Managerial Accounting: NPV, IRR, Payback Period and Investment Decisions

This article covers topics related to Managerial Accounting such as NPV, IRR, Payback Period and Investment Decisions. It includes solved examples and references.

Running Head: MANAGERIAL ACCOUNTING 0
MANAGERIAL ACCOUNTING

MANAGERIAL ACCOUNTING 1
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................2
Question 3..................................................................................................................................3
Question 4..................................................................................................................................4
Question 5..................................................................................................................................4
References..................................................................................................................................6

MANAGERIAL ACCOUNTING 2
Question 1
Years Amount Factor @14%
Present
value
Working Capital Investment -100000 1 -100000
Annual Cash Flows
1 17000 0.877 14912.3
2 17000 0.769 13080.9
3 17000 0.675 11474.5
4 17000 0.592 10065.4
5 17000 0.519 8829.3
Working Capital released 100000 0.519 51936.9
Net Present Value 10299
Yes the project shall be accepted at 10299 as the NPV is positive (González, 2015).
Question 2
Machine A
Pv Factor @
10% NPV
Purchase Cost 25000 0.909 22,727
Annual Cash Flow 3500 7.61 26,621
Salvage Value 1000 0.239 239 49,588
Machine B 10% NPV
1 3500 0.909 3182
2 3500 0.826 2893
3 3500 0.751 2630
4 3500 0.683 2391
5 3500 0.621 2173
6 3500 0.564 1976

MANAGERIAL ACCOUNTING 3
7 3500 0.513 1796
8 3500 0.467 1633 18672
Machine C
Outflow Inflow Rate of return
-31296 6000 14%
6000
6000
6000
6000
6000
6000
6000
6000
6000
If the company wants to purchase the machine C it needs to reduce the rate of return
from 14%.
Question 3
Cumulative Cash flows
Purchase cost -180000 0 Purchase Cost -180000 -180000
Annual
savings 37500 1
Annual cash
flows 37500 -142500
37500 2 37500 -105000
37500 3 37500 -67500
37500 4 37500 -30000
37500 5 37500 7500
37500 6 37500 45000
37500 7 37500 82500
37500 8 37500 120000
37500 9 37500 157500

MANAGERIAL ACCOUNTING 4
37500 10 37500 195000
37500 11 37500 232500
37500 12 37500 270000
IRR 18%
Payback period 4.2
Particulars
PV Factor
14% NPV S
0 -180000 1 -180000 Purchase Cost -180000 -127500
1 52500 0.877 46053 Annual cash flows 52500 -75000
2 52500 0.769 40397 52500 -22500
3 52500 0.675 35436 52500 30000
4 52500 0.592 31084 52500 82500
5 52500 0.519 27267 52500 135000
6 52500 0.456 23918 52500 187500
7 52500 0.400 20981 52500 240000
8 52500 0.351 18404 52500 292500
9 52500 0.308 16144 52500 345000
10 52500 0.270 14162 52500 397500
11 52500 0.237 12422 52500 450000
12 52500 0.208 10897 52500 502500
117165 Payback period 2.57
The equipment shall not be purchased since the company is rejecting all the proposals
which are having a payback period of more than 4 years.
In the second case the equipment shall be purchased as the payback period is less at 2.57
years and the NPV is also positive (Simon, 2015).
Question 4
Project X Cash Discounted rate @ Present value

MANAGERIAL ACCOUNTING 5
flows 20%
1000 0.833 833.3
2000 0.694 1388.9
3000 0.579 1736.1
4000 0.482 1929.0
Total 5887.3
Project Y Cash
flows
Discounted rate @
20% Present value
4000 0.833 3333.3
3000 0.694 2083.3
2000 0.579 1157.4
1000 0.482 482.3
Total 7056.3
6% 10075.431
10% 9015.778
Question 5
Particulars PV Factor NPV
60000 0.909 54545
60000 0.826 49587
60000 0.751 45079
60000 0.683 40981
60000 0.621 37255
60000 0.564 33868
60000 0.513 30789
60000 0.467 27990
200000 0.467 93301

MANAGERIAL ACCOUNTING 6
Present Value 413397
options
A 50000
B 75000
C Particulars
PV Factor
@12% NPV
1 12000 0.893 10714
2 12000 0.797 9566
3 12000 0.712 8541
4 12000 0.636 7626
5 12000 0.567 6809
6 12000 0.507 6080
Total 49337
In case of mark he shall choose the 500000 immediately.
Option A is better with the amount of 50000.

MANAGERIAL ACCOUNTING 7
References
González, I. R. R., Lima, B. C., Pincheira, P. I., Brum, A. A., Macêdo, A. M., Vasconcelos,
G. L., ... & Kashyap, R. (2017). Turbulence hierarchy in a random fibre laser. Nature
Communications, 8, 15731.
Simon, R. (2015). Sensitivity, specificity, PPV, and NPV for predictive biomarkers. JNCI:
Journal of the National Cancer Institute, 107(8).