Question

In: Accounting

Mars Incorporated, makers of the M&M ́s, is considering a capital investment of $275,000 in new...

Mars Incorporated, makers of the M&M ́s, is considering a capital investment of $275,000 in new equipment. The equipment is expected to have a 5-year useful life with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $25,000 and $80,000, respectively. Mars's minimum required rate of return is 10%. The present value of 1 for 5 periods at 10% is .621 and the present value of an annuity of 1 for 5 periods at 10% is 3.791.

Instructions

Compute each of the following:

  1. (a) cash payback period.

  2. (b) net present value.

  3. (c) annual rate of return.

Solutions

Expert Solution

a) Cash Payback Period =Initial investment /Saving in Annual net cash flow
     =275000/ 80000
3.44 Years
Annual Rate of Return = Annual Net Income/ Initial Investment
       =12661 / 28080
45.09%
b) Calculation of Net Present value
Year Cash Flow PV Factor @19% Present value
0 -275000 1         (275,000)
   01-05 80000 3.791           303,280
5 0 0.621                       -  
Net Present value              28,280
c) Annual Rate of Return = Annual Net Income/ Initial Investment
       =25000 / 275000

ekkarill92 answered 3 years ago
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