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

Present-value factors for
€1 received after 4 years
14%
IRR rate
16% Difference
0.592
–
0.552 0.040 0.592 0.571
–
0.021
IRR rate 14% +




0.021 0.040 (2%) = 15.05% Project 1 is preferable to Project 2 using the IRR criterion.
2
Net present value
Project
1 Gross present value = PV of €12,000 at 10% to be received at the end of year 1

= €12,000 (0.909) = €10,908 Net present value
= €10,908 − €10,000 = €908
Project
2 Gross present value = PV of €17,500 at 10% to be received at the end of year 4

= €17,500 (0.683) = €11,952.50 Net present value
= €11,952.50 − €10,000 = €1,952.50 Project 2 is preferable to Project 1 using the net present-value criterion.
3
This problem contrasts the implied reinvestment rates of return under the internal rate of return and net present-value methods. Where the economic lives of mutually exclusive projects are unequal, this clash of reinvestment rates may give different conclusions under the two methods. This result occurs because the internal rate of return method assumes that the reinvestment rate is at least equal to the calculated rate of return on the project. The net present-value method assumes that the funds obtainable from competing projects can be reinvested at the rate of the company's required rate of return. Comparisons areas follows

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 Ranking by Ranking by internal rate of return net present value Assumption Project 1 funds can be Assumption Project 1 funds can reinvested at 20% over the life of the be reinvested at 10%, the required shorter-lived project. rate of return.

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