Question

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.

Answer 1

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