvage Value