as least as possible.
6PM last
ACC 212
REVIEW FOR FINAL EXAM
tUESDAY 3:00-4:50 Room 134.
SPRING 2019
INSTRUCTIONS: Complete this review guide to
prepare for Final Test 4.
Chapter 10
1. Know how to answer all the differential
decision making problems.
A. Lease or sell
B. Make or buy
C. Sell or process further
D. Discontinue a segment
E. Special purchase, etc.
2. Know terms such as sunk cost, opportunity cost,
etc.
CHAPTER 11
1. Define/describe capital investment analysis.
2. Which methods of analyzing capital investment
proposals use present values?
3. Which methods of analyzing capital investment
proposals do not use present values?
4. Describe the time value of money concept and
its relationship to present value.
5. Calculate the average rate of return for a proposed
investment.
6. Calculate the payback period for a proposed
investment.
7. Calculate the present value of a future amount.
What is the present value of $1000 to be received at the end of three periods
discounted at 12%?
8. Calculate the present value of an annuity. What
is the present value of an annuity of $1000 per period payable at the end of
the next five periods discounted at 12%?
9. Describe and calculate net present value and a
present value index. When is the present value index useful? 11. Define the
term annuity.
10.Describe six factors which complicate
capital investment decisions.
11. Define capital rationing.
11. Calculate IRR.
\
Solution
ACC 212
REVIEW FOR FINAL EXAM
Tuesday 3:00-4:50
Room
134.
SPRING 2019
Chapter 10
1. Know how to answer all the differential decision-making problems.
A. Lease or sell
While leasing an asset the problem
which is faced by the owner of that asset is that the owner has to bear all the
wear and tear and repair maintenance cost related to that asset if it is
operational level while on the other hand in the financial lease the owner get
the total value of that asset in portions in the form of instalments. On the
other hand, while selling the asset, the fair value of the asset needs to be
estimated so that the gain and loss on the sale of that asset can e calculated
B. Make or buy
Buy:
While buying an asset, all the
costs which were occurred from buying that asset till making it able to perform
will be capitalized
Make:
All the costs which occur while
making an asset helps to calculate the total value of that asset.
C. Sell or process further
While selling an asset the gain or
loss on sale will be recorded while processing that asset further, the asset
will be recorded in the balance sheet of the company
D. Discontinue a segment
Every discontinued operation of the
company is also subject to record profit, and loss on that operation that was
capital gain was made on the discontinuation of that asset or loss was made while
selling that asset
E. Special purchase, etc.
Special purchases are also recorded
as the asset of the company while the normal purchases are also part of the
inventory of the balance sheet of a company
2. Know terms such as sunk cost, opportunity cost, etc.
The sunk cost of the company is
known as the cost which has occurred and which cannot be recovered. These kinds
of costs are not capitalized but recorded at the expense or loss section of the
income statement of the company
CHAPTER 11
1.
Define/describe
capital investment analysis.
Answer:
Capital investment analysis hips to
analyze the investments in terms of the capital
invested in the projects and the estimated return rates associated with
these investments to check the
feasibility of the project that does these projects need to be accepted or not
while performing the capital investment
analysis
2.
Which
methods of analyzing capital investment proposals use present values?
Answer:
Following are the capital
investment appraisal methods,
·
The average/accounting rate of return (ARR)
method.
·
payback period method
·
Discounted payback period
·
The net present value (NPV) method.
·
The internal rate of return (IRR) method.
3.
Which
methods of analyzing capital investment proposals do not use present values?
Answer:
Following are the methods which do
not use the present value,
·
Payback period method
·
Average / accounting rate of return (ARR)
4.
Describe
the time value of money concept and its relationship to present value.
Answer:
According to the concept of the time
value for money, the money loses its value over the period therefore the
companies always discount its projects on the cost of capital of the company to
calculate the present value of the future cash flows, which will be generated
from a project under consideration. As the project evaluators /investors are
evaluating the project in present time, therefore, all the cash flows which are
expected in future will be discounted to calculate the present value so that
these cash flows can be compared with the present value of the total investment
to calculate the net present value. if the net present value of the project
will be positive, then that project will be accepted while in case of present
negative value the project will be rejected the rate which is used to discount the cash flows of a project is known
as the cost of capital rate of the company
5.
