The payback period

Managerial Accounting for Managers (4th Edition)Complete Problems E8-12 and P8-23 in the textbook and present your responses in an Excel spreadsheet.
For assistance, here is some hints on completion of the first assigned problem, E8-12. We need to use Present Value analysis to solve. The 104,950 really includes a present value amount for each year. In other words, the PV of year 1 + PV of year 2 + PV of Year 3 = 104,950, which is the current present value. Step 1 is to determine the present value of the cash flow in year 1. We do this by finding the factor in Exhibit 8B-1 in Appendix 8B for the correct period and interest rate. We then multiply the rate times the cash flow of 30,000 to determine the PV of Year 1 amount. We do the same thing with Year 2, using the correct factor and interest rate. Then, we can take the total PV of 104,950 less the PV of Year 1 and Year 2. This will give us the PV amount of Year 3. (For example, if Year 1 PV was 25,000 and PV of Year 2 was 35,000, we would know PV of Year 3 was 104,950 – 25,000 – 35,000 = 44,950). However, we are not done yet, as we need to take the PV amount of Year 3 and use the factor from the table to find out what the cash flow would be for that amount.

E8-12 The Cambro Foundation, a nonprofit organization, is planning to invest $104,950 in a project that will last for three years. The project will produce net cash inflows as follows:
Year 1 ………………..$30,000
Year 2………………..$40,000
Year 3………………..
Assuming that the project will yield exactly a 12% rate of return, what is the expected net cash inflow for Year 3?
P8- 23 Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 18% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Initial investment: Product A Product B
cost of equipment (zero salvage value) …… $170,000 $380,000
Sales revenues ……………………… $250,000 $350,000
Variable expenses …………………… .$120,000 $170,000
Depreciation expense ……………….. .$34,000 $76,000
Fixed out-of-pocket operating costs …….. .$70,000 $50,000
Required

  1. Calculate the payback period for each product.
  2. Calculate the net present value for each product.
  3. Calculate the internal rate of return for each product.
  4. Calculate the project profitability index for each product.
  5. Calculate the simple rate of return for each product.
  6. Which of the two products should Lou’s division pursue? Why?

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