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Initial investment

Annual cash inflow


Year 1
Year 2
Year 3
Total
Annual depreciation
Payback period

Proposal A
Proposal B Proposal C
$ 100,000 $ 100,000 $ 100,000
$
70,000 $
50,000 $ 100,000
$
30,000 $
50,000 $
$
10,000 $
50,000 $
$ 110,000 $ 150,000 $ 100,000
$
33,333 $
33,333 $ 100,000
2 years
Proposal A

Year 1
Year 2
Year 3

Year 1
Year 2
Year 3
Total PV of cash inflows
Initial investment
Net present value

Total cash inflows


Divided by number of years
average annual cash flow
Less: annual depreciation
average annual income
divided by initial investment
accrual actg rate-of-return

$
$
$

2 years
Proposal B

70,000 $
30,000 $
10,000 $

1 year
Proposal C

50,000 $ 100,000
50,000 $
50,000 $
-

Present value
factors
0.8929
0.7972
0.7118

Present value of cash inflows


Proposal A
Proposal B Proposal C
$
62,500 $
44,643 $
89,286
$
23,916 $
39,860
$
7,118 $
35,589
$
93,534 $ 120,092 $
89,286
$ 100,000 $ 100,000 $ 100,000
$
(6,466) $
20,092 $ (10,714)
Proposal A
$ 110,000
3
36,667
$
33,333
$
3,333
$ 100,000
3.33%

Proposal B
$ 150,000
3
50,000
$
33,333
$
16,667
$ 100,000
16.67%

Proposal C
$ 100,000
1
100,000
$ 100,000
$
$ 100,000
0.00%

Based on the computations above, the payback period method would favor proposal C since initial inv
would be recovered within 1 year. Under the NPV method, Proposal B is favorable because it's the only
a positive NPV. Under the AARR, proposal B is also a better investment because it has the highest rate

$ 33,333 $ 36,667
$ 33,333 $ (3,333)
$ 33,333 $ (23,333)
$ 10,000
3333.3333

posal C since initial investment


le because it's the only project with
e it has the highest rate of return.

Initial investment
Annual cash inflow
Year 1
Year 2
Year 3
Total
Annual depreciation
Payback period
Year 1
Year 2
Total

Year 1
Year 2
Year 3

Year 1
Year 2
Year 3
Total PV of cash inflows
Initial investment
Net present value

Total cash inflows


Divided by number of years
average annual cash flow
Less: annual depreciation
average annual income
divided by initial investment
accrual actg rate-of-return

Proposal A
Proposal B
Proposal C

Proposal A
Proposal B Proposal C
$
90,000 $
90,000 $
90,000
$
80,000 $
45,000 $
$
10,000 $
45,000 $
$
45,000 $
45,000 $
$ 135,000 $ 135,000 $
$
30,000 $
30,000 $

90,000
90,000
90,000

2 years
Proposal A
$
80,000
$
10,000
$
90,000

2 years
Proposal B
$
45,000
$
45,000
$
90,000

1 year
Proposal C
$
90,000

Proposal A

Proposal B

Proposal C

$
$
$

80,000 $
10,000 $
45,000 $

45,000 $
45,000 $
45,000 $

90,000

90,000
-

Present
Proposal A
$
70,160
$
7,690
$
30,375
$ 108,225
$
90,000
$
18,225

value of cash inflows


Proposal B Proposal C
$
39,465 $
78,930
$
34,605
$
30,375
$ 104,445 $
78,930
$
90,000 $
90,000
$
14,445 $ (11,070)

Proposal A
$ 135,000
3
45,000
$
30,000
$
15,000
$
90,000
16.67%

Proposal B
$ 135,000
3
45,000
$
30,000
$
15,000
$
90,000
16.67%

Proposal C
$
90,000
1
90,000
$
90,000
$
$
90,000
0.00%

NPV
1
2
3

AARR
1.5
1.5
3

Ranking
PP period
2.5
2.5
1

Present value
factors
0.877
0.769
0.675

Based on the computations above, the payback period method would favor proposal C since initial inv
would be recovered within 1 year. Under the NPV method, Proposal A is favorable because it has the h
Under the AARR, proposal A and B have the same rate of return.
I still think Proposal A is the best alternative because it has the highest NPV and the NPV method is a b
in evaluating a project because it considers the time value of money.

posal C since initial investment


le because it has the highest NPV.

d the NPV method is a better method

Question 1: Compute the operating income for


Customer Customer
Revenues
Costs
Marveline Burnett
$
300 $
225
J Jackson
$
200 $
305
Roger Jones
$
80 $
75
Paul Saas
$
75 $
110
Becky Stephan
$
350 $
220
Total
$
1,005 $
935

each of the five customers. (five points)


Operating
Income
$
75
$
(105)
$
5
$
(35)
$
130
$
70

Question 2: What options should Handy-Man Services consider in light of the customer-profitability res
The company should try to find out why Jackson and Saas have net losses. He should try
to check the costs involved if it could be reduced. It should also consider if the fees
charged to these customers are enough to generate income for the company. If costs
cannot be reduced, it should consider raising the fee for these customers. The charging
of fee based on the number of rooms may not be a good measure. It should also
consider the age of the house because new houses have lesser repairs needed. It should
also consider the transportation costs and other expenses because houses located far
away from the office may require more costs. The customers that are highly profitable
should also be considered. The company should focus on Burnett and Stephan. It should
take good care of these customers. It should also check the costs charged to these
customers. There might be some errors in allocating costs to these customers that's why
it has higher profit. It could be that costs were not allocated properly that's why some
customers were having big losses while some have very high profit. If after considering
those factors, there are no discrepancies in allocating the costs and charging of the right
fees, the company may want to discontinue serving Jackson because the loss incurred is
hurting the company's profitability.

Question 3: What problems might Handy-Man Services encounter in accurately estimating the operat

Some problems the company would encounter in accurately estimating the operating costs of each
the work involved in keeping the correct records per customer, accurate computations in allocating
performance of each worker assigned to the different customers. Proper and accurate recording of
transactions should be maintained because it plays a very important role in decision making. The
encounter problems in properly allocating costs especially those costs that are indirect costs and c
only one customer. In comparing costs per customer, the employees assigned to different custome
terms of efficiency in performing the repairs. Some employees may be less efficient than the other
more costs.

mer-profitability results?

e should try
e fees
If costs
charging
so
d. It should
ated far
profitable
n. It should
hese
that's why
hy some
onsidering
of the right
incurred is

timating the operating costs of each customer?

erating costs of each customer includes


tations in allocating costs, assessing the
curate recording of the company's
cision making. The company may also
indirect costs and cannot be traced to
to different customers may have differ in
cient than the others that's why they incur