Spacely Sprockets Inc is a new start-up evaluating a new project. They worry that they don't have all the requisite operating information they will need to estimate Cash Flows From Assets and that they wouldn't be able to evaluate this project based on NPV and IRR (which both use the CFFA's to evaluate). Instead they have decided to use the Average Accounting Return (AAR) rule to evaluate the project. What is the AAR for this project? (Enter your answer as a percentage and Round to 2 decimals) Accounting Info for Spacely Sprockets Year 1 Year 2 Year 3 Net Income 37,000 58,000 118,000 Book Value of Assets 686,000 560,000 672,000
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- Devril plc is considering the investment in a project that has an initial cash outlay followed by a series of net cash inflows. The business applied the NPV and IRR methods to evaluate the proposal but, after the evaluation had been undertaken, it was found that the correct cost of capital figure was lower than that used in the evaluation. What will be the effect of correcting for this error on the NPV and IRR figures? O a. NPV Increase IRR No Change O b. NPV Decrease IRR No change O c. NPV Decrease IRR Decrease O d. NPV Increase IRR Increase e. NPV Increase IRR DecreaseDevril plc is considering the investment in a project that has an initial cash outlay followed by a series of net cash inflows. The business applied the NPV and IRR methods to evaluate the proposal but, after the evaluation had been undertaken, it was found that the correct cost of capital figure was lower than that used in the evaluation. What will be the effect of correcting for this error on the NPV and IRR figures? a. NPV Increase IRR Decrease Ob. NPV Increase IRR Increase OC. NPV Decrease IRR Decrease d. NPV Decrease IRR No change Oe. NPV Increase IRR No Change Jump to... 1 Academic IntegrityWhy does a company evaluate both the money allocated to a project and the time allocated to the project? What is the next thing a company needs to do after it establishes investment criteria? What is the payback method used to determine? Why do businesses consider the time value of money before making an investment decision? A fellow student studying Financial Accounting says, “The net present value (NPV) weighs early receipts of cash much more heavily than more distant receipts of cash.” Do you agree or disagree? Why?
- A finance director has been asked to explain various methods of project appraisal to his board colleagues. The operations director has already explained to the maring director that: The payback method is a good evaluation tool as it takes into account the liquidity of an individual project The Internal Rate of Return (IRR) calculation is irrelevant as the company does not need to borrow funds for its future projects (1) (2) (3) (4) The Net Present Value (NPV) method is too complicated as various discount rates have to be tried until a zero NPV can be found The Accounting Rate of Return (ARR) would be a good method after the audited accounts are completed and the company's profit margin can be ascertained The finance director has decided he should first inform the managing director that his board colleague has not accurately explained the alternatives, as DA. only statement (1) is true B. only statement (2) is true only statement (3) is true one of the statements are trueYour company is considering two different methods of producing its product: purchase production equipment, or contract with a supplier to build the product for them. The methods have differing lives and cash flow streams. You should: Question 12Select one: a. Choose the method that will least affect the statement of financial position of the company. b. Choose the method that maximizes firm value. c. Choose the method that minimizes initial cash outflows. d. Choose the method that will result in the highest net income. e. Choose the method that maximizes future cash inflows.Which of the following statements is true? I. In the payback method, depreciation is added back to net operating income when computing the annual net cash flow. II. When a company is cash poor, a project with a short payback period but a low rate of return may be preferred to a project with a long payback period and a high rate of return. III. A shorter payback period does not necessarily mean that one investment is more desirable than another. Only statement III is true. O All of the statements are true. None of the statements are true. Only statement I is true.
- Which one of these statements is correct? Accountants record sales and expenses after the related cash flows occur. The value of an investment depends on the size, timing, and risk of the investment's cash flows. Individuals tend to prefer later cash flows over current cash flows. When selecting one of two projects, managers should select the project with the higher total expected cash flow Most investors prefer greater risk over less risk.Which of the following business strategies is most likely toincrease the net cash flows of a software developer in theshort run but reduce them over a longer term?a. Develop software that is more costly to create but easierto update and improve. b. Lower the price of existing versions of products as cus-tomer demand begins to fall. c. Reduce expenditures for the purpose of developing newproducts.d. Purchase the building in which the business operates(assume the company currently rents this location).Travellers Inn (Millions of Dollars) Cash $ 10 Accounts payable $ 10 Accounts 20 Accruals 15 receivable Inventories 20 Short-term debt Current assets $ 50 Current liabilities $ 25 Net fixed assets 50 Long-term debt 30 Preferred stock (50,000 shares) 5 Common equity Common stock (3,800,000 shares) $ 10 Retained earnings 30 Total common equity $ 40 Total assets $100 Total liabilities and equity $100 The following facts also apply to TII: 1. The long-term debt consists of 29,412 bonds, each having a 20-year maturity, semiannual payments, a coupon rate of 7.8%, and a face value of $1,000. Currently, these bonds provide investors with a yield to maturity of 11.8%. If new bonds were sold, they would have an 11.8% yield to maturity. 2. TII's perpetual preferred stock has a $100 par value, pays a quarterly dividend per share of $2, and has a yield to investors of 8%. New perpetual preferred stock would have to provide the same yield to investors, and the company would incur a 3.55% flotation…
- Which of the following are significant flaws with the Payback Period Method? (Select all that apply) A. Biased against long-term projects B. Uses an arbitrary benchmark C. Very rarely used in practice D. Uses accounting profits rather than cash flows E. Ignores Time Value of MoneyMarket Fresh Foods is evaluating a new project to determine whether it warrants funding consideration. Having just taken over managing the project initiation process for Market Fresh from the previous project controller, Ray Bones is trying to evaluate the project's potential given its projected cash flows. As a first step, Ray developed the table of investment and revenue estimates below that he plans to use to determine the project's net present value. Market Fresh's CFO has indicated that, based on assumptions about risk during the course of the project, Ray should initially use 0.15 as a discount rate, but use 0.14 beginning in year 6. Assume all cash flows occur at the end of the specified year and calculate all values to three decimal places. if the problem has table data, copy the following lines and paste into the appropriate spot in the text section\footnotesize \baselineskip = 12pt\begin{tabular}{c | c}Investment & Revenue \\ \hline12.4 & 0 \\ 15.8 & 0 \\ 17.5…Jordan’s response about the financial statement impact of Alpha’s decision to capitalize thecost of its new computer system is most likely correct with respect to:A. lower net income.B. lower total assets.C. higher cash flow from operating activities.