Prior to beginning work on this assignment, review Chapter 14 in your course textbook, Survey of Accounting.
McEntyre Company has $80,000 in capital funds available for investment. The capital investment committee at McEntyre Company is currently considering two capital investment projects.
The estimated income from operations and net cash flows expected from each project are as follows:
Project A Project B
Year Income from Operations Net Cash Flow Income from Operations Net Cash Flow
1 $ 8,000 $24,000 $ 14,000 $ 30,000
2 9,000 25,000 10,000 26,000
3 11,000 27,000 8,000 24,000
4 8,000 24,000 7,000 23,000
5 8,000 24,000 3,000 19,000
$44,000$124,000$42,000$122,000
Each project requires an investment of $80,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 20% as the minimum average rate of return for capital investments.
Analyze the projects and prepare a report for the capital investment committee, advising it of the relative merits of each project.
In your paper,
• Explain the purpose of the report and describe the nature and importance of capital investment analysis.
• Analyze each long-term capital investment project based on the average rate of return.
o Compute the average rate of return for each project and show your work.
o Determine whether each project meets the minimum average rate of return required by the committee.
o Discuss the advantages and disadvantages of the average rate of return method.
o Rank the projects based on average rate of return.
• Analyze each project based on cash payback period.
o Determine the cash payback period for each project. Assume that net cash flows for both projects are uniform throughout the year.
o Discuss the advantages and disadvantages of the cash payback method.
o Rank the projects based on the cash payback period.
• Discuss at least three factors that could potentially complicate your capital investment analysis.
• Summarize your analysis and make a recommendation to the capital investment committee regarding which project the committee should fund.