Using a time line The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $22,000 and is expected to produce cash inflows of $1,000 at the end of year 1, $7,000 at the end of years 2 and 3, $12,000 at the end of year 4, $8,000 at the end of year 5, and $7,000 at the end of year 6. a. Select the time line option that represents the cash flows associated with Starbuck Industries' proposed investment. b. Which of the approaches-future value or present value-do financial managers rely on most often for decision making? Why? a. Which of the following time lines correctly represents the cash flows associated with Starbuck Industries' proposed investment? (Select the best answer below.) OA. $22,000-$1,000-$7,000-$7,000-$12,000-$8,000 - $7,000 0 2 3 4 5 6 OB. $22,000 $1,000 $7,000 $7,000 $12,000 $8,000 $7,000 6 OC. $7,000 $8,000 $12,000 $7,000 $7,000 $1,000-$22,000 OD. -$22,000 $1,000 $7,000 $7,000 $12,000 $8,000 $7,000

Using a time line The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $22,000 and is expected to produce cash inflows of $1,000 at the end of year 1, $7,000 at the end of years 2 and 3, $12,000 at the end of year 4, $8,000 at the end of year 5, and $7,000 at the end of year 6. a. Select the time line option that represents the cash flows associated with Starbuck Industries' proposed investment. b. Which of the approaches-future value or present value-do financial managers rely on most often for decision making? Why? a. Which of the following time lines correctly represents the cash flows associated with Starbuck Industries' proposed investment? (Select the best answer below.) OA. $22,000-$1,000-$7,000-$7,000-$12,000-$8,000 - $7,000 0 2 3 4 5 6 OB. $22,000 $1,000 $7,000 $7,000 $12,000 $8,000 $7,000 6 OC. $7,000 $8,000 $12,000 $7,000 $7,000 $1,000-$22,000 OD. -$22,000 $1,000 $7,000 $7,000 $12,000 $8,000 $7,000

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 8TP: Fenton, Inc., has established a new strategic plan that calls for new capital investment. The...

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Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $25,000 and is expected to produce cash inflows of $3,000 at the end of year 1, $6,000 at the end of years 2 and 3, $10,000 at the end of year 4, $8,000 at the end of year 5, and $7,000 at the end of year 6. Draw and label a timeline depicting the cash flows associated with Starbuck Industries’ proposed investment. Use arrows to demonstrate, on the timeline in part a,how compounding to find future value can be used to measure all cash flows at the end of year 6. Use arrows to demonstrate, on the timeline in part b,how discounting to find present value can be used to measure all cash flows at time zero. Which of the approaches—future value or present value—do financial managers rely on most often for decision making?
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