Question

1. Determine the payback period for an investment 2. Evaluate the acceptability of an investment project using the net present value method 3. Evaluate the acceptability of an investment project using the internal rate of return method 4. Compute the simple rate of return for an investment Comparison of Capital Budgeting Methods Excel FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEWVEW Alignment Number Conditional Format as Cel Cells Editing Formatting" TableStyles Cipboard A1 v | | | X | | Laurman, inc. is considering the following project: the 2 Required investment in equipment 3 Project life 225,000 6 The project would provide net operating income each year as follows 7 Sales $ 2,750,000 8 Variable expenses 9 Contribution margin 10 Fixed expenses: 11 Salaries, rent and other fixed out-of pocket costs 12 Depreciation 13 Total fixed expenses 14 Net operating income 15 16 Company discount rate 520,000 18 1. Compute the annual net cash inflow from the project. 19 20 2. Complete the table to compute the net present value of the investment 21 23 24 Initial investment 25 Annual cost savings 26 Salvage value of the new machine 27 Total cash flows 28 Discount factor 29 Present value of the cash flows 30 Net present value 1.000 82 Use Excets PV function to compute the present value of the future cash flows 33 Deduct the cost of the investment 34 Net present value 35 36 3. Use Excel's RATE function to compute the project's internal rate of return 37 8 4. Compute the project's payback period. 40 5. Compute the project's simple rate of return.

Answer 1

Home ert Page Layout Formulas Data Review V Di E F G 0 2 Required Investment in equipment 3 2,205,000 Project life 4 Salvage value 225,000 6 Projected data 7 Sales 8 variable expense 9 contribution margin 10 Fixed expense 11 salaries, rent and other fixed costs 12 Depreciation 13 Total Fixed costs 14 Net operating income 15 16 Company Discount rate 17 18 Annul net cash flow From Project 19 20 Net present value of investment 21 2,750,000 1,600,000 1,150,000 520,000 350,000 870,000 280,000 18% 630,000 Depreciation is Non-cash expense. So not deduced from Present value factor @ 18% Year(s) 1-7 Year 23 24 Initial investment (4 , Sheet43 . Sheet44 . Sheet45 . Sheet46 0.84745763 0.71818443 (2,205,000) Activate Windows ,Sheet48 Sheet49. Sheet50 SheetS1 Sheet52 Ready Search the web and Windows 17-04-19

Home ert Page Layout Formulas Data Review V 017 E F G 0 17 18 Annul net cash flow From Project 19 20 Net present value of investment 21 630,000 Depreciation is Non-cash expense. So not deduced from Present value factor @ 18% Year(s) 1-7 Year 23 24 Initial investment 25 Annual cost saving 26 Salvage value of new machine 27 Total cash flows 28 Discount factor 29 Present value of cash 30 Net present value 31 32 Present value of cash flow 33 Less: cost of investment 34 Net present value 35 36 Project's Internal rate of return 37 38 Project's Payback periocd 39 40 Project's Simple rate of return 0.84745763 0.71818443 0.60863087 0.51578888 0.43710922 0.37043154 0.31392503 3.81152759 (2,205,000) 630,000 (2,205,000) 630,000 (2,205,000) 2,401,262 225,000 225,000 1 3.81152759 0.31392503 70,633 6 266,896 Total 2,471,896 2,205,000 266,896 22.0449% 3.50 Years 12.6984% Activate Windows トト1 , Sheet43. Sheet44. Sheet45. Sheet46 SRAT 'Sheet48 Sheet49. Sheet50 SheetS1 SheetS2 Ready 12096 Search the web and Windows 17-04-19

Formula View

Home ert Page Layout Formulas Data Review V 17 18 Annul net cash flow Fro 19 20 Net present value of inv 21 -D9-C11 Depreciation is Non-cash expense. So not deduced from contribution margin Year(s) Year Present value factor @ 18% 23 24 Initial investment 25 Annual cost saving 26 Salvage value of new ma 27 Total cash flows 28 Discount factor 29 Present value of cash flo-B27 B28 30 Net present vale SUM(B29:D29) 31 32 Present value of cash flo 33 Less: cost of investment 34 Net present value 35 36 Project's Internal rate of 37 38 Project's Payback perioc 39 40 Project's Simple rate of -H23/1.18 -H24/1.18 -H25/1.18 -H26/1.18 -H27/1.18 -H28/1.18 D18 C4 4 SUM(B24:B26) SUM(C24:C26) SUM(D24:D26) -H30 -C27*C28 -H29 -D27 D28 TotalSUM(H23:H29) PV(C16,7,C27,D27,0) D32-D33 RATE(7,C27,B27,D27,0) -C2/D18 D14/C2 Years tivate Windows トト1 , Sheet43. Sheet44. Sheet45. Sheet46 SRAT 'Sheet48 Sheet49. Sheet50 SheetS1 Sheet52 Ready 12096 Search the web and Windows 17-04-19