MANAGERIAL ACCOUNTING QUIZ 9 Score Name Section Problem (10 points) The Connery

Question

MANAGERIAL ACCOUNTING QUIZ 9 Score Name Section Problem (10 points) The Connery Company is considering a capital investment for which the initial investment is S20,000. Net annual cash inflows (before income taxes) are estimated to be $3,500 per year for 10 years. The companycalculates depreciation on a straight line basis, using an estimated salvage value of zero REQUIRED: Ignoring income taxes, compute the following items related to this capital investment. Round all dollar calculations to the nearest whole dollar, all percentages to four decimal places, and all other calculations to two decimal places. (1) Payback period. (2) Accounting rate of return, using average investment. (3) Net present value, assuming a before tax cost of capital of 12 percent

Explanation / Answer

1) Payback Period = Initial Investment/Annual Cash Inflows

= $20,000/$3,500 = 5.71 years

2) Annual Depreciation = (Inital Investment - Salvage value)/Project Life

= ($20,000 - $0)/10 yrs = $2,000 per year

Annual Net Income = Annual Cash Inflows - Annual Depreciation

= $3,500 - $2,000 = $1,500 per year

Average Investment = (Initial Investment+Salvage Value)/2

= ($20,000+$0)/2 = $10,000

Accounting rate of return = Annual Net Income/Average Investment

= $1,500/$10,000 = 0.15 or 15%

3) Present Value of Annual Cash Inflows = Annual Cash Inflows*PVAF(12%, 10 yrs)

= $3,500*5.65022 = $19,775.77

Net Present Value = Present Value of Cash Inflows - Initial Investment

= $19,775.77 - $20,000 = ($224.23)

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