Please follow excel spreadsheet layout, so it will be easier to follow.
Ch 11 - Capital Budgeting Homework Alternate Exercise A Diane Manufacturing Company is considering investing $500,000 in new equipment with an estimated useful life of 10 years and no salvage value. The equipment is expected to produce $320,000 in cash inflows and $200,000 in cash outflows annually. The company uses straight- line depreciation, and has a 30% tax rate. a. Determine the annual estimated net income and net cash inflow. b. Calculate the payback period c. Calculate the accounting rate of return. Problem E Mexxxll, Inc., is considering three different investments involving depreciable assets with no salvage value. The following data relate to these investments: Investment Initial Cost After-tax net cash inflow Useful Life (years) $ 140,000 $28,000 240,000 48,000 360,000 68,000 The income tax rate is 40%, Management requires a minimum return on investment of 12%. Rank these proposals using the following selection techniques: a. Payback period. b. Unadjusted rate of return. (remember to calculate and SUBTRACT depreciation from net cash inflow for net income) c. Discuss the results. Which project would you recommend and why? Discuss both payback period and rate of return in your analysis. Alt. Exercise A Solution Code a. Determine the annual estimated NET INCOME and NET CASH FLOW. Accrual Net Income Hine x Cash Inflows Cash Flow The ONLY difference between Net Income (Accrual) and Cash Flow is depreciation. It is NOT included in a Cash Flow since it is a non-cash Cash Outflows expense. Depreciation Income before taxes Hint?lx Depreciation calculated as (Cost - Salvage) /Useful life. Do NOT Income Tax (30%) include in cash flow! Annual net income Hint? x Accrual income before taxes x 30% and include in BOTH Net Income Annual net cash flow (Accrual) and Net Cash Flow since taxes are paid in cash Self check: b. Calculate the payback period (show work) Minx Payback period = Payback period Cost of investment Annual net cash flow Self check: c. Calculate the accounting for unadjusted) rate of return (show work) First, you need the annual average investment: Minex Annual Average investment (Equip Cost + salvage)/2 Note: ADD salvage and do not subtract like when calculating depreciation 27 Next, Calculate Accounting Rate of Return: int? Acety Rate of return Annual after-tax net income Annual average investment 29 Accte Rate of return = Self check: 52 Payback period Cost of Investment Problem E Hint a. Calculate the payback period for each Investment (show wark) Anus net cash Low Inwest 1 Invest 2 Invest Investment Cost Net Cash Inflow Payback period (years) Self check: . Calculate the accounting for unadjusted) rate of return (show work) First, you will need to depreciation for each Investment Hint? x Depreciation calculated as (Cost-Salvage) /Useful life Invest 3 Invest 1 Invest 2 Depreciation Self check Hint: Invest 3 Subtract depreciation from net cash inflow to get after-tax Invest 2 net income Second, calculate after-tax net income Invest 1 After-tax net income Self check: Third, calculate average Investment Invest 1 Average Investment Hint I nvest 3 Invest2 Annual Average investment Equip Cost + salvage)/2 ADD salvage and do not subtract like when calculating depreciation Self check Finally, calculate Unadjusted for Accounting) Rate of Return: Hinti x Acct Rate of return Annual after-tax net income Annual average Investment Accounting for unadjusted) Rate of Return Invest 1 After-tax net income Annual Avg Investment Invest 2 Invest 3 Acct Rate of Return Self check: Analysis
