CHAPTER 12 Planning for Capital Investments ASSIGNMENT CLASSIFICATION TABLE Learning Objectives Questions Exercises Do It Exercises Problems Problems Brief A B Discuss capital budgeting evaluation and explain inputs used in capital budgeting 1 2 3 8 9 10 11 Describe the cash payback technique Explain the net present value method Identify the challenges presented by intangible benefits in capital budgeting Describe the profitability index Indicate the benefits of performing a post audit Explain the internal rate of return method 1 2 3 4 5 6 7 8 4 5 6 7 2 3 4 5 1 4 5 6 9 1 2 3 4 12 13 16 7 8 5 6 7 3A 5A 3B 5B Describe the annual rate of return method 3 14 15 8 9 10 11 1A 2A 1B 2B 1 2 6 9 10 11 1 2 3 4 10 11 1A 2A 1B 2B 1A 2A 3A 4A 5A 1B 2B 3B 4B 5B 4A 3A 4B 3B 4 12 1 Copyright 2012 John Wiley Sons Inc Weygandt Managerial Accounting 6 e Solutions Manual For Instructor Use Only ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Moderate Time Allotted min 30 40 1A 2A 3A 4A 5A 1B 2B 3B 4B 5B Compute annual rate of return cash payback and net present value Compute annual rate of return cash payback and net present value Complex 30 40 Compute net present value profitability index and internal rate of return Compute net present value considering intangible benefits Compute net present value and internal rate of return with sensitivity analysis Moderate 20 30 Moderate 20 30 Moderate 30 40 Compute annual rate of return cash payback and net present value Moderate 30 40 Compute annual rate of return cash payback and net present value Complex 30 40 Compute net present value profitability index and internal rate of return Compute net present value considering intangible benefits Compute net present value and internal rate of return with sensitivity analysis Moderate 20 30 Moderate 30 40 Moderate 30 40 12 2 Copyright 2012 John Wiley Sons Inc Weygandt Managerial Accounting 6 e Solutions Manual For Instructor Use Only Correlation Chart between Bloom s Taxonomy Learning Objectives and End of Chapter Exercises and Problems Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1 Discuss capital budgeting evaluation and explain inputs used in capital budgeting 2 Describe the cash payback technique Q12 1 Q12 2 Q12 3 3 Explain the net present value method Q12 5 Q12 6 Q12 4 Q12 7 Q12 9 Q12 8 4 Identify the challenges presented by intangible benefits in capital budgeting 5 Describe the profitability index 6 Indicate the benefits of performing a post audit 7 Explain the internal rate of return method method 8 Describe the annual rate of return Broadening Your Perspective Q12 11 Q12 12 Q12 13 Q12 14 Q12 15 Q12 10 Q12 16 Q12 3 BYP12 4 B L O O M S T A X O N O M Y T A B L E E12 1 E12 2 E12 6 P12 1A BE12 2 BE12 5 DI12 2 E12 1 E12 2 E12 3 E12 4 P12 1A P12 4A P12 4B BE12 5 E12 4 BE12 6 P12 2A P12 1B P12 2B P12 2A P12 3A P12 4A P12 1B P12 2B P12 3B P12 4B P12 3A P12 3B E12 5 P12 3A P12 3B P12 1B P12 2B E12 11 BE12 1 DI12 1 E12 9 E12 10 BE12 3 E12 8 E12 10 E12 11 BE12 4 P12 5A P12 5B BE12 4 BE12 7 E12 7 BE12 9 E12 8 E12 9 BYP12 5 BYP12 2 E12 10 E12 11 P12 5A P12 5B BYP12 1 BYP12 9 BE12 8 DI12 3 E12 6 DI12 4 P12 1A P12 2A BYP12 8 BYP12 3 BYP12 6 BYP12 7 C o p y r i g h t 2 0 1 2 i l J o h n W e y S o n s I n c W e y g a n d t M a n a g e r i a l A c c o u n t i n g 6 e l S o u t i o n s M a n u a l F o r I n s t r u c t o r U s e O n y l 1 2 3 ANSWERS TO QUESTIONS 1 2 3 4 5 6 7 8 9 The screening of proposed capital expenditures may be done by a capital budgeting committee which submits its findings to the officers of the company The officers in turn select the projects they believe to be the most worthy of funding and submit them to the board of directors The directors ultimately approve the capital expenditure budget for the year The cash payback technique is relatively easy to compute and understand However it should not ordinarily be the only basis for the capital budgeting decision because it ignores the expected profitability of the investment and the time value of money Tom is not correct The formula for the cash payback technique is Cost of the capital investment Net annual cash flow The formula for the annual rate of return is Expected annual net income average investment The two tables are 1 The present value of a single future amount Table 3 in Appendix A This table is used when a project has uneven cash payments over its useful life and to compute the present value of the salvage value of the project 2 The present value of an annuity Table 4 in Appendix A This table is used when a project has equal cash payments occurring at equal intervals of time over its useful life The decision rule is Accept the project when net present value is zero or positive reject the project when net present value is negative The discount rate has two elements a cost of capital element and a risk element Many times companies set the risk element equal to zero thus they are setting the discount rate equal to the cost of capital However if a project is considered to be riskier than the firm s other projects the discount rate should include a risk element The following simplifying assumptions were made All cash flows come at the end of the year All cash flows are immediately reinvested in another project that has a similar return All cash flows can be predicted with certainty Examples of intangible benefits of investment projects would be increased product quality improved safety and enhanced employee loyalty Intangible benefits often complicate the capital budgeting process because their value can be difficult to quantify Ignoring intangible benefits may result in rejecting projects that would be financially beneficial to the company Two approaches can be taken Under the first approach management should ask whether the value of the intangible benefits exceeds the amount by which the net present value of the project is negative If so the project should be accepted Under the second approach management should make conservative dollar estimates of the value of the intangible benefits and the …