In: Accounting
Basic Concepts
Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows:
Year | Cash Revenues | Cash Expenses |
1 | $2,981,160 | $2,293,200 |
2 | 2,981,160 | 2,293,200 |
3 | 2,981,160 | 2,293,200 |
4 | 2,981,160 | 2,293,200 |
5 | 2,981,160 | 2,293,200 |
The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.
Required:
1. Compute the project’s payback period. If
required, round your answer to two decimal places.
years
2. Compute the project’s accounting rate of
return. Enter your answer as a whole percentage value (for example,
16% should be entered as "16" in the answer box).
%
3. Compute the project’s net present value,
assuming a required rate of return of 10 percent. When required,
round your answer to the nearest dollar.
$
4. Compute the project’s internal rate of return. Enter your answers as whole percentage values (for example, 16% should be entered as "16" in the answer box).
Between % and %
Year | Cash Revenues | Cash Expenses | Net cash flow |
1 | $2,981,160 | $2,293,200 | 687,960$ |
2 | 2,981,160 | 2,293,200 | 687,960 |
3 | 2,981,160 | 2,293,200 | 687,960 |
4 | 2,981,160 | 2,293,200 | 687,960 |
5 | 2,981,160 | 2,293,200 | 687,960$ |
Total | 3,439,800 |
1. project’s payback period
initial outlay / cash flow per year
=2,293,200/687,960
=3.33 years
2. Compute the project’s accounting rate of return.
average net income /average investment
=687960$ /(2293200+0salvage)/2
=687960/1146600
=60%
3. Compute the project’s net present value, assuming a required
rate of return of 10 percent. When required, round your answer to
the nearest dollar.
year | cash flow | pv factor 10% | Present value | |
0 | (2,293,200) | 1 | (2,293,200) | [2293200*1] |
1-5 | 687,960 | 3.791 | 2,608,056$ | [687960*3.791] |
Net Present Value | 314856$ | [2608056-2293200] |
4. project’s internal rate of return is the rate at which NPV becomes zero.
we will find NPV at random rates
r2 = 14%
year | cash flow | pv factor 142% | Present value | |
0 | (2,293,200) | 1 | (2,293,200) | [2293200*1] |
1-5 | 687,960 | 3.433 | 2,361,767$ | [687960*3.433] |
Net Present Value | 68567$ | [2361767-2293200] |
r1 = 0.10
r2 = 0.14
npv 1 =314856
npv 2 =68567
IRR = R1 + (R2-R1)*NPV1/(NPV1-NPV2)
IRR = 0.10 + (0.14-0.10)*314856 / (314856-68567)
0.10 +12594.24/246289
=0.10+0.0511
=15%