Part 4. Chapter 26, Problem 1CPP on Chegg study workbook solutions for Horngren's Managerial Accounting (12th Edition)

Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,600,000. Expected annual net cash inflows are $1,525,000 with zero residual value at the end of 10 years. Under Plan B, Division D would begin producing a new product at a cost of $8,000,000. This plan is expected to generate net cash inflows of $1,100,000 per year for 10 years, the estimated useful life of the product line. Estimated residual value for Plan B is $980,000. Division D uses STRAIGHT-LINE depreciation and requires an annual return of 10%.

A. Compute the payback, the ARR, the NPV, and the profitability index for both plans.

Requirement 4A

Payback=	Amount invested	/	Expected Annual
			net cash flow
plan A=	(answer)/	(answer)	=(answer)
plan b=	(answer)/	(answer)	=(answer)
Total net cash inflows during =	Average annual	X	Operating life
operating life of property	net cash inflow		of property
plan A=	(answer) x	10 years=	(answer)
plan B=	(answer) x	10 years=	(answer)
Total depreciation during=	cost	-	Residual Value
operating life of property
plan A=	(answer)-	$0 (or answer)=	(answer)
plan B=	(answer)-	(answer) =	(answer)
			Plan A	PlanB
Total net cash inflows during operating life of property			(answer)	(answer)
Less: Total depreciation during operating life of property			(answer)	(answer)
Total operating income during operating life			(answer)	(answer)
Divide by : Property's operating life in years			/ 10 years	/ 10 years
Average annual operating income from plan			(answer)	(answer)
Average Amount Invested	=	(Amount invested + residual value) / 2
Plan A	=	(answer)
Plan B	=	(answer)
ARR	=	(Amount annual operating income/average amount invested)
Plan A:	=	(answer)
Plan B:	=	(answer)
TIME	Net cash flow	Annuity PV factor (i=10%, n=10)	PV factor (i =10%, n=10)	Present value
Plan A
1-10 years PV of annuity	(answer)	(answer)		(answer)
0 initial investment				(answer)
NPV of Plan A				(answer)
Plan B
1-10 years PV of annuity	$0 (answer)	(answer)		(answer)
10 PV of residual value	0 (answer)		(answer)	(answer)
Total PV of net cash inflows				(answer)
0 Initial investment				(answer)
NPV of Plan B				$ (answer?)
Plan	Present value / net cash inflows	Initial investment	=	Profitability Index
A	$0 (answer) /	-	=	(answer)
B	$0 (answer) /	-	=	(answer)