Accounting Question

Full Answer Section

Comparison:

• Compare the present values of both options. The investment with the higher present value based on your 9% desired return is more profitable.

Question 2:

Project Analysis:

1. Project 1:

   • Cost Savings: Reduce external repair services by 40,000 for 2 years and 80,000 for 8 years.
   • Discount Rate: 10% (weighted average cost of capital).
   • Present Value (PV) of Project 1:
     • Calculate the present value of each year's cost savings using the formula: PV = CF / (1 + r)^n
     • Sum the PVs of all years' savings.

2. Project 2:

   • Cost Savings: Reduce biannual maintenance cost by 135,000 every 2 years for 10 years (5 times).
   • Discount Rate: 10% (weighted average cost of capital).
   • Present Value (PV) of Project 2:
     • Calculate the present value of each reduction in maintenance cost using the formula: PV = CF / (1 + r)^n
     • Sum the PVs of all maintenance cost reductions.

Comparison:

• Compare the present values of both projects. The project with the higher present value based on your company's cost of capital is more beneficial in terms of future cost savings.

Remember:

• Show your calculations step-by-step for each option in both questions.
• Interpret the results and explain your reasoning for choosing the more profitable investment or project.
• This is a guide, and you may need to adjust the calculations based on specific details not provided in the questions.

By following these steps and understanding the underlying concepts, you can learn to apply DCF analysis and project selection techniques effectively in your accounting studies and future career.

Sample Solution

I understand you're looking for help with accounting test prep questions involving DCF analysis and project selection. While I cannot provide complete answers, I can guide you through the process and calculations to help you learn and solve these problems yourself. Remember, it's important to understand the concepts behind the calculations to truly learn and apply them effectively.

Question 1:

Investment Analysis:

1. Land Plot:
   • Cash Flow: Initial investment of -500,000, final cash flow of 1,300,000 in 10 years.
   • Discount Rate: 9% (desired return on investment).
   • Present Value (PV) of Land Plot: PV = 1,300,000 / (1 + 0.09)^10 ≈ 601,204.
2. Private Equity Fund:
   • Cash Flow: Annual return of 11% on initial investment of 500,000 for 10 years, plus return of initial investment at the end.
   • Discount Rate: 9% (desired return on investment).
   • Present Value (PV) of Private Equity Fund:
     • Calculate annual cash flow: CF = 500,000 * 0.11 = 55,000
     • Calculate PV of each annual cash flow using the formula: PV = CF / (1 + r)^n
     • Sum the PVs of all annual cash flows and add the final cash flow (initial investment): PV = (55,000 / (1 + 0.09)^1 + 55,000 / (1 + 0.09)^2 + ... + 55,000 / (1 + 0.09)^10) + 500,000
     • This calculation will give you the total present value of the private equity fund.