Question

Answer each independent question, (a) through (e) below. a. Project A costs $6,000 and will generate annual after-tax net cash inflows of $2,650 for 5 years. What is the payback period for this investment under the assumption that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) b. Project B costs $6,000 and will generate after-tax cash inflows of $850 in year 1, $1,450 in year 2, $2,500 in year 3, $2,750 in year 4, and $2,500 in year 5. What is the payback period (in years) for this investment assuming that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) c. Project C costs $6,000 and will generate net cash inflows of $2,750 before taxes for 5 years. The firm uses straight-line depreciation with no salvage value and is subject to a 30% tax rate. What is the payback period under the assumption that all cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) d. Project D costs $6,000 and will generate sales of $4,500 each year for 5 years. The cash expenditures will be $1,750 per year. The firm uses straight-line depreciation with an estimated salvage value of $750 and has a tax rate of 30%. (1) What is the accounting (book) rate of return based on the original investment? (Round your answer to 2 decimal places.) (2) What is the book rate of return based on the average book value? (Round your answer to 2 decimal places.) Use the built-in NPV function in Excel to calculate the amounts for proiects a through d. (Round your answers to the nearest whole dollar amount.) el. What is the NPV of project A? Assume that the firm requires a minimum after-tax return of 6% on investment e2. What is the NPV of project B? Assume that the firm requires a minimum after-tax return of 6% on investment e3. What is the NPV of project C? Assume that the firm requires a minimum after-tax return of 6% on investment e4. What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 6% on investment a b. d1 d2. e1 Payback period Payback period Payback period Book rate of return Book rate of return NPV of Project A NPV of Project B NPV of Project C NPV of Project D

Answer 1

Answer-a:

Project A cost is $6,000

Year Cash flow Cash flow 1 $ Cumulative cash flow $ 2,650 5,300 7,950 10,600 13,250 2,650 2,650 2,650 2,650 2,650 31 4

During Year 3 the cumulative cash flow reaches the payback point at which the original investment of $6,000 has been recouped.

Payback for the project arises $700/$2,650 through Year 3 = 0.26

So the payback period = 2 years + 0.26 = 2.26 year

Answer-b:

Project B cost is $6,000

Year Cumulative Cash flow cash flow 1 $ 850 $ 850 2 1,450 2,300 3 2,500 4,800 2 ,750 7,550 2,500 10,050 4

During Year 4 the cumulative cash flow reaches the payback point at which the original investment of $6,000 has been recouped.

Payback for the project arises $1,200/$2,750 through Year 4 = 0.44

So the payback period = 3 years + 0.44 = 3.44 year

Answer-c:

Project C cost is $6,000

Year Cash flow Depreciation Cash flow + Dep 1 $ $ $ 2,750 2,750 2,750 2,750 2,750 1,200 1,200 1,200 1,200 1,200 Net cash flow $ 1,550 1,550 1,550 1,550 1,550 Cash flow after tax $ 1,085 1,085 1,085 1,085 1,085 2,285 2,285 2,285 2,285 2,285 Cumulative cash flow $ 2,285 4,570 6,855 9,140 11,425

During Year 3 the cumulative cash flow reaches the payback point at which the original investment of $6,000 has been recouped.

Payback for the project arises $1,430/$2,285 through Year 3 = 0.63

So the payback period = 2 years + 0.63 = 2.63 year

Answer-d1:

• Calculate the depreciation expense per year: ($6,000 - $750) / 5 = $1,050
• Calculate the average annual profit: $4,500 – ($1,750 + $1,050) = $1,700 - 30% = $1,190
• Use the formula: ARR = Average profit / initial investment = $1,190 / $6,000 = 19.83%

Answer-d2:

Average investment = (Initial investment + Salvage value) / 2

                                 = ($6,000 + $750) / 2 = $3,375

ARR = Average profit / Average investment = $1,190 / $3,375 = 35.26%