Description
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: 2024 – 2025
Term: First Semester
Instructor Name: XXXXXXX
Prepared Date: 19 November 2024
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: 2024 – 2025
Term: First Semester
Instructor Name: XXXXXXX
Prepared Date: 19 November 2024
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.
tal projects:
Years
13
6
8
3
2
5
3
0%. Top management has decided that only SAR 2,200,000 can be spent in the current year for capital projects.
s), profitability index (round to three decimal points), and internal rate of return (round to two decimal points).
y should be spent. What would be the total NPV of your chosen investments?
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
2,000,000
Machinery
320,000
Leasehold improvements
500,000
Computers
178,000
Office furniture
114,000
Company plan
800,000
Company car
240,000
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
IP
IRR
SAR 202,040.42
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
IRR
Cash flows (SAR)
-178,000
497,000
497,000
497,000
SAR 1,057,965.44
6.944
273.87%
Year
0
1
Office furniture project
Cash flows (SAR)
-114,000
392,000
2
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%
Company car project
Year
0
1
2
3
NPV
IP
IRR
Cash flows (SAR)
-240,000
77,000
77,000
77,000
-SAR 48,512.40
0.798
-1.89%
Answer 2
Based on NPV (from highest to lowest):
Project
Computers
Office Furniture
New Manufacturing Plant
Leasehold Improvements
Company Plan
Machinery
Company Car
Based on PI (from highest to lowest):
NPV (SAR)
1,057,965.44
566,330.58
202,040.42
129,521.29
71,880.96
28,420.86
-48,512.40
Project
Computers
Office Furniture
Leasehold Improvements
New Manufacturing Plant
Machinery
Company Plan
Company Car
NPV (SAR)
1,057,965.44
566,330.58
129,521.29
202,040.42
28,420.86
71,880.96
-48,512.40
Based on IRR (from highest to lowest):
Project
Office Furniture
Computers
Leasehold Improvements
Company Plan
Machinery
New Manufacturing Plant
Company Car
NPV (SAR)
566,330.58
1,057,965.44
129,521.29
71,880.96
28,420.86
202,040.42
-48,512.40
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
Machinery
Initial Investment or Cost (SAR)
178,000.00
114,000.00
500,000.00
800,000.00
320,000.00
1,912,000.00
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
Initial Investment
s / Initial Investment
r=10%, t= time period
hich NPV = 0
Annual cash flows (SAR)
Years
310,000
13
80,000
6
118,000
8
497,000
3
392,000
2
230,000
5
77,000
3
PI
6.944
5.968
1.101
1.259
1.09
1.089
0.798
IRR (%)
273.87
324.8
11.91
16.77
13.46
12.98
-1.89
PI
6.944
5.968
1.259
1.101
1.089
1.09
0.798
IRR (%)
273.87
324.8
16.77
11.91
12.98
13.46
-1.89
PI
5.968
6.944
1.259
1.09
1.089
1.101
0.798
IRR (%)
324.8
273.87
16.77
13.46
12.98
11.91
-1.89
I and NPV while staying within the budget.
udget, the selected projects are:
NPV (SAR)
1,057,965.44
566,330.58
129,521.29
71,880.96
28,420.86
1,854,119.13
projects except the Company Car, as it has a negative NPV of SAR -48,512.40.
plan due to its weaker financial metrics compared to the other projects.
R invested, is relatively low because the cash inflows (SAR 77,000 annually) are modest and span only three years.
ers in the portfolio. Additionally, its Net Present Value (NPV) is either low or possibly negative, meaning it fails to add significa
is less favorable because the short project duration and limited cash flows do not sufficiently exceed the company’s 10% cost of
allocated to projects that deliver the greatest financial benefits.
NPV (SAR)
202,040
28,421
129,521
1,057,965
566,331
71,881
2,056,159.55
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.
The management team of Lisa’s Linens & Furniture is considering the following capital
projects:
Project
Cost (SAR) Annual cash flows (SAR) Years
New manufacturing plant 2,000,000 310,000
13
Machinery
320,000
80,000
6
Leasehold improvements 500,000
118,000
8
Computers
178,000
497,000
3
Office furniture
114,000
392,000
2
Company plan
800,000
230,000
5
Company car
240,000
77,000
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.
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