Question

Problems: Set A CHAPTER 23 197 8-9Minulus Inc. is consideringa capital investment of $300,000 in additional productive facilities. The new Cakulate annual rate of tod During the life of the investment, annual protit and cash inflows are expecied to be $30,001 and S0,000, and ner present value, canery is expected to have a useful life of five years with no residual value. Depreciation is by the straight line return, cash payback period, prele Mitulos has a 15% cost af capital rate, which is the minimum acceptable rate of return on the 1O 3, 4) AP instmant, sttions Tnuto decinals.? Calclace (1) the annual rate of return, and (2) the cash payback period on the pruposed capital expenditure. i icg the discounted cash flow technique, calculate the net present valne.

Answer 1

a.
1. Annual rate of return = Annual Profit / Investment x 100
= $30000 / $300000 x 100 = 10%

2. Cash Payback Period = Investment / Annual Cash inflows
= $300000 / $90000 = 3.33 years

b.
NPV = PV of annual cash inflows - Investment
PV annuity @15% for 5 years = 3.3524
NPV = $90000 x 3.3524 - $300000 = $1716