CB Problems
CB Problems
CB Problems
Solution:
Since the annual cash inflow is even in this project, we can simply divide the
initial investment by the annual cash inflow to compute the payback period. It is
shown below:
Example 2:
Sales: $75,000
Solution:
= $37,500/$15,000
=2.5 years
ARR – Example 1
XYZ Company is looking to invest in some new machinery to replace its current
malfunctioning one. The new machine, which costs $420,000, would increase
annual revenue by $200,000 and annual expenses by $50,000. The machine is estimated to
have a useful life of 12 years and zero salvage value.
Therefore, this means that for every dollar invested, the investment will return a profit of
about 54.76 cents.
ARR – Example 2
In this example, the NPV is $8,250, meaning the project is expected to generate a
positive return of $6,250.
Example 2: You invest $2,000 in a project and expect to receive $3,000 in cash flows
over the next five years with an inflation rate of 2%.
Using the formula above, you would calculate the NPV as follows:
NPV = $2,000 + ($3,000 0.04) * (1+0.02)^5 = $8,805
In this example, the NPV is $8,805, which means the project is expected to generate a
positive return of $6,805.
If the expected cash flows in either example had been negative, the NPV would have
been negative, indicating that the project would likely yield a negative return investment.
You can also use NPV to compare two different investments. For example, if you had
two projects with the same expected cash flows but various initial investments and
discount rates, the higher NPV would be the more profitable option.
0=NPV=t=1∑T(1+IRR)tCt−C0where:Ct
=Net cash inflow during the period tC0
=Total initial investment costsIRR=The internal rate of returnt=The
number of time periods
IRR Example
Assume a company is reviewing two projects. Management must decide
whether to move forward with one, both, or neither. Its cost of capital is
10%. The cash flow patterns for each are as follows:
Project A
Project B
The company must calculate the IRR for each project. The initial outlay
(period = 0) will be negative. Solving for IRR is an iterative process using
the following equation:
$0 = Σ CFt ÷ (1 + IRR)t
where:
-or-
Using the above examples, the company can calculate IRR for each
project as:
IRR Project A
IRR Project B
Adjustments:
Solution:
Profit and Loss Account for the Year Ended December 31, 2023
This case study demonstrates how to prepare final accounts including the Trading Account,
Profit and Loss Account, and Balance Sheet for a small business like XYZ Ltd.