Write a memorandum discussing the usefulness of capital investment techniques, accounting assignment
Write a memorandum discussing the usefulness of capital investment techniques, accounting assignment
Case Summary
Write a memorandum discussing the usefulness of capital investment techniques (net present value, internal rate of return, payback, and unadjusted rate of return). Address the strengths and weaknesses of the methods and the advantages of techniques using time value of money.
Case Analysis
The management of Southern Power and Light is considering two capital investment projects. The estimated net cash flows fro each project are as follows:
|
Year |
Wind Turbines |
Biofuel Equipment |
|
1 |
320,000 |
350,000 |
|
2 |
320,000 |
350,000 |
|
3 |
320,000 |
350,000 |
|
4 |
320,000 |
350,000 |
The wind turbines require an investment of 971,840, while the biofuel equipment requires an investment of 1,109,500. No residual value is expected from either project. Use a rate of 6% for all calculations.
Compute the net present value of each project.
Compute the internal rate of return for each project.
Executive Decisions
Indicate which project would be selected if the net present value is used. Indicate which project would be selected if the internal rate of return is used. Indicate which criteria you would suggest using and why.
