Problem:
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 expected future cash inflows for each oppurtunity follow:
Year 1 Year 2 Year 3 Year 4
Project 1 $144,000 $147,000 $160,000 $178,000
Project 2 204,000 199,000 114,000 112,000
Both investments require an initial payment of $400,000. Advo's desired rate of return is 16 percent.
Required:
A) Compute the net present value of each project. Which project should Advo adopt based on the net present value approach.
B) Use the incremental revenue summation method to compute the payback period for each project. Which project should Advo adopt based on the payback approach?
Complete the information requested in parts (a) and (b) of the Self-Study. 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?