Critical Thinking Assignment Module 12 – Capital Investment Analysis

Critical Thinking Assignment

Module 12 – Capital Investment Analysis

Q- The management team of Lisa’s Linens & Furniture is considering the following capital projects:

Project

Cost

Annual cash flows

Years

New manufacturing plant

20,000,000SAR

310,000SAR

13

Machinery

320,000SAR

80,000SAR

6

Leasehold improvements

500,000SAR

118,000SAR

8

Computers

178,000SAR

497,000SAR

3

Office furniture

114,000SAR

392,000SAR

2

Company plan

800,000SAR

230,000SAR

5

Company car

240,000SAR

77,000SAR

3

Assume that each project has no salvage value, and the firm uses a discount rate of 10%. Top management has decided that only 2,200,000SAR can be spent in the current year for capital projects.

1. Compute the net present value (NPV), profitability index, and internal rate of return for each of the projects.

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. What other methods could be used with this information to evaluate whether this project is feasible or not? How does the time value of money concept impact the cash flows and outcome?

You must show all your work. Complete the problems in an Excel spreadsheet. Be sure to show all your work on the Excel spreadsheet to receive credit.

Learning Outcomes

Examine the relation of capital investment analysis to the management process.

Solve capital investment evaluations including using net present value and internal rate of return.

Evaluate payback calculations and accounting rate of return.

Distinguish factors that can impact the capital budgeting process.

Readings

Required:

Chapter 12 in Managerial Accounting

Sarwary, Z. (2019). Capital budgeting techniques in SMEs: A literature review. Journal of Accounting & Finance (2158-3625), 19(3), 97–114.

Recommended:

Module 10 PowerPoint Presentation

Nikias, A. D. (2019). An experimental examination of the effects of information control on budget reporting with relative project evaluation. Journal of Management Accounting Research, 31(2), 177–196.

Ghumro, I. A., Lashari, A. A., Bhatti, I., & Abro, M.-R. (2019). Investment decisions: How it influence capital budgeting practices. Journal of Managerial Sciences, 13(2), 84–94.