Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

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solutions-manual-to-bhimani-et-al-management-and-cost-accounting-pearson-2012-1

Solutions to exercises
13.12 Comparison of approaches to capital budgeting.
(22–25 min)
1
Payback period = €220,000 ÷ €50,000 = 4.4 years
2
The table for the present value of annuities (Appendix B, Table 4) shows
10 periods at 16% = 4.833 Net present value = €50,000 (4.833) − €220,000

= €241,650 − €220,000 = €21,650
3
Internal rate of return (IRR):
€220,000 = Present value of annuity of €50,000 at
X
% for 10 years or what factor (F) in the table of present values of an annuity Appendix B, Table 4) will satisfy the following equation.
€220,000 = €50,000F
F
=
220,000 50,000
€
€
= 4.400 On the year line in the table for the present value of annuities (Appendix B, Table 4), find the column closest to 4.400; 4.400 is between a rate of return of 18% and 20%.

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 Interpolation is necessary
Present-value factors
18% 4.494 4.494
IRR rate
–
4.400 20%
4.192
–
Difference
0.302 0.094 Internal rate of return
= 18% +




0.094 0.302 (2%)
= 18% + (0.311) (2%) = 18.62%
4
Accounting rate of return based on net initial investment Net initial investment
= €220,000 Estimated useful life
= 10 years Annual straight-line depreciation = €220,000 ÷ 10 = €22,000
ARR
= Increase in expected average annual operating income
Net initial investment
=
50, 000 22, 000 220, 000
−
=
28, 000 220, 000
= 12.73% Note how the accrual accounting rate of return, whichever way calculated, can produce results that differ markedly from the internal rate of return.

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