Calculate and report the economic justification measures, present worth, return on sales, return on investment, and...

Calculate and report the economic justification measures, present worth, return on sales, return on investment, and payback, shown in Chapter 9 example 9.4 for the investment cash flows shown below.  The new method will cost $14,800 with no salvage planned. Use an interest rate of 10%. Note the payback measure asked in this question is calculated differently than the example 9.4 calculation.
Year    Sales Increase $        Production Cost $
1       8,500                          4,100
2       11,200                         7,100
3       19,400                         12,700
4       12,400                          7,900
5       9,200                           5,500
6       6,300                           4,900
7       4,200                           2,900
a. What is the net present value? Note that initial investment has to be subtracted to find the net.
b. What is the return on investment?
c. What is the return on sales?
d. What is the payback, the year that the end of year cash flow turns positive including recovery of the original investment and stays positive thereafter?

Expert Solution

a)

Calculation of net present value

Year	Inflows( $) (sales -product cost)	PV" factor" (10%)	$PV (present value)
1	4400	.9091	4000.04
2	4100	.8264	3388.24
3	6700	.7513	5033.71
4	4500	.6830	3073.5
5	3700	.6209	2297.33
6	1400	.5645	790.3
7	1300	.5132	667.16
			19250.28

Net present value =PV - initial investment

PV = $19250.28

Initial investment = $14800

=$19250.28 - $14800

Net present value =$4450.28

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