Calculate
the average rate of return for a proposed investment.
Answer:
The formula for ARR is:
Average
Rate of Return formula = Average Annual Net Earnings after Taxes / Initial
investment * 100%
Or
Average
Rate of Return formula = Average annual net earnings after taxes / Average
investment of the project * 100%
Or
ARR
= average annual profit / average investment
Note:
Average
investment = (book value at year 1+ book value at end of useful life) / 2
Average
annual profit = total profit over investment period/number of years
6.
Calculate
the payback period for a proposed investment.
|
Initial investment
|
|
Cash flow per year
|
Answer:
Payback Period =
|
Discounted Payback Period =
|
|
||||||||||||
7.
Calculate
the present value of a future amount. What is the present value of $1000 to be
received at the end of three periods discounted at 12%?
Answer:
Present value=FV/(1+r) n
r= rate of return (or cost of capital)
r= rate of return (or cost of capital)
FV= future value (future amount to
be received)
N= number of years
Present value = 1000 (1+0.12)3
Present Value: $711.78
Total Interest: $288.22
8.
Calculate
the present value of an annuity. What is the present value of an annuity of
$1000 per period payable at the end of the next five periods discounted at 12%?
Answer:
FVOrdinary Annuity=C× [(1+i) n−1/ i]
C=
cash flow per year
i=interest rate
n=total number of or
years payments
Results of the calculations are as
follows,
|
End Balance of 5 years annuity
|
$7,115.19
|
|
Total Principal
|
$5,000.00
|
|
Total Interest
|
$2,115.19
|
9.
Describe
and calculate the net present value and a present value index. When is the
present value index useful? Define the term annuity.
Answer:
NPV:
Net present value is known as the
net value of a project after deducting the total investment from the present
value of future cash flows
NPV = Total investment - a total of
the present value of all cash inflows
If there will be positive NPV, then
the project will be accepted while on the other hand in case of negative NPV,
the project will be rejected
Present value index:
Present Value Index (PVI) is known
as the ratio of the NPV of a project as compared to the initial investment
(outflow) required for it. This index helps to measure the efficiency of
investment decisions, particularly in case of limited resources with multiple
opportunities of investment available(capital rationing).
Annuity:
An annuity is known as the series
of payments which after an equal interval of time. In annuity the payments
remain the same every year because size and duration (interval) of payment do
not change in case of an annuity
10. Describe six factors which complicate
capital investment decisions.
Answer:
Following are the factors which can
result in leading to a complicated capital investment situation/ decision:
A.
If the economic and market situation is changing rapidly
B.
When limited resources (investment) is available
C.
When more than one or multiple investment
opportunities are available, and investment with the investor is limited
D.
Inappropriate use of the investment appraisal
method, which is either outdated or which do not account for all the factors
E.
When it is difficult to find a rate to discount
a project due to the availability of multiple rates or due to unavailability of
any appropriate rate
F.
If an investor is going to appraise an
investment opportunity which is based on a seasonal or new business idea, which
is going to be exercised the very first time
11.
Define
capital rationing.
Answer:
Capital rationing is a tool to
calculate the net present value index of projects when an investor has a
limited amount to invest on, and one is offered multiple numbers of projects
which have positive NPV and there is no apparent reason of rejecting the
projects among them then, in that case, the net present value investment index
help to evaluate that how much the return will be earned by investor on each
dollar invested in a project. After prioritizing all projects based on their
net present value index, the project with higher net present value index will
be selected while others will be rejected based on it
11.
Calculate
IRR.
Answer:
IRR is the rate at which NPV is
zero. It helps to compare this rate with the cost of capital rate. If the IRR
is higher than the cost of capital rate then the project will be accepted while
in case of lower IRR rate then the COC rate, the project will be rejected.
The formula which can be used for
the calculation of the IRR is as follows,
Where
L
= Lower rate of interest
H
= Higher rate of interest
NL =
NPV at a lower rate of interest
NH =
NPV at a higher rate of interest.
Social Contact