Answer: [1]. Simple Rate of Return = 16.64%
[2]. Profitability Index = 1.20
[3]. Payback Period = 2.73 years
[4]. Lower net present value
Explanation:
let us take a step by step process to deal with this question.
Given the Initial Investment = $2,915,000
With a useful Life of 5 years
Annual Net Cash flows = Annual Net Operating Income + Depreciation
Annual Net Cash flows = $485,000 + $583,000
Annual Net Cash flows = $1,068,000
(1). Simple Rate of Return = Annual Net Income / Initial Investment
Simple Rate of Return = $485,000 / $2,915,000
Simple Rate of Return = 16.64%
(2). Present Value of Cash Inflows = $1,068,000 * PVA of $1 (16%, 5)
Present Value of Cash Inflows = $1,068,000 * 3.27429
Present Value of Cash Inflows = $3,496,941.72
Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $3,496,941.72 / $2,915,000
Profitability Index = 1.20
(3). Payback Period = Initial Investment / Annual Net Cash flows
Payback Period = $2,915,000 / $1,068,000
Payback Period = 2.73 years
(4). An increase in discount rate, will cause a decrease in net present value
As a result causes the project's net present value to be lower.
cheers i hope this helps!!!
