Question
In: Accounting
Water World is considering purchasing a water park in Atlanta, Georgia, for $1,950,000. The new facility...
Water World
is considering purchasing a water park in Atlanta, Georgia, for
$1,950,000.
The new facility will generate annual net cash inflows of
$481,000
for
eighteight
years. Engineers estimate that the facility will remain useful for
eighteight
years and have no residual value. The company uses straight-line depreciation, and its stockholders demand an annual return of
1010%
on investments of this nature.
LOADING...
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(Click the icon to view Present Value of Ordinary Annuity of $1 table.)
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(Click the icon to view Future Value of $1 table.)
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(Click the icon to view Future Value of Ordinary Annuity of $1 table.)Read the requirements
LOADING...
.
Requirement 1. Compute the payback, the ARR, the NPV, the IRR, and the profitability index of this investment.
First, determine the formula and calculate payback. (Round your answer to one decimal place, X.X.)
|
Amount invested |
/ |
Expected annual net cash inflow |
= |
Payback |
|
|
$1,950,000 |
/ |
$481,000 |
= |
4.1 |
years |
Next, determine the formula and calculate the accounting rate of return (ARR). (Round the percentage to the nearest tenth percent, X.X%.)
|
Average annual operating income |
/ |
Average amount invested |
= |
ARR |
|
|
$237,250 |
/ |
$975,000 (how did they get this?) |
= |
24.3 |
% |
Calculate the net present value (NPV). (Enter any factor amounts to three decimal places, X.XXX.)
|
Net Cash |
Annuity PV Factor |
Present |
||
|
Years |
Inflow |
(i=10%, n=8) |
Value |
|
|
1 - 8 |
Present value of annuity |
|||
|
0 |
Investment |
|||
|
Net present value of the investment |
||||
Solutions
Expert Solution
| Average amount invested |
| Average amount invested = (Initial Investment cost + Salvage Value) / 2 |
| Average amount invested = ($1,950,000 + $0) / 2 |
| Average amount invested = $1,950,000 / 2 |
| Average amount invested = $975,000 |
|
Net present value of the investment |
| Years | Annual net cash flow | Annuity PV Factor | Present Value | |
| (i=10%, n=8) | ||||
| Year 1 - Year 8 | Present value of annuity | 481,000 | 5.335 | 2,566,135 |
| Year 0 | Less: Investment Cost | (1,950,000) | ||
| Net present value of the investment | 616,135 |
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