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Textbook:
Warren, C. S., & Tayler, W. B. (2020). Managerial accounting (15th ed). Cengage.
Print: ISBN: 9781337912020
eText ISBN: 9780357685709
capital projects:
Project
New manufacturing plant
Machinery
Leasehold improvements
Computers
Office furniture
Company plan
Company car
Cost (SAR)
2,000,000
320,000
500,000
178,000
114,000
800,000
240,000
Annual cash flows (SAR)
310,000
80,000
118,000
497,000
392,000
230,000
77,000
Years
13
6
8
3
2
5
3
Assume that each project has no salvage value, and the firm uses a discount rate of
10%. Top management has decided that only SAR 2,200,000 can be spent in the
current year for capital projects.
1. For each of the projects, compute the net present value (round to two decimal
points), profitability index (round to three decimal points), and internal rate of return
(round to two decimal points).
Discount Rate: 10%
2. Rank the projects according to each method used in Part 1.
3. Explain how you would recommend to management of the company that the money
should be spent. What would be the total NPV of your chosen investments?
4. Would your answer to Part 3 be different if there was no limit to capital spending?
Explain.
ACT-500: Managerial Accounting XXXXXX-Riyadh-Males
Module 12: Critical Thinking Assignment
Capital Investment Analysis (100 points)
Student’s Name: XXXXXXX
Student’s ID Number: XXXXXXX
Course Code: ACT500
CRN: XXXXXX
Academic Year: 2025-2026
Term: First Semester
Instructor Name: XXXXXXX
Prepared Date: XX November 2025
ACT-500: Managerial Accounting XXXXXX-Riyadh-Males
Module 12: Critical Thinking Assignment
Capital Investment Analysis (100 points)
Student’s Name: XXXXXXX
Student’s ID Number: XXXXXXX
Course Code: ACT500
CRN: XXXXXX
Academic Year: 2025-2026
Term: First Semester
Instructor Name: XXXXXXX
Prepared Date: XX November 2025
The management team of Lisa’s Linens & Furniture is considering the following capital projects:
Project
Cost (SAR)
Annual cash flows (SAR)
New manufacturing plant
2,000,000
310,000
Machinery
320,000
80,000
Leasehold improvements
500,000
118,000
Computers
178,000
497,000
Office furniture
114,000
392,000
Company plan
800,000
230,000
Company car
240,000
77,000
Assume that each project has no salvage value, and the firm uses a discount rate of 10%. Top management has decide
1. For each of the projects, compute the net present value (round to two decimal points), profitability index (round to
Discount Rate: 10%
2. Rank the projects according to each method used in Part 1.
3. Explain how you would recommend to management of the company that the money should be spent. What would
4. Would your answer to Part 3 be different if there was no limit to capital spending? Explain.
ing capital projects:
Years
13
6
8
3
2
5
3
ate of 10%. Top management has decided that only SAR 2,200,000 can be spent in the current year for capital projects.
mal points), profitability index (round to three decimal points), and internal rate of return (round to two decimal points).
e money should be spent. What would be the total NPV of your chosen investments?
nding? Explain.
pital projects.
imal points).
