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



Download 1.72 Mb.
View original pdf
Page289/469
Date01.12.2021
Size1.72 Mb.
#57828
1   ...   285   286   287   288   289   290   291   292   ...   469
solutions-manual-to-bhimani-et-al-management-and-cost-accounting-pearson-2012-1


Relevant
cash
flows
Present-
value
discount
factors at
14%


Total
present
value
1 Initial investment in CIM today
2a Current disposal price of old production line
2b Current recovery of working capital (€6 − €2)
3 Recurring operating cash savings

€4* each year for 10 years
4a Higher terminal disposal price of machines
(€14
− €0) in year 10
4b Reduced recovery of working capital
(€2
− €6) in year 10 Net present value of CIM investment
€(45)
5 4
4 14
(4)
1.000 1.000 1.000 5.216 0.270 0.270
€(45.000)
5.000 4.000 20.864 3.780
(1.080)
€(12.436)
* Recurring operating cash flows areas follows Cost of maintaining software programs and CIM equipment
€(1.5) Reduction in lease payments due to reduced floor-space requirements
1.0 Fewer product defects and reduced reworking
4.5 Annual recurring operating cash flows
€4.0 On the basis of this formal financial analysis, Dinamica should not invest in CIM – it has a negative net present value of €(12.436) million.
2
Requirement 1 only looked at cost savings to justify the investment in CIM. Manuel estimates additional cash revenues net of cash operating costs of €3 million a year as a result of higher quality and faster production resulting from CIM. From Appendix B, Table 4, the net present value of the €3 million annuity stream for 10 years discounted at 14% is €3
×
5.216 = €15.648. Taking these revenue benefits into account, the net present value of the CIM investment is €3.212
(€15.648 − €12.436) million. On the basis of this financial analysis, Dinamica should invest in CIM.
3
Let the annual cash flow from additional revenues be €X. Then we want the present value of this cash flow stream to overcome the negative NPV of €(12.436) calculated in requirement 1. Hence,
X
(5.216) = 12.436
X
= €2.384 million An annuity stream of €2.384 million for 10 years discounted at 14% gives an NPV of €2.384
×
5.216 = 12.436 (rounded.


Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012

Download 1.72 Mb.

Share with your friends:
1   ...   285   286   287   288   289   290   291   292   ...   469




The database is protected by copyright ©ininet.org 2024
send message

    Main page