Question

Problem 2 (Ignore taxes for this problem)

Bullock Prosthetics is planning to buy 3-D printing machinery costing $380,000. This machinery’s expected useful life is 5 years. They require a minimum rate of return of 8%, and have calculated the following data pertaining to the purchase and operation of this machinery:

Year	Estimated Annual Cash Inflows	Estimated Annual Cash Outflows	Depreciation
1	$ 90,000	$15,000	$60,000
2	$150,000	$45,000	$60,000
3	$230,000	$95,000	$60,000
4	$270,000	$110,000	$60,000
5	$300,000	$125,000	$60,000

• Determine Terra's payback period, accounting rate of return, and NPV for this investment?

I have seen other examples of this question, but I still don't understand and truly want to comprehend. Id appreciate it if shown exactly how to resolve.

Answer 1

SOLUTION: A
	CACULATION OF PAYBACK PERIOD
	Period	Particulars	Inflow (Outflow)	Cumulative Value
	0	Outflow	$ -380,000	$                             -380,000
	1	Net Cash Inflow	$      75,000	$                             -305,000
	2	Net Cash Inflow	$    105,000	$                             -200,000
	3	Net Cash Inflow	$    135,000	$                               -65,000
	4	Net Cash Inflow	$    160,000	$                                 95,000
	5	Net Cash Inflow	$    175,000	$                               270,000
		Total
	All the investment is recovered in the year 4 but not all the whole year is required for this
	So the we have to calculate the fraction as below,
		Payback Period =	3 Years +	$                                 65,000	"/" By	$                         160,000
		Payback Period =	3 Years +	0.41
		Payback Period =	3.41 Years
	Answer =Pay back period = 3.41 Years
SOLUTION: B
		Total Net Cash Inflow (Total of Yr 1 to Yr 5 of net cash inflow)	=	$                               650,000
		Divide By	=	"/" By
		No. of Years	=	5	Years
		Equals to	=	=
		Average Annual Net cash inflow	=	$                               130,000
		CALCULATION OF ACCOUNTING RATE OF RETURN
		Average Annual Net Cash inflow	"/"	Initital Investment	"="	Accounting Rate of Return (ARR)
		$                                               130,000	"/"	$                               380,000	"="	34.21%
	Answer = ARR = 34.21 %
SOLUTION: C
	CACULATION OF NET PRESENT VALUE
	Years	Inflow (Outflow)	PVF of $ 1 @ 8 %	Present Value
	0	$                                              -380,000	1.00000	$                             -380,000
	1	$                                                  75,000	0.92593	$                                 69,444
	2	$                                               105,000	0.85734	$                                 90,021
	3	$                                               135,000	0.79383	$                               107,167
	4	$                                               160,000	0.73503	$                               117,605
	5	$                                               175,000	0.68058	$                               119,102
		Total		$                               123,339
	Answer = Net Present Value = $ 123,339