need in 3 hours
Nokcool
DQweek5accounting.docx1. Deontray Johnson
Greetings all,
After reading the text, section 10.3 of the test declares "managerial accountants" prefer the present value of the capital investment evaluation (Schneider, 2017). I put in quotes managerial accountants because the first thing I asked myself; if I am a manager of the operation, overseeing several departments, what is the quickest report that I can glance at to get the gist of the big picture. Unlike a person how is titled to be a plant accountant, who has time to sit down and study the financial well being of the plants financial future; most managers that I know prefer something that can be looked at quickly, yet the information has enough detail that they can base sound decision from. Within chapter 10, the author notes four types of returns; Net Present Value, Internal Rate of Return, Pay Back Period, and Accounting Rate of Return. When looking at the ethical concern of chapter 10.4, it mentions that the manager is looking for the highest rate of return ((Schneider, 2017), therefore I know most will say that the Net Present Value will offer more and precise value over the years. Still, I like the Internal Rate of Return. By understanding what I should profit, I can then schedule what is in my favor. By this, I give an example that if we made baby material on an assembly line (diapers, shampoo, bibs, etc.) and we notice that diapers will return a higher yield than any other product, the decision should be to ramp up diapers since it is the highest contributor.
Reference:
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
ThursdayMay 28 at 5:27pm
Although I know that the present value methods are the most popular when it comes to capital investment evaluation methods, but I found the Payback Period Method interesting. The text describes the payback period method as “quick and dirty” (Schneider, 2017). While no major firms relies solely on the payback period method, it asks: how fast can a firm get the initial cash investment back? The formula used is:
Net initial investment/Annual net cash inflow = Payback period
This method is advantageous to businesses that use small investments and does not have incredibly complicated calculations to consider. It is easy to populate and easy to understand. A firm can compare several projects and decide quickly depending on the project with the shortest payback time. The payback period can essentially measure the risk of having a longer payback period versus a shorter one. The payback period method has a liquidity focus as it focuses on favoring projects that return money quickly (Bragg, 2020). There are, of course, disadvantages, the simplicity itself is considered a disadvantage. The payback period method does not consider the time value of money. All of this encourages a firm to supplement its analysis by using other capital investment evaluations methods on top of the payback period method. I chose this as my husband, and I are considering smaller investments like rental properties over time.
References:
Bragg, S. (2020, May 25). Advantages of the payback period. Accounting Tools. Retrieved from https://www.accountingtools.com/articles/advantages-of-the-payback-period.html (Links to an external site.)
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
3. Sabrina Williams
ThursdayMay 28 at 6:29pm
The profitability index is considered an extension of the NPV method and is calculated by dividing the NPV by the amount invested and using the corresponding ratio (Schneider, 2017).
|
Ranking |
Project |
Net Investment |
NPV |
Profitability Index |
|
1 |
J |
$250,000.00 |
$35,000.00 |
1.14 |
|
2 |
F |
$250,000.00 |
$30,000.00 |
1.12 |
|
3 |
A |
$200,000.00 |
$22,000.00 |
1.11 |
|
4 |
H |
$200,000.00 |
$18,000.00 |
1.09 |
|
5 |
E |
$500,000.00 |
$40,000.00 |
1.08 |
|
6 |
B |
$275,000.00 |
$21,000.00 |
1.076 |
|
7 |
G |
$100,000.00 |
$7,000.00 |
1.07 |
|
8 |
C |
$150,000.00 |
$6,000.00 |
1.04 |
|
9 |
I |
$210,000.00 |
$4,000.00 |
1.019 |
|
10 |
D |
$190,000.00 |
-$19,000,00 |
0.90 |
Considering the limit on funds available, which projects should be accepted?
Projects J,F,A,H, and B should be the projects accepted because the funds are available and because they total $1.175 million they utilize almost all of the funds available without going over the $1.2 million budget Grosvenor Industries has set.
Using the NPV, which projects should be accepted, considering the limit on funds available?
The projects are ranked highest to lowest by NPV and would be: E, J, F, A, B, H, G, C, I, and finally D. Considering the $1.2 million in funds available, projects E, J, F, and A should be accepted and total $1.2 million.
If the available investment funds are reduced to only $1,000,000?
Projects E, J, and F should be accepted and would leave $50,000 in investment funds left if available funds are lowered $1million.
Does the list of accepted projects change from Part 2?
Lowered available amounts to invest results in their not being enough to invest in project A.
What is the opportunity cost of the eliminated $200,000?
$28,000 would be the opportunity cost of capital being 14%.
Resources
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
ThursdayMay 28 at 9:04pm
|
Project |
Net Investment |
NPV |
P/I |
Rank |
|
A |
$200,000 |
$22,000 |
1.11 |
3 |
|
B |
$275,000 |
$21,000 |
1.076 |
6 |
|
C |
$150,000 |
$6,000 |
1.04 |
8 |
|
D |
$190,000 |
-$19,000 |
0.90 |
10 |
|
E |
$500,000 |
$40,000 |
1.08 |
5 |
|
F |
$250,000 |
$30,000 |
1.12 |
2 |
|
G |
$100,000 |
$7,000 |
1.07 |
7 |
|
H |
$200,000 |
$18,000 |
1.09 |
4 |
|
I |
$210,000 |
$4,000 |
1.02 |
9 |
|
J |
$250,000 |
$35,000 |
1.14 |
1 |
After ranking the projects with the profitability index, the acceptable projects would be J, F, A, H, and B. B is selected as the sixth ranked project over fifth ranked E because E’s investment is $500k and it would put Grosvenor over their designated $1.2 million for capital investment.
Net present value (NPV) “Is the difference between the present value of the incremental net cash inflows and incremental investment cash outflows” (Schneider, 2017). Ranking the projects by NPV would show E, J, F, A, B, H, G, C, I, D. Keeping the limit on funds in mind, the accepted projects would be the top four, E, J, F, and A.
If the available funds were reduced to one million, the easy move is to drop the fourth ranked project, project A, which would leave them with projects E, J, and F, equaling exactly one million.
Reference
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
