Question

In: Accounting

Revenues $300,000 Less operating expenses: Rent $169,000 Insurance 15,000 Depreciation 46,000 Maintenance 20,000 250,000 Net operating...

Revenues		$300,000
Less operating expenses:
Rent	$169,000
Insurance	15,000
Depreciation	46,000
Maintenance	20,000	250,000
Net operating income		$ 50,000

1. A company has estimated the annual revenues and expenses for a project it is considering (listed above) that will cost a total of $500,000, have a ten-year useful life, and has a salvage value of $40,000. The company requires a payback period of 5 years or less.

Using the information above, what is the expected annual cash flow for this company? ______________
What is the payback period? __________________________
Would the company consider this project? ______________
What is the internal rate of return to the nearest percent? _______________
What is the simple rate of return promised by the project? _____________________________
If the company requires a simple rate of return of at least 10%, will the games be purchased? __________

Please show work

Expert Solution

Solution a): Calculation of Expected Annual Cash flows of the company

Year	Net Operating Income	Depreciation	Expected Annual Cash Flows = Net Operating Income + Depreciation
1	50,000.00	46,000.00	96,000.00
2	50,000.00	46,000.00	96,000.00
3	50,000.00	46,000.00	96,000.00
4	50,000.00	46,000.00	96,000.00
5	50,000.00	46,000.00	96,000.00
6	50,000.00	46,000.00	96,000.00
7	50,000.00	46,000.00	96,000.00
8	50,000.00	46,000.00	96,000.00
9	50,000.00	46,000.00	96,000.00
10	50,000.00	46,000.00	1,36,000.00

Solution b) Calculation of Payback period:

Year	Net Operating Income	Depreciation	Expected Annual Cash Flows = Net Operating Income + Depreciation	Cumulative Expected Annual Cash Flows
1	50,000.00	46,000.00	96,000.00	96,000.00
2	50,000.00	46,000.00	96,000.00	1,92,000.00
3	50,000.00	46,000.00	96,000.00	2,88,000.00
4	50,000.00	46,000.00	96,000.00	3,84,000.00
5	50,000.00	46,000.00	96,000.00	4,80,000.00
6	50,000.00	46,000.00	96,000.00	5,76,000.00
7	50,000.00	46,000.00	96,000.00	6,72,000.00
8	50,000.00	46,000.00	96,000.00	7,68,000.00
9	50,000.00	46,000.00	96,000.00	8,64,000.00
10	50,000.00	46,000.00	1,36,000.00	10,00,000.00

As the Initial Investment is $500,000, the Payback period is between 5^th and 6^th Year.

PayBack Period

= Completed Number of Years + (Cash Inflows to be recovered / Cash inflows for the next Year)

= 5 + (500,000 – 480,0000 / 96,000)

= 5.21 Years

The Payback period is 5.21 Years

As the company requires Payback period less than 5 years, the company should not consider this project.

Solution c) Calculation of Internal Rate of Return

Year	Cash Flows $
0	-5,00,000.00
1	96,000.00
2	96,000.00
3	96,000.00
4	96,000.00
5	96,000.00
6	96,000.00
7	96,000.00
8	96,000.00
9	96,000.00
10	1,36,000.00

Following are the steps to be followed on Microsoft Excel to calculate the IRR:

Step 1: Click on "FORMULAS" tab at the top of Microsoft Excel
Step 2: Select the option "Financial"
Step 3: Under "Financial" select the option "IRR"
Step 4: Insert Values: (-500000;96000;96000;96000;96000;96000;96000;96000;96000;96000;136000)

IRR = 14.57%

The Internal Rate of Return is 14.57%

Solution d) Calculation of Simple Rate of Return

Simple Rate of Return = Average Net Income / Investment x 100

= 50,000 / 500,000 x 100

= 10%

Simple Rate of Return for the Investment is 10%

If the company requires a simple rate of return of at least 10%, will the games be purchased?
Yes. The games should be purchased as the project is earning return of 10%

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