11)

Sequential order in capital budgeting process are as follows:

f. Identify potential capital investments

a. Budget capital investment
b. Project investments' cash flows
d. Make investments
g. Screen/analyze investments using one or more of the methods discussed
c. Perform post-audits
e. Use feedback to reassess investments already made
12)
Capital outlay = $12500000
Calculation of net cash inflows:

Number of additional skiers per day 120

Average number of days per year 149
Total number of skiers per year 17880

Average cash spent by each skier per day 159

Average variable cost of serving each skier per day 85
Net cash inflow on each skier 74
R1. Average annual net cash inflow from the expansion 1323120

Depreciation each year = 991666.7

R2. Average annual operating income from the expansion 331453.3

13)
Average annual net cash inflow from the expansion 1323120
Capital Outlay for the expansion 12500000

Payback period = 9.447 years

14)

ARR = Average annual operating income from asset/Average amount invested in asset

Average annual operating income from asset = 331453.3 (Calculated in question 12)

Average amount invested in asset = (Amount invested in asset + Residual Value)/2

(12500000 + 600000)/2 = 6550000

ARR = 5.06%
15)
R1) Payback period will not change because residual value does not play any role in calculating payback period.

R2) Project ARR will change because we take residual value in calculating average amount invested in asset.

ARR = Average annual operating income from asset/Average amount invested in asset

Average annual operating income from asset = 331453.3 (Calculated in question 12)

Average amount invested in asset = (Amount invested in asset + Residual Value)/2

(12500000 + 0)/2 = 6250000

ARR = 5.30%

R3)
White Valley will reject this project because maximum payback period required is 5.4 years but actual payback period is 9.447
minimum accounting rate of return required is 12% but actual accounting rate of return is 5.06%.
payback period.

ted in asset.

actual payback period is 9.447 years and

16)
Cost of accounting software = 27375
Life of software = 3 years
Payback period = 5 years
Annual cash inflow from software = 5475
Required rate of return = 12%
Required amount each year = 3285
Expected annual cash savings from new software = 2190
17)
Discount rate = 8%
Scenario :1

Present Value of $7550 = 7550* Present Value annuity factor (8%,8)

7550*5.7466 = 43386.83

Scenario :2

Present Value = 48350

Scenario :3

Present Value of $100050 = 100050* Present Value interest factor (8%,8)

100050*0.54026 = 54053.01

Scenario 3 yields the highest present value if discount rate is 8%.

Discount rate = 10%

Scenario :1

Present Value of $7550 = 7550* Present Value annuity factor (10%,8)

7550*5.3349 = 40278.50

Scenario :2

Present Value = 48350

Scenario :3

Present Value of $100050 = 100050* Present Value interest factor (10%,8)

100050*0.4665 = 46673.325

Scenario 2 yields the highest present value if discount rate is 10%.

18)
a)
Investment value = $7250
Maturity = 3 years
Interest rate = 12%
Value of investment at the end of 3 years = 7250*(1+0.12)^3
7250*1.4049 = 10185.52

b)

Investment value at the end of each year = $2500

Maturity = 3 years
Interest rate = 12%
Value of investment at the end of 3 years = 2500/12% [(1+0.12)^3 - 1]
20833.34 * 0.4049 = 8435.42
19)
R1)
Amount = $1
Interest rate = 14%

Year Amount PV factor @ 14% Present Value

1 1 0.8772 0.8772
2 1 0.7695 0.7695
3 1 0.6750 0.6750
4 1 0.5921 0.5921
5 1 0.5194 0.5194

TOTAL 3.4331

R2)
Yes, stream of cash flows can be characterised as an annuity because
same amount is received for fixed period i.e. same amount is received
periodically for the fixed period.

R3)
Amount = $1
Interest rate = 14%
Annuity = 5 years
Present Value of annuity = Amount *Present value annuity factor (14%,5)
1*3.4331 = 3.4331

Answer to Part 1 and part 3 is exactly same.

R4)
Answer to Part 1 and part 3 is exactly same because we have already discussed in part 2 that
in the given question, stream of cash flows can characterised as annuity because same amount is received
at the end of each year for five years. Annuity is also defined as a fixed sum of money received each year
for the fixed period.
20)
Capital outlay = 12500000
Average annual net cash inflow from the expansion = 1323120
Discount rate = 12%
Residual value at the end of 12th year = 600000

Present Value of cash inflows = 1323120*present value annuity factor (12%,12) + 600000*Present value interest factor (12%,1
1323120*6.19437 + 600000*0.25667 = 8195894.83 + 154002 = 8349896.83

Project's NPV = Present value of cash inflows - Capital outlay = 8349896.83 - 12500000 = -4150103.17

No, Investment is not attractive because Net present value (NPV) is negative.
ue interest factor (12%,12)
21)
a) NPV, IRR
b) payback period
c) ARR
d) IRR
e) NPV
f) payback period
g) IRR
h) payback period
i) ARR
Decision Case
R1)
Selection 1:
Work full time for bottling plant

Number of weeks worked = 12

Payment per week in year 1 = 380
Total payment in year 1 = 4560

Payment per week in Year 2 = 406.6

Total payment in year 2 = 4879.2
Net payment received in two years = 9439.2

Selection 2:
Working at meat-packing plant
Total working hours in a week = 20
Total number of hours worked in year 1 = 240
Payment per hour = 8.75
Total payment in Year 1 = 2100
Tuition fees payment = 1800
Net total pay in Year 1 = 300
Total payment in Year 2 = 6600
Payment received from Grading = 750
Net total pay in Year 2 = 7350
Net payment received in two years = 7650

If Hunter ignores the time value of money in decisions that cover this short time period and his
sole goal is to make as much money as possible between now and the end of next summer then he should work full time
for bottlingplant because it provides higher payment than working at meat- packing plant.

Non quantiative factors that might be considered are:

Experience gained from accounting classes
Reduction in studying workload
Take time to work as a grader

If I were faced with these alternatives then I would select to work at meat-packing plant because of non-quantiative factors.
He should not overlook the non quantiative factors.

R2)
Now say discount rate is 10%
Selection 1:
Work full time for bottling plant

Calculation of present value of payment received in two years:

Year Payment PV Factor@10% Present Value
 1 4560 0.909 4145.45
2 4879.2 0.826 4032.40

TOTAL 8177.85

Selection 2:
Working at meat-packing plant

Calculation of present value of payment received in two years:

Year Payment PV Factor@10% Present Value
1 300 0.909 272.73
2 7350 0.826 6074.38

TOTAL 6347.11

If Hunter considers the time value of money for all cash flows that he expects to receive one year or more in the future
then also Hunter should go for Alternative 1 i.e. work full time for bottling plant because present value of future payments are
n he should work full time

se of non-quantiative factors.
 ar or more in the future
nt value of future payments are greater in Alternative 1.