Answer:
12.5%
4 years
NPV = $302,387
PV of cash flows = $1,552,387
Amount invested = $1,250,000
Explanation:
Average rate of return = net income / amount invested
Net income = cash flow - depreciation
Straight line depreciation expense = (Cost of asset - Salvage value) / useful life
1,250,000 / 8 = 156,250
Net income = $312,500 - 156,250 = $156250
(156250 / $1,250,000) x 100 = 12.50%
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
$1,250,000 / $312,500 = 4 years
Net present value is the present value of after-tax cash flows from an investment less the amount invested.
NPV can be calculated using a financial calculator
Cash flow in year 0 = $-1,250,000
Cash flow each year from year 1 to 8 = $312,500
I = 12%
NPV = $302,387
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.
