Question

Question 1: Evaluating investment projects You are planning to invest $100,000 in new equipment. This investment will generate net cash flows of $60,000 a year for the next 2 years. The salvage value after 2 years is zero. The cost of capital is 25% a year. a) Compute the net present value NPV = $ Enter negative numbers with a minus sign, i.e., -100 not ($100) or (100). Should you invest? Why? O NO -- the NPV is negative, which indicates that the investment is unprofitable YES -- the NPV is negative, which indicates that the investment will reduce costs YES -- the NPV is positive, which indicates that the investment is profitable b) Compute the payback period. payback period = ACR Period years c) Compute the accounting rate of return (ARR). To compute ARR, first compute: annual depreciation=$ annual income=$ average investment=$ ARR = If your answer is 10%, enter 10 without the percent sign. % d) Which of the three methods in (a)-(c) should you use in real life? O NPV only O payback method only ARR only always use all three methods to reach the best decision

Answer 1

Tnifial out floo 100,000 cash nflou Per annum = 460,000 for Jears Annuty factor sy Sor ears 144 net Pdesent value of ntlouo 4x60,000 -/aon'3$ר . Ner Present value 100,000 -86400 13,600 NO-The Npv s negaiue ohch ndcates that the nvestment s un Prottable Pay back Pesoal 7alnvestment Pay back Perod Net annua cashenflou 100,00D -1.6 years bo,0oD 20 momhs Annual defreation 4100,000 50,000)- Defde Gation ncome- net casht)oLoS Annual 410,000/ 460000- S0,000

Average nvestment 100,000 4 50,000 2 Accounting Yate of seturn = Av net Prof Ava nuestmeut 0,000 Sopoo 20% 2 20 20 NPV Only Nov method as t consders the ID Seal 1fe use we tme value of money and s com monly used n al LeIds +he

All the required calculations are shown clearly