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

return

8% 6% 4% 7%

Required:

How can this information be used in the decision-making process for the new loading facilities? Does it cause

any confusion?

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

value.

Required:

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.

Required:

What suggestions do you have for the CEO?

 

 

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