Answer 1
Net Present Value (NPV) =
Profitability Index (PI) =
∑ ( Cash Inflows / (1+r)t ) – Initial Investment
Present Value of Cash Inflows / Initial Investment
Internal Rate of Return (IRR) =
IRR is the discount rate at which NPV = 0
Discount Rate ( r )
Project
10%
Initial Investment or Cost (SAR)
New manufacturing plant
Annual cash flows (SAR)
2,000,000
310,000
Machinery
320,000
80,000
Leasehold improvements
500,000
118,000
Computers
178,000
497,000
Office furniture
114,000
392,000
Company plan
800,000
230,000
Company car
240,000
77,000
New manufacturing plant project
Year
Cash flows (SAR)
0
-2,000,000
1
310,000
2
310,000
3
310,000
4
310,000
5
310,000
6
310,000
7
310,000
8
310,000
9
310,000
10
310,000
11
310,000
12
310,000
13
310,000
NPV
SAR 202,040.42
IP
IRR
1.101
11.91%
Machinery project
Year
0
1
2
3
4
5
6
Cash flows (SAR)
-320,000
80,000
80,000
80,000
80,000
80,000
80,000
NPV
IP
IRR
SAR 28,420.86
1.089
12.98%
Leasehold improvements project
Year
Cash flows (SAR)
0
-500,000
1
118,000
2
118,000
3
118,000
4
118,000
5
118,000
6
118,000
7
118,000
8
118,000
NPV
IP
IRR
SAR 129,521.29
1.259
16.77%
Computers project
Year
0
1
2
3
NPV
IP
Cash flows (SAR)
-178,000
497,000
497,000
497,000
SAR 1,057,965.44
6.944
IRR
273.87%
Year
0
1
2
Office furniture project
Cash flows (SAR)
-114,000
392,000
392,000
NPV
IP
IRR
SAR 566,330.58
5.968
324.80%
Year
0
1
2
3
4
5
Company plan project
Cash flows (SAR)
-800,000
230,000
230,000
230,000
230,000
230,000
NPV
IP
IRR
SAR 71,880.96
1.090
13.46%
Year
0
1
2
3
Company car project
Cash flows (SAR)
-240,000
77,000
77,000
77,000
NPV
IP
IRR
-SAR 48,512.40
0.798
-1.89%
Answer 2
Based on NPV (from highest to lowest):
Project
NPV (SAR)
PI
Computers
Office Furniture
New Manufacturing Plant
Leasehold Improvements
Company Plan
Machinery
Company Car
1,057,965.44
566,330.58
202,040.42
129,521.29
71,880.96
28,420.86
-48,512.40
6.944
5.968
1.101
1.259
1.09
1.089
0.798
NPV (SAR)
1,057,965.44
566,330.58
129,521.29
202,040.42
28,420.86
71,880.96
-48,512.40
PI
6.944
5.968
1.259
1.101
1.089
1.09
0.798
NPV (SAR)
566,330.58
1,057,965.44
129,521.29
71,880.96
28,420.86
202,040.42
-48,512.40
PI
5.968
6.944
1.259
1.09
1.089
1.101
0.798
Based on PI (from highest to lowest):
Project
Computers
Office Furniture
Leasehold Improvements
New Manufacturing Plant
Machinery
Company Plan
Company Car
Based on IRR (from highest to lowest):
Project
Office Furniture
Computers
Leasehold Improvements
Company Plan
Machinery
New Manufacturing Plant
Company Car
Answer 3
To maximize the total NPV, we prioritize projects with the highest PI and NPV while staying within the budget.
Recommended Projects for SAR 2,200,000 Budget
Based on the highest profitability index (PI) and staying within the budget, the selected projects are:
Project
Computers
Office Furniture
Leasehold Improvements
Company Plan
Initial Investment or Cost (SAR)
178,000.00
114,000.00
500,000.00
800,000.00
NPV (SAR)
1,057,965.44
566,330.58
129,521.29
71,880.96
Machinery
320,000.00
1,912,000.00
28,420.86
1,854,119.13
Answer 4
If there were no budget constraints, the company should invest in all projects except the Company Car, as it has a ne
The total NPV from all viable projects would then be SAR 2,056,159.55.
The Company Car project should be excluded from the investment plan due to its weaker financial metrics compare
Its Profitability Index (PI), which measures the value created per SAR invested, is relatively low because the cash inf
This indicates that the project does not generate as much value as others in the portfolio. Additionally, its Net Presen
Furthermore, the Internal Rate of Return (IRR) for the Company Car is less favorable because the short project durati
Excluding the Company Car ensures that the limited capital budget is allocated to projects that deliver the greatest fin
Project
New manufacturing plant
Machinery
Leasehold improvements
Computers
Office furniture
Company plan
Initial Investment or Cost (SAR)
2,000,000
320,000
500,000
178,000
114,000
800,000
3,912,000.00
NPV (SAR)
202,040
28,421
129,521
1,057,965
566,331
71,881
2,056,159.55
r=10%, t= time period
Years
13
6
8
3
2
5
3
IRR (%)
273.87
324.8
11.91
16.77
13.46
12.98
-1.89
IRR (%)
273.87
324.8
16.77
11.91
12.98
13.46
-1.89
IRR (%)
324.8
273.87
16.77
13.46
12.98
11.91
-1.89
within the budget.
