Answer:
1. Payback period = 3.94 Years
The ARR is $262,750
The NPV is $937,102,
The approximate IRR of this investment is 20.87%
2. The Company should invest in this project as it NPV is positive, payback period is lower than the required Payaback period, ARR is greater than the minimum ARR, IRR is greater than cost of capital
Explanation:
In order to calculate the Payback period ARR, the NPV, and the approximate IRR of this investment we would have to use the following formula:
Payback period = Initial Investment/Annual net Cash inflow
Payback period = $ 2,050,000/$ 520,000
Payback period = 3.94 Years
ARR = Average Net Income/Average Investment
Average Net Income = Annual net Cash Flow - Annual Depreciation
Average Net Income = $ 520,000-$ 2,050,000/8
Average Net Income = $262,750
Average Investment = ($ 2,050,000+0)/2 = $1,025,000
ARR = $262,750/1,025,000
ARR = 25.63%
NPV = -Initial Investment + Annual Cash Inflow *(1-(1+r)^-n)/r
NPV = -$ 2,050,000 + $ 520,000*(1-(1+10%)^-8)/10%
NPV = 937,102.15
IRR = rate(nper,pmt,pv,fv)
IRR = rate(8, $ 520,000,-$ 2,050,000,0)
IRR = 20.87%
The Company should invest in this project as it NPV is positive, payback period is lower than the required Payaback period, ARR is greater than the minimum ARR, IRR is greater than cost of capital
