Answer:
a. 4.92 years
b. NPV = $26,770.20
c. 1.0837
d. IRR = 12.26%
e. 15.6%
the project should be accepted
Explanation:
Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows
Payback period = Amount invested / cash flow = $320,000 / $65,000 = 4.92 years
Net present value is the present value of after tax cash flows from an investment less the amount invested.
Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested
NPV and IRR can be calculated using a financial calculator
Cash flow in year 0 = $-320,000
Cash flow each year from year 1 to 8 = $65,000
I = 10%
NPV = $26,770.20
IRR = 12.26%
profitability index = 1 + (NPV / Initial investment) = 1 + ($26,770.20 / $320,000 ) = 1.0837
The project should be accepted because the NPV and profitability index are positive. the IRR is greater than the discount rate. this means that the project is profitable.
Accounting rate of return = Average net income / Average book value
Average book value = (cost of equipment - salvage value) / 2 = $320,000 / 2 = $160,000
$25,000 / $160,000 = 0.156 = 15.6%
To find the NPV using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
To find the IRR using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. After inputting all the cash flows, press the IRR button and then press the compute button.
