Question

Splash City is considering purchasing a water park in​ Atlanta, Georgia, for $1,910,000. The new facility will generate annual net cash inflows of $472,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have no residual value. The company uses​ straight-line depreciation, and its stockholders demand an annual return of 10​% on investments of this nature.

Requirement 1. Compute the​ payback, the​ ARR, the​ NPV, the​ IRR, and the profitability index of this investment.

​First, determine the formula and calculate payback. ​(Round your answer to one decimal​ place, X.X.)

	/		=	Payback
	/		=		years

​Next, determine the formula and calculate the accounting rate of return​ (ARR). ​(Round the percentage to the nearest tenth​ percent, X.X%.)

	/		=	ARR
	/		=		%

Calculate the net present value​ (NPV). ​(Enter any factor amounts to three decimal​ places, X.XXX.)

		Net Cash	Annuity PV Factor	Present
Years		Inflow	(i=10%, n=8)	Value
1 - 8	Present value of annuity
0	Investment
	Net present value of the investment

The IRR​ (internal rate of​ return) is between

▼

12-14%

14-16%

16-18%

18-20%

.

​Finally, determine the formula and calculate the profitability index. ​(Round your answer to two decimal​ places, X.XX.)

	/		=	Profitability index
	/		=

Requirement 2. Recommend whether the company should invest in this project.

​Recommendation:

Splash CitySplash City

▼

should

shoud not

invest in the project because the payback period is

▼

greater than

less than

the operating​ life, the NPV is

▼

negative

positive

​, the profitability index is

▼

greater than

less than

​one, and the ARR and IRR are

▼

greater than

less than

the​ company's required rate of return.

Answer 1

1. Project Payback Period Payback Period Formula = Initial Investment / Annual CashFlows Payback Period Initial Investment Net CashFlows Payback Period (in Years) $19,10,000.00 $4,72,000.00 4.0 2. Accounting rate of return Accounting rate of return Formula = Annual Cashflows / Initial Investment Accounting Rate of Return Initial Investment $19,10,000.00 Net CashFlows $4,72,000.00 Accounting Rate of Return 25% 3. Net Present Value Years 1-8 Net Cash Inflows $4,72,000.000 $19,10,000.000 Annuity PV Factor 5.334 Present Value of Annuity Investment Net Present Value of investment Present Value $25,17,648.000 $19,10,000.000 $6,07,648.000 4. Profitibility Index Formula = Present Value of CashFlows / initial Investment Present Value of Cash Flows Investment $25,17,648.000 $19,10,000.000 Profitibility Index 1.32

5. IRR Year Initial Investment Cash Inflows 000 WNPO -$19,10,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 IRR Net CashFlow d=(a+b+c) $19,10,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 $4,72,000.00 18% Requirement 2 Payback Period 4 Years Project Life 8 Years The Company Should Invest in the project based on Payback period because it is less than Operating Life of Project The NPV is Positive The Profitibility index is greater than one ARR and IRR is greater than the Company's Required rate of return

Formula for IRR Year Initial Investment Cash Inflows =C21 ON m000 =C20 472000 472000 472000 472000 472000 472000 472000 Net Cash Flow d=(a+b+c) =B40+C40 =B41+C41 =B42+C42 =B43+C43 =B44+C44 =B45+245 =B46+C46 =B47+047 =B48+C48 =IRR(D40:048) IRR