Net Present Value (NPV):
The NPV is calculated using the formula:
NPV=∑(Ct(1+r)t)−C0
Where:
– Ct = Cash flow at time t
– r = Discount rate (10% or 0.10 in this case)
– C0 = Initial investment cost
Profitability Index (PI):
The PI is calculated as:
PI=∑(Ct(1+r)t)C0
Internal Rate of Return (IRR):
IRR is the discount rate that makes the NPV of all cash flows from the project equal to zero
References
Warren, C. S., & Tayler, W. B. (2020). Managerial accounting (15th ed). Cengage.
Project
New manufacturing plant
Cost
Annual cash flows
2,000,000
310,000
Machinery
320,000
80,000
Leasehold improvements
500,000
118,000
Computers
178,000
497,000
Office furniture
114,000
392,000
Company plan
800,000
230,000
Company car
240,000
77,000
Computers
Office furniture
New manufacturing plant
Cost
178,000
114,000
2,000,000
Annual cash flows
497,000
392,000
310,000
Leasehold improvements
Company plan
Machinery
Company car
500,000
800,000
320,000
240,000
118,000
230,000
80,000
77,000
Project
Computers
Office furniture
Leasehold improvements
New manufacturing plant
Company plan
Machinery
Company car
Cost
178,000
114,000
500,000
2,000,000
800,000
320,000
240,000
Annual cash flows
497,000
392,000
118,000
310,000
230,000
80,000
77,000
Project
Cost
114,000
178,000
500,000
800,000
Annual cash flows
392,000
497,000
118,000
230,000
Project
Office furniture
Computers
Leasehold improvements
Company plan
Machinery
New manufacturing plant
Company car
320,000
2,000,000
240,000
80,000
310,000
77,000
We would recommend to management of the company that the m
management has decided that only 2,200,000SAR can be spent in t
NPV and lower PI and IRR . T
My answer to part 3 will be different if there was no limit to capital
we will accept all projects except Company car will not be ac
Years
PV
NPV
13
2,202,040
202,040
6
348,421
28,421
8
629,521
129,521
3
1,235,965
1,057,965
2
680,331
566,331
5
871,881
71,881
3
191,488
(48,512)
Years
PV
NPV
3
2
13
1,235,965
680,331
2,202,040
1,057,965
566,331
202,040
8
5
6
3
629,521
871,881
348,421
191,488
129,521
71,881
28,421
(48,512)
Years
PV
3
2
8
13
5
6
3
Years
PI
1,235,965
680,331
629,521
2,202,040
871,881
348,421
191,488
PV
2
3
8
5
6.94
5.97
1.26
1.10
1.09
1.09
0.80
IRR
680,331
1,235,965
629,521
871,881
325%
274%
17%
13%
6
13
3
348,421
2,202,040
191,488
13%
12%
-2%
anagement of the company that the money should be spent on Office Furniture and Computers as top
at only 2,200,000SAR can be spent in the current year for capital projects also other projects have less
NPV and lower PI and IRR . Total NPV will be 1,624,296
fferent if there was no limit to capital spending as on previous part we accept only two projects but now
cts except Company car will not be acceptable as it has negative NPV and IRR and has lowest PI
PI
IRR
10%
(2,000,000)
310,000
1.10
12%
310,000
1.09
13%
310,000
1.26
17%
310,000
6.94
274%
310,000
5.97
325%
310,000
1.09
13%
310,000
0.80
-2%
310,000
310,000
310,000
310,000
310,000
310,000
1,624,296
(320,000)
80,000
(500,000)
118,000
(178,000)
497,000
(114,000)
392,000
(800,000)
230,000
(240,000)
77,000
80,000
118,000
497,000
392,000
230,000
77,000
80,000
118,000
497,000
230,000
77,000
80,000
118,000
230,000
80,000
118,000
230,000
80,000
118,000
118,000
118,000
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