In the spring of 20xx, management of Front Range Furniture met to discuss a large capital investment project under consideration. The following three investment options have arisen and the board wants input from the company controller. As you are nearing the end of your internship, the controller has assigned you the task of analyzing the various capital investment options. CAPITAL INVESTMENT OPTIONS: Option A: Investment $400,000 (assume salvage of zero). Years 1 2 3 4 5 Net Income $ 30,000 30,000 20,000 10,000 (30,000) Net Cash Flows $120,000 120,000 110,000 100,000 60,000 Option B: Investment $225,000 (assume salvage of zero). Years 12345 Net Income $ 60,000 40,000 20,000 (10,000) (20,000) Net Cash Flows $100,000 80,000 60,000 30,000 20,000 Option C: Investment $320,000 (assume salvage of zero). Years Net Income Net Cash Flows 1 $ 36,000 $100,000 2 26,000 90,000 3 26,000 90,000 4 16,000 80,000 16,000 80,000 Required 1. Follow the instructions provided in your working papers to complete the capital budgeting analysis for the various options. You will be calculating the Payback Period, the Accounting Rate of Return, the Profitability Index, and the Net Present Value for all four options. 2. Present a brief business memo summarizing your findings and recommendations to management. Add the following chart in your memo. OPTIONS PBP ARR PI NPV ACCEPT/REJECT PAYBACK PERIOD Cost of investment/Annual Net Cash Flow-Even Cash Flows See Exhibit 26.5 in the textbook (FAP, 24th edition)- Uneven Cash Flows NTING RATE OF RETURN Average Net Income/Annual Average investment NET PRESENT VALUE Use Time Value of Money tables to discount each year's cash flow Add present values of all cash inflows, subtract total inflows from initial outflows. Add back in present value of any expected salvage Year D 1 2 B 4 $ INVESTMENT OPTION A Expected Net Income Initial Investment TOTALS INVESTMENT OPTION B Cepected Net Income Initial Investment 0 1 2 3 4 TOTALS Options Payback Period (nbr of years) Accounting Rate of Return (%) Profitability Index Net Present Value A B C $400,000 Expected Cash Flows (400,000) Cumulative Cash Flow Year INVESTMENT OPTION AT Expected Cash Flows NET PRESENT VALUE Table Values @12% HURDLE RATE 12% Table Vale 0 1.0000 1 2 3 4 5 (400,000) TOTALS NPV $225,000 Expected Cash Fixed Cumulative Cash Flow Yean INVESTMENT OPTION B Expected Cash Flow NET PRESENT VALUE Teble Vales@128 HURDLE RATE 12% Table Value 1.0000 1 2 3 4 5 TOTALS NPV INVESTMENT OPTION C 35 Years Expected Net Income $320,000 Expected Cash Flow Cumulative Cash Flow Year INVESTMENT OPTION C Expected Cash Flows O Initial Investment 0 NET PRESENT VALUE Table Vabes 12% 1.0000 HURDLE RATE 12% Table Value 41 1 1 42 2 2 G ' ' 44 4 4 45 44 TOTALS TOTALS NPV AY Present a brief business memo summarizing your findings and recommendations to management. Add the following chart in your memo Home Insert Draw Page Layout Formula Outa Review View Telme C General LL " B7- x5 VESTMENT OPTION esc VESTMENT OPTION NET PRESENT VALUE 10000 2 70 MPV 180 Q 17 n " 15 5