Learning Materials
Features
Discover
Chapter 26: Q15RQ (page 1464)
Why is it preferable to receive cash sooner rather than later?
Answer
The basic rule is that cash received now can be invested to generate revenue sooner than cash received later.
Over 30 million students worldwide already upgrade their learning with 91影视!
All the tools & learning materials you need for study success - in one app.
Get started for free
What are some criticisms of the payback method?
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?
Henderson Manufacturing, Inc. has a manufacturing machine that needs attention. The company is considering two options. Option 1 is to refurbish the current machineat a cost of \(1,200,000. If refurbished, Henderson expects the machine to last anothereight years and then have no residual value. Option 2 is to replace the machine at acost of \)4,600,000. A new machine would last 10 years and have no residual value.Henderson expects the following net cash inflows from the two options:
YearRefurbish CurrentPurchase New
MachineMachine
1 \( 350,000 \) 3,780,000
2 340,000 510,000
3 270,000 440,000
4 200,000 370,000
5 130,000 300,000
6 130,000 300,000
7 130,000 300,000
8 130,000 300,000
9 300,000
10 300,000
Total \( 1,680,000 \) 6,900,000
Henderson uses straight-line depreciation and requires an annual return of 10%.
Requirements
1. Compute the payback, the ARR, the NPV, and the profitability index of these twooptions.
2. Which option should Henderson choose? Why?
Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26-4 and your calculations in Short Exercises S26-5 and S26-6. Assume the expansion has zero residual value.
Requirements
1. Will the payback change? Explain your answer. Recalculate the payback if it changes. Round to one decimal place.
2. Will the project鈥檚 ARR change? Explain your answer. Recalculate ARR if it changes. Round to two decimal places.
3. Assume Hunter Valley screens its potential capital investments using the following decision criteria:
Maximum payback period | 5.0 years |
Maximum accounting rate of return | 18.00% |
Using the payback method to make capital investment decisions
Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26-4. Compute the payback for the expansion project. Round to one decimal place.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Flashcards 
91影视 AI 
Notes 
Study Plans 
Study Sets 
Find a degree 
Magazine