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Accounting:Net present value,payback and annual return.

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The Three Stooges partnership is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.

Project Moe Project Larry Project Curly
Capital investment $150,000 $160,000 $200,000
Annual net income:
Year 1 13,000 18,000 27,000
2 13,000 17,000 22,000
3 13,000 16,000 21,000
4 13,000 12,000 13,000
5 13,000 9,000 12,000
Total $ 65,000 $ 72,000 $ 95,000

Depreciation is computed by the straight-line method with no salvage value. The company's cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.)
Hint:
Compute annual rate of return, cash payback, and net present value.

Instructions

(a) Compute the cash payback period for each project. (Round to two decimals.)

(b) Compute the net present value for each project. (Round to nearest dollar.)

(c) Compute the annual rate of return for each project. (Round to two decimals.) (Hint: Use average annual net income in your computation.)

(d) Rank the projects on each of the foregoing bases. Which project do you recommend?

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The problem deals with estimating the net present value, payback period and annual rate of return for three companies.

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GAAP vs. IFRS and comparing IRR, NPV, and payback approaches

GAAP vs. IFRS

The United States uses Generally Accepted Accounting Principles (GAAP) as the basis of financial reporting. The International Financial Accounting Standards (IFRS) is an alternative way to report financials. This article from Ernst and Young compares the two methods of financial reporting.

Ernst & Young's US GAAP vs. IFRS: The Basics http://www.ey.com/Publication/vwLUAssets/IFRS_vs_US_GAAP_Basics_March_2010/$FILE/IFRS_vs_US_GAAP_Basics_March_2010.pdf

After reading the article from Ernst and Young, answer the following questions:

- How does the GAAP reporting method cause cash flows to differ from net income?
- How are the features of the Income Statement, Balance Sheet, and Statement of Cash Flow utilized in both the GAAP and the IFRS reporting methods?
- Does it make sense to adapt a worldwide standard for financial reporting? Should this be mandated or voluntary?
- Calculate some of the potential costs and benefits of switching from GAAP to IFRS.

Capital Rationing

Compare and contrast the Internal Rate of Return (IRR), the Net Present Value (NPV), and Payback approaches to capital rationing. Which do you think is better? Why?

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