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Chapter 26: Q11RQ (page 1463)
What are some criticisms of the payback method?
Answer
The payback method ignores the time value of money.
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Your grandfather would like to share some of his fortune with you. He offers to give you money under one of the following scenarios (you get to choose):
1. \(7,250 per year at the end of each of the next eight years
2. \)49,650 (lump sum) now
3. $98,650 (lump sum) eight years from now
Requirements
1. Calculate the present value of each scenario using an 8% discount rate. Which scenario yields the highest present value? Round to nearest whole dollar.
2. Would your preference change if you used a 10% discount rate?
What are post-audits? When are they conducted?
Using accounting rate of return to make capital investment decisions
Carter Company is considering three investment opportunities with the following accounting rates of return:
Project X | Project Y | Project Z | |
ARR | 13.25% | 6.58% | 10.47% |
Use the decision rule for ARR to rank the projects from most desirable to least desirable. Carter Company鈥檚 required rate of return is 8%.
Explain the difference between the present value factor tables鈥擯resent Value of \(1 and Present Value of Ordinary Annuity of \)1.
Question: Defining capital investment terms
Fill in each statement with the appropriate capital investment analysis method:
Payback, ARR, NPV, or IRR. Some statements may have more than one answer.
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