Question

Home Decor Pty Ltd is considering investing in a new machine to assemble its new product of high quality speakers. The machine is estimated to cost $124000 which can last for 5 years before it becomes unreliable and can be sold for scrap at $12,000. The project is estimated to bring in additional $40,000 net cash inflow annually with an annual 2% growth . The net cash flow in year 5 also includes the scrap value. The company plans to fund the purchase of the new machine using a bank loan with an interest rate of 10%. A. What is the ARR of the project?(Case sensitive. Type in 20.00 (two decimal places) for 20%.) B. How long is the payback period for this project? (Case sensitive. Type in 7.00 (two decimal places) for 7 years.) C. What is the NPV for this project? $ D. What is the IRR for this project? %

Answer 1

Annual depreciation	(124000-12000)/5	22400
Year		1	2	3	4	5
annual cash flow =cash flow in year 1*(1+g)^n growth = 2%		40000	40800	41616	42448.32	43297.2864
average accounting income = annual cash flow-annual depreciation		17600	18400	19216	20048.32	20897.2864
average cash flow = sum of annual cash flow/n	19232.32128
Accounting rate of return = average accounting income/initial investment	19232.32/124000	15.51%
2-
Year		1	2	3	4	5
annual cash flow =cash flow in year 1*(1+g)^n growth = 2%		40000	40800	41616	42448.32	43297.2864
scrap value of equipment						12000
net operating annual cash flow	-124000	40000	40800	41616	42448.32	55297.2864
cumulative cash flow		40000	80800	122416	1584
					amount to be recovered in year 4
Payback period in years = year before final year of recovery+(amount to be recovered in year 4/net operating annual cash flow)	3+(1584/42448.32)	3.04
3-
Year	0	1	2	3	4	5
net operating annual cash flow	-124000	40000	40800	41616	42448.32	55297.2864
present value factor at 10% = 1/(1+r)^n r =10%	1	0.909090909	0.826446281	0.7513148	0.68301346	0.62092132
present value of net operating cash flow= net operating cash flow*present value factor at 10%	-124000	36363.63636	33719.00826	31266.7168	28992.7737	34335.2642
net present value = sum of present value of net operating cash flow	40677.40
4-
Year	0	1	2	3	4	5
net operating annual cash flow	-124000	40000	40800	41616	42448.32	55297.2864
IRR = Using IRR function in MS excel	IRR(G3734:L3734)	21.54%

. Co New Microsoft Office Excel Worksheet - Microsoft Excel Insert Page Layout Formulas Data Review View Home Cut Dr Percentage 1 Wrap Text 1 Merge & Center 0 Autosum * 47 Eg Copy Paste Format Painter Clipboard Insert Delete Format Calibri - 11 - A A BI U >> A. Font f =IRR(G3734:L3734) Conditional Format Formatting as Table Styles Cell Styles 2 Clear Sort & Filter Editing Find & Select Alignment Number Cells H3735 E к L M N O P Q R S T 3726 21 31 3727 -124000 40000 40800 41616 42448.32 55297.2864 3728 0.909090909 0.826446281 0.7513148 0.68301346 0.62092132 Year net operating annual cash flow present value factor at 10% = 1/(1+r)^n r =10% present value of net operating cash flow= net operating cash flow*present value factor at 10% net present value = sum of present value of net operating cash flow 3729 -124000 36363.63636 33719.00826 31266.7168 28992.7737 34335.2642 3730 40677.40 3731 3732 3733 1 40000 2 40800 3734 41616 42448.32 55297.2864 Year net operating ann - 124000 IRR = Using IRR function in MS excel IRR(G3734:L3734) 3735 21.54%