In: Accounting
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:
(a) cash payback period.
(b) net present value.
(c) annual rate of return.
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 | |||||||