140) Bock Construction Company is considering four proposals for the construction of new loading facilities that will
include the latest in ship loading/unloading equipment. After careful analysis, the company's accountant has
developed the following information about the four proposals:
Proposal 1 Proposal 2 Proposal 3 Proposal 4
Payback period 4 years 4.5 years 6 years 7 years
Net present value $80 000 $178 000 $166 000 $308 000
Internal rate of return 12% 14% 11% 13%
Accrual accounting rate of
8% 6% 4% 7%
How can this information be used in the decision-making process for the new loading facilities? Does it cause
141) What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and
accrual accounting for performance evaluation? How can these conflicts be reduced?
142) Retail Outlet is looking for a new location near a shopping centre. It is considering purchasing a building rather
than leasing, as it has done in the past. Three retail buildings near a new shopping centre are available but each
has its own advantages and disadvantages. The owner of the company has completed an analysis of each
location that includes considerations for the time value of money. The information is as follows:
Location A Location B Location C
Internal rate of return 13% 17% 20%
Net present value $25 000 $40 000 $20 000
The owner does not understand how the location with the highest percentage return has the lowest net present
Explain to the owner what is (are) the probable cause(s) of the comparable differences.
143) Aluminium Casting Company wants to buy a moulding machine that can be integrated into its computerised
manufacturing process. It has received three bids, and related manufacturer's specifications, for the machine.
The bids range from $3 500 000 to $3 550 000. The estimated annual savings of the machines range from $260
000 to $270 000. The payback periods are almost identical and the net present values are all within $8000 of each
other. The CEO just doesn't know which vendor to choose since all of the selection criteria are so close together.
What suggestions do you have for the CEO?