The following table contains information about four projects in which Carlos Corporation has the opportunity to invest. This information is based on estimates that different managers have prepared about their potential project. PEE (Click the icon to view the projects information) Requirements 1. Rank the four projects in order of preference by using the a. net present value b. project profitability Index c. Internal rate of retum. d. payback period e. accounting rate of return. 2. Which method(s) do you think is best for evaluating capital investment projects in general? Why? Requirement Rank the projects in order of preference (a) (b) (c) Net Present Profitability Internal Rate Value Index of Return (d) Payback Period (e) Accounting Rate of Return 1st preferred 2nd preferred 3rd preferred 4th preferred Requirement 2. Select the method that corresponds to the appropriate explanation. This method indicates profitability by comparing the present value of the investment's net cash inflows with the cost of the investment (already stated at its present value). This method is superior because it incorporates the time value of money V: This method helps to compare the NPV across alternative investments of varying sizes This method also indicates profitability and incorporates the time value of money. This method will show us the actual rate of retum being earned on the investment by equating the present value of the net cash inflows to the investment's cost. In other words, it is the interest rate which brings the investment's NPV to zero. This method will show the company how quickly it recoups its initial investment. This method will be good for screening out those potential investments that are too risky because the period is too long. However, the period will not be the sole criterion for accepting capital investments since it does not give the company any insight about the investment's profitability. Additionally, it does not incorporate the time value of money. This method will give the company an indication of how profitable the investment will be. However, since it does not consider the time value of money, it is not the best indicator of profitability. This method is the only method that uses accrual accounting figures. Therefore it will help the company assess the impact of investments on the financial statements The other methods use net cash fows. ziu pielieu 3rd preferred 4th preferred Requirement 2. Select the method that corresponds to the appropriate explanation. This method indicates profitability by comparing the present value of the investment cause it incorporates the time value of money. Accounting rate of return (ARR) lethod helps to compare the NPV across alternative investments of varying siz Internal rate of return Net present value (NPV) lethod also indicates profitability and incorporates the time value of money. Th of the net cash inflows to the investment's cost. In other words, it is the interes Payback period Profitability index ethod will show the company how quickly it recoups its initial investment. This lowever, the period will not be the sole criterion for accepting capital investmen profitability. Additionally, it does not incorporate the time value of money. 1: This method will give the company an indication of how profitable the investment will best indicator of profitability. This method is the only method that uses accrual accounting figures. Therefore it will help th- The other methods use net cash flows. Data Table Life of Internal Rate Profitability Payback Period Accounting Rate of Return Index in Years of Return Project 5 1.28 2.82 17% Investment Net Present Project Required Value A...... $ 220,000 $ 61,190 B 410,000 $ 37,744 $ 1,030,000 $ 191,498 D $ 1,545,000 $ 52,680 23 % 22 % ..... $ 6 1.09 3.20 15 % C 3 18 % 1.19 2.17 13 % 4 12 % 1.03 3.07 25 %
