Problem 1 (Textbook Reference: P10-5) – Rank proposals using the payback period,

Question

Problem 1 (Textbook Reference: P10-5) – Rank proposals using the payback period, unadjusted rate of return, profitability index, and time-adjusted rate of return Merryll, Inc., is considering three different investments involving depreciable assets with no salvage value. The following data relate to these investments:

Rank these proposals using the following selection techniques. Round each answer two decimal places.
(1) Payback period rankings: _________________________________________________________
a. Payback period calculation – Investment 1: ____________________________________
b. Payback period calculation – Investment 2: ____________________________________
c. Payback period calculation – Investment 3: ____________________________________
(2) Unadjusted rate of return rankings: _________________________________________________
a. Unadjusted rate of return calculation – Investment 1: ____________________________
b. Unadjusted rate of return calculation – Investment 2: ____________________________
c. Unadjusted rate of return calculation – Investment 3: ____________________________
(3) Profitability index: ______________________________________________________________
a. Profitability index calculation – Investment 1: __________________________________
b. Profitability index calculation – Investment 2: __________________________________
c. Profitability index calculation – Investment 3: __________________________________
(4) Time-adjusted rate or return rakings: ________________________________________________
a. Unadjusted rate of return calculation – Investment 1: _____________________________
b. Unadjusted rate of return calculation – Investment 2: _____________________________
c. Unadjusted rate of return calculation – Investment 3: _____________________________
***Use the Template provided below for Investment 1, 2 and 3 ***

Expected Before- Expected After Tax Cash Inflow Life of Proposal (as) 10 20 10 ash Tax Cash Inflow Investiment Outlay per Year er ear 140,000 $ 240,000 S 360,000 $ 37,333 $ 72,000 S 89,333 $ 28,000 48,000 68,000

Explanation / Answer

solution 1    Payback peroid = Intial investment          inflow Investment Amount PP rank I 140000 5years 28000 2nd II 240000 5 yrs. 48000 2nd III 360000 5.29 yrs. 68000 1st 2    Unadjusted rate of return (URR)=                      Accounting income* Initial investment         * Accounting income = cash flow- depriciation (1-tax) **                ** depriciation= initial investment           no of years investment description URR Rank 1 28000-14000(1-0.40)x100 14% 2nd 140000 Dep. =    140000 =   14000 10 2 48000-12000(1-0.40)x100 17% 1st 240000 Dep. =    240000 =   12000 20 3 68000-36000(1-0.40)x100 12.88% 3rd 360000 Dep. =    360000 =   36000 10 3 Profitability index: = Present value of inflow*                    cash outflow                 * inflow x 1     P.V.A.F. of yrs 1.12 investment description PI rank 1 28000x(1/1.12) 10 P.V.A.F 1.13 2nd 140000 2 48000x(1/1.12) 20 P.V.A.F 1.494 1st 240000 3 68000x(1/1.12) 10 P.V.A.F 1.02 3rd 360000 4 Time-adjusted rate or return investment payback period (by point 1) pv factor@ 12% inflow after tax pv* inflow rank 1 5 yrs 3.6 28000 100800 3rd 2 5yrs 3.6 48000 172800 2nd 3 6 yrs(rounded off) 4.11 68000 279480 1st

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