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Subject Topic: cpa-05833 Payback Period (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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ArcSine
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Posted: 11 Sep 2012 at 15:20 | IP Logged  

Agreed that the salvage value is just extraneous smokescreen. The SV can only be realized at or after t = 4, otherwise the year 4 cash flow wouldn't be obtained.

If it's after t = 4, it has no affect on the payback calc, since payback occurs during the fourth year.

If we assume it's realized concurrently with the year 4 cash flow, and we assume further it isn't already included with the 27,000 (although given no basis for such assumption), the t = 4 cash flow becomes 30,000 and the resulting discounted payback drops to only 3.227 years, which is not an answer option
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Mark7
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Posted: 11 Sep 2012 at 16:30 | IP Logged  

But a good estimation ....
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pat1387
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Posted: 11 Sep 2012 at 18:48 | IP Logged  

GVen wrote:
<SPAN lang=X-NONE>

Wouldn't you expect that the solution below
would factor in the year 4 salvage value into the net
cash flow? Did they ignore the SV b/c they did not
actually say when the asset life is, nor whether year 4
did or did not have the salvage value? Or perhaps are
they assuming that, since we did not reach the end of
year 4, there is no CF to be included?


Question CPA-05833

<FONT face=Helvetica
size=2><FONT face=Helvetica size=2>

A company purchases an item for $43,000.
The salvage value of the item is $3,000. The cost of
capital is 8%.


Pertinent information related to this
purchase is as follows:

<FONT
face=Helvetica-Oblique size=2><FONT face=Helvetica-
Oblique size=2>

Net cash flows Present value factor at 8%

<FONT face=Helvetica size=2><FONT
face=Helvetica size=2>

Year 1 $10,000 0.926


Year 2 15,000 0.857


Year 3 20,000 0.794


Year 4 27,000 0.735


What is the discounted payback period in
years?


a. 3.10


b. 3.25


c. 2.90


d. 3.14


Explanation

<FONT face=Helvetica
size=2><FONT face=Helvetica size=2>

Choice "b" is correct. The discounted
payback period of 3.25 years is computed as follows:


<FONT face=Helvetica-Oblique size=2><FONT
face=Helvetica-Oblique size=2>

Net Present value


cash flows factor at 8% Product
Cumulative

<FONT face=Helvetica size=2>
<FONT face=Helvetica size=2>

Year 1 $10,000 x 0.926 = 9,260 9,260


Year 2 15,000 x 0.857 = 12,855 22,115


Year 3 20,000 x 0.794 = 15,880 37,955


Year 4 27,000 x 0.735 = 19,845


The cumulative payback after three years is
$37,955. The portion of the fourth year needed to fully
pay back the


investment is computed as the ratio of the
amount remaining to be recovered to the amount collected
in the fourth


year as follows:


(43,000 - 37,955)

<FONT
face=Symbol size=2><FONT face=Symbol size=2>

÷

<FONT face=Helvetica
size=2><FONT face=Helvetica size=2>

19,845 = .252


The discounted payback period is,
therefore:


Years 1-3 3.00 years


Year 4 .25 years


Total 3.25 years


Choice "a" is incorrect. This solution only
anticipates payback of the capital investment net of
salvage.


Choice "c" is incorrect. This solution does
not apply the discount factors


Choice "d" is incorrect, per the above.


</SPAN>


Hey GVen,

It seems like you are almost done. I just got my BEC
score today..i got a 69. FAR - 74.

Your scores for all parts are above 80. Which program do
you use? and what are your study methods/habits? Any tips
will be appreciated.

__________________
AUDIT - 67, 81
FAR - 68, 66, 74
BEC - 69
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GVen
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Posted: 20 Sep 2012 at 11:16 | IP Logged  

Pat1387: I used Becker for all first time exams (and will do so for BEC as well). When I failed REG, I re-took using Gleim which was a lot more intense and a lot more info. I recommend trying the "easier way" unless you really want to make sure you have covered all the material.

That said, doing the word problems at the end of each gleim chapter really helped to crystallize some things that become automaton-like when doing MC's.

thanks for everyone's help.



__________________
FAR 8/2011: 86
AUD 11/2011: 93
Reg 2/2012: 71, 7/1/2012: 89
BEC 10/2012: TBD
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