Capital Investment Analysis - Extra Practice
Ex. 1 - Daily Inc
1 Average Rate of Return = Average Annual GAAP Net Income/Average Investment
= 240,000/5 48000
=620,000/2 equals 310000
15.50%
2 Cash Payback Cash Accum Cash
Flow Flow
1st 200000 200,000
2nd 200000 400,000
3rd 200000 600,000 Cash payback between 3 and 4 years
4th 200000 800,000 to recoup 620,000
per month = 200,000/12
or 16,666 per month, so between 1st and
3 years and 1 to 2 months 2nd month after third year
3 Probably not
4 No -- it does not meet the maximum cash payback period
Ex. 2 - Crusty Corp
Cash Payback of Proposal 1:
250,000 divided by cash flow of $60,000 per year
4.16 years or 4 years and 1 - 2 months
Cash Payback of Proposal 2:
3 years
Ex. 3 - Crusty Corp using NPV
Proposal 1 : PV factor of annuity using 10% for 6 years
60,000 X 4.355 261,300
less cost 250,000
Net PV 11,300 Investment earning above 10%
when time value of money
is considered
Proposal 2 Cash Flow Factor
1 100,000 0.909 90,900
2 80,000 0.826 66,080
3 70,000 0.751 52,570
4 45,000 0.683 30,735
5 45,000 0.621 27,945
6 20,000 0.564 11,280
PV Cash Flows 279,510
less cost 250,000
Net PV 29,510 Investment earning above 10%
when time value of money
is considered
Ex. 4 Argo I ...