ACC501 All Assignment1

Question 1
(a)

(b)

(c)

(d)

Question 2
(a)
Year

Projected Annual Annual Depreciation

Projected Net
Discount
Profits for Project R of new machinery Annual Cash Flow Rate at 14%

Present
Value of
Cash Flow

$ 10,000

$ 25,000

$ 35,000

0.8772

$ 30,702

3,000

25,000

28,000

0.7695

21,546

2,000

25,000

27,000

0.6750

18,225

4-6

Present Value of Cash Flow

Less: New project machinery purchase
Net Present Value

$ 70,473

$ 70,473
75,000
$ -4,527

From the table, the Present Value of the Net Cash Flow from the new machinery
replacement in Project R is less than the $ 75,000 capital investment. Thus, it is not recommended
for the company replaced with new project machinery at the end of year 3.

(b)
(i)
Project T

Project R

Years Investment Net Annual Cumulative Years Investment

Cash Flow* Net Cash Flow
0

$ 70,000

Net Annual
Cumulative
Cash Flow* Net Cash Flow

$ 60,000

$ 27,000

$ 27,000

$ 40,000

$ 40,000

30,000

57,000

45,000

85,000

32,000

89,000

5
6

*Net Annual Cash Flow = Annual Profits + Annual Depreciation

Annual Depreciation of Project T = $ 12,000 / Project R = $ 20,000
Payback period of Project T = 2 +

13,000

Payback period of Project R = 1 +

32,000

= 2.41 Years

20,000
45,000

= 1.44 Years

(ii)
Project T
Years

Projected
Discount
Net Annual Rate at 14%
Cash Flow*

Project R
Present
Years Projected
Value of
Net Annual
Cash Flow
Cash Flow*

Discount
Rate at
14%

Present
Value of
Cash Flow

$ 27,000

0.8772

$ 23,684.4

$ 40,000

0.8772

35088.0

30,000

0.7695

23,085.0

45,000

0.7695

34627.5

32,000

0.6750

21600.0

45,000

0.6750

30375.0

44,000

0.5921

26052.4

35,000

0.5921

20723.5

30,000

0.5194

15582.0

28,000

0.5194

14543.2

27,000

0.4556

12301.2

6
1-5

$ 110003.8 1-6

*Net Annual Cash Flow = Annual Profits + Annual Depreciation

Annual Depreciation of Project T = $ 12,000 / Project R = $ 20,000

$ 147658.4

Net Present Value of Project T

Present Value of Cash Flow
Add: Present Value of Salvage*
Less: Present Value of Initial
Investment

Net Present Value of Project R

$ 110,003.8 Present Value of Cash Flow

5,194.0 Add: Present2 Value of Salvage
70,000.0 Less: Present Value of Initial
Investment
Less: Present Value of
New machinery purchase*

Net Present Value

$ 147,658.4

$ 45,197.8 Net Present Value

*Present Value of Salvage =$10,000 0.5194

0.0
60,000.0
50,625.00
$ 37,033.4

*Present Value of New machinery purchase

=$75,000 0.6750

According to Net Present Value method above, This means that the Project T made you the
required return of 14% annually, plus an additional $ 45,197.8 on top of that and the Project R
made you the required return of 14% annually, with an additional $ 37,033.4.
Thus, if Projects T and R are independent projects then both projects should be accepted because
the Net Present Value for both investments is a positive number. On the other hand, if they are
mutually exclusive projects then Project T should be chosen since it has the larger Net Present
Value.

Question 3
As I propose about the new piece of equipment that would dramatically reduce the
production's costs and you reply that we should use existing machine for a couple of years, I
strongly believe that you are making a mistake.
The fact that the company recently bought a machine should not relevant in the decision
making process to retain or replace equipment (Investopedia, 2015). Book value of the existing
machine is a sunk cost, which is a cost of business that cannot be get them back or changed by any
present or future decision. Instead, a decision maker should ignore the sunk costs and base on future
costs (Weygandt, Kimmel and Kieso, 2015).
For making better and more accurate decision, we should work together preparing
informations to do the incremental analysis to determine whether the savings generated by the
efficiencies of the new machine would justify its purchases.

References
Investopedia, (2015). Why should sunk costs be ignored in future decision making?. [online]
Available at: http://www.investopedia.com/ask/answers/042115/why-should-sunk-costs-beignored-future-decision-making.asp [Accessed 15 Oct. 2015].
Weygandt, J., Kimmel, P. and Kieso, D. (2015). Managerial accounting. Singapore: Wiley.

Bibliography
Garrison, R., Noreen, E. and Brewer, P. (2014). Managerial accounting. New York: McGraw-Hill
Education.
Weygandt, J., Kimmel, P. and Kieso, D. (2015). Managerial accounting. Singapore: Wiley.