Problem 10-5: Rank proposals using the payback period, un-adjustment rate of return, profitability index, and time-adjusted rate of return
Merryll, lnc., is considering three different investments involving depreciable assets with no salvage value. The following data relate to these investments:
|
Investment
|
Initial Cash Outlay
|
Expected Before-Tax Net Cash Inflow per Year
|
Expected After-Tax Net Cash Inflow per Year
|
Life of proposal (years)
|
|
1
|
$140,000
|
$37,333
|
$28,000
|
10
|
|
2
|
240,000
|
72,000
|
48,000
|
20
|
|
3
|
360,000
|
89,333
|
68,000
|
10
|
The income tax rate is 40%. Management requires a minimum return on investment of 12%.
Required - Rank these proposals using the following selection techniques:
a. Payback period.
b. Unadjusted rate of return.
c. Profitability index.
d. Time-adjusted rate of return.
Problem 10-8: Evaluate investment proposal using net presented value
Jordan Company is considering purchasing new equipment costing $2,400,000. Jordan estimates that the useful life of the equipment will be live years and that it will have a salvage value of $600,000. The company uses straight-line depreciation. The new equipment is expected to have a net cash inflow (before taxes) of $258,000 annually. Assume that the tax rate is 40% and that management requires a minimum return of 14%.
Required - Using the net present value method, determine whether the equipment is an acceptable investment.
Attachment:- Template.rar