Question

The compound interest method of depreciation values assets at the end of each period at:

Group of answer choices

A) the present value of their remaining cash flows using the discount rate (i)

B) the present value of their remaining cash flows using the internal rate of return (IRR)

C) the net book value per straight line depreciation procedures

D) the total of their remaining cash flows

Answer #1

**B) the present value of their remaining cash flows using
the internal rate of return (IRR)**

The depreciation under this method is calculated by the following step:

1. Estimate of the future cash flows that are associated with the asset.

2. Find the IRR of the above cash flows

3. Multiply that IRR by the asset's initial book value to get Depreciation of 1st year.

and the asset will be depreciated by Multiplying the opening balance with IRR. which means the closing balance of every Year will be the Present value of Such cashflow by the end of that year.

Internal Rate of Return Method
The internal rate of return (IRR) method uses present value
concepts to compute the rate of return from a capital investment
proposal based on its expected net cash flows. This method,
sometimes called the time-adjusted rate of return method, starts
with the proposal's net cash flows and works backward to estimate
the proposal's expected rate of return.
Let's look at an example of internal rate of return calculation
with even cash flows.
A company has...

Your fund has two groups of investors. The first invests in year
zero, and the second invests in year three. Throughout the life of
the fund, you pay the investors cash flows at the end of every
year, as described below, ending in the final payout of all the
remaining capital at the end of year five. Every cash flow is
distributed to the investors proportional to their capital
contribution; for example, if a group of investors contributed 50%
of...

Average Rate of Return, Cash Payback Period, Net Present Value
Method for a Service Company
Spanish Peaks Railroad Inc. is considering acquiring equipment
at a cost of $1,250,000. The equipment has an estimated life of
eight years and no residual value. It is expected to provide yearly
net cash flows of $312,500. The company’s minimum desired rate of
return for net present value analysis is 12%.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%...

1) Which of the following is NOT an advantage
to using the average rate of return method?
It is easy to compute.
It includes the entire amount of income earned over the life of
the proposal.
It emphasizes accounting income, which is often used by
investors and creditors in evaluating management performance.
It directly considers the expected cash flows from the
proposal.
2) The present value index is computed as
the
total present value of net cash flow divided by...

Factor Company is planning to add a new product to its line. To
manufacture this product, the company needs to buy a new machine at
a $503,000 cost with an expected four-year life and a $11,000
salvage value. All sales are for cash, and all costs are
out-of-pocket, except for depreciation on the new machine.
Additional information includes the following. (PV of $1, FV of $1,
PVA of $1, and FVA of $1) (Use appropriate factor(s) from
the tables provided.)...

Average Rate of Return, Cash Payback Period, Net Present Value
Method for a Service Company
Spanish Peaks Railroad Inc. is considering acquiring equipment
at a cost of $144,000. The equipment has an estimated life of 10
years and no residual value. It is expected to provide yearly net
cash flows of $72,000. The company's minimum desired rate of return
for net present value analysis is 12%.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%...

Average Rate of Return, Cash Payback Period, Net Present Value
Method for a Service Company
Spanish Peaks Railroad Inc. is considering acquiring equipment
at a cost of $295,000. The equipment has an estimated life of 10
years and no residual value. It is expected to provide yearly net
cash flows of $59,000. The company's minimum desired rate of return
for net present value analysis is 10%.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%...

Average Rate of Return, Cash Payback Period, Net Present Value
Method for a Service Company
Spanish Peaks Railroad Inc. is considering acquiring equipment
at a cost of $210,000. The equipment has an estimated life of 10
years and no residual value. It is expected to provide yearly net
cash flows of $42,000. The company's minimum desired rate of return
for net present value analysis is 10%.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%...

art Three
Present Value Index
When funds for capital investments are limited, projects can be
ranked using a present value index. A project with a negative net
present value will have a present value index below 1.0. Also, it
is important to note that a project with the largest net present
value may, in fact, return a lower present value per dollar
invested.
Let's look at an example of how to determine the present value
index.
The company has a...

Which one of the following statements is
TRUE?
Group of answer choices
When the required return is less than the internal rate of
return, net present value is positive.
When the IRR is greater than the required return, the net
present value is negative.
If projects are mutually exclusive, you should always select the
project with the greatest IRR.
Projects with conventional cash flows have multiple internal
rates of return.

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