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NPV, Payback Period, Time Value of Money

I need help with a self-review study questions. This is the text we are using.
Thomas P. Edmonds, Bor-Yi Tsay, and Phillip R. Olds., Fundamental Managerial Accounting Concepts, 6th ed., McGraw-Hill Erwin (2011).

The CFO of Advo Corporation is considering two investment opportunities.

The self-study review problems on page 463, a. & b. have to be answered as well as: Complete the information requested in parts (a) and (b) of the Self-Study Review Problem on pg. 463. Then answer the following questions related to capital investment proposals. (1) What is meant by the expression, time value of money? (2) Why should all capital investment proposals include time value of money (present value) calculations of future cash flows that are to be received from the alternative investments?

Thank you.


Solution Preview

An Excel file and pdf files are attached. Text is provided here for reference only.

Self-Study review problem
a) Compute NPV using the formula:

Where Ct = net cash inflow during the period
C0 = initial installment
r = discount rate
t = number of time periods

For this problem, the computations are as follows:

For project 1,

For project 2,

Choose the project with the highest NPV, i.e. project 2.

b) The name incremental revenue summation means to add the revenues in small portions.

Refer to the Excel spreadsheet, project 1
Sum of cash inflows from Year 1 = ...

Solution Summary

Explained in 419 words. This response includes step-by-step calculations for NPV and Payback period by hand, as well as the same calculations done in Excel. Also included is an explanation of the time value of money.