Accounting for Managers: Interpreting accounting information for decision-making

432 ACCOUNTING FOR MANAGERS

NPV

Inflow Outflow Net Factor PV

Year 1 75,000 30,000 45,000 .9091 40,910

Year 2 90,000 40,000 50,000 .8264 41,320

Year 3 100,000 45,000 55,000 .7513 41,321

Year 4 100,000 50,000 50,000 .6830 34,150

Year 5 75,000 40,000 35,000 .6209 21,731

PV of net cash flows 179,432

Cash outflow −200,000

NPV −20,568

Although the project has a payback of four years and an ROI of 7%, it should not be
accepted as the NPV is negative, i.e. the cashflows do not cover the cost of capital.

Solutions for Chapter 13

13.1
Original Additional New
Investment 10,000 2,000 12,000
ROI 15% 14% 14.8%
Profit 1,500 280 1,780
Cost of capital 12% 1,200 240 1,440

RI 300 40 340

13.2
Original Additional New

Investment 10,000,000 2,000,000 12,000,000
ROI 15% 14% (£280/£2000) 14.8% (1,780/12,000)
1,500,000 280,000 1,780,000
Cost of capital 9% 900,000 180,000 1,080,000

Residual income 600,000 100,000 700,000

13.3
Current Additional After
Controllable investment 750,000 100,000 850,000
Profit 150,000 15,000 165,000
ROI 20% 15% 19.4%

Green may not want to accept the investment as itdecreases the divisional ROI, but for
Brummy the project is better than the cost of capital (15% compared to 12%) and will
increase shareholder value.

Current Additional After

Controllable investment 750,000 100,000 850,000

Profit 150,000 15,000 165,000

Cost of capital 12% 90,000 12,000 102,000

RI 60,000 3,000 63,000