Question

The asset cost is $600,000. The machine is expected to have a 10-year useful life with no salvage value. Straight-line depreciation is used. The net cash inflow is expected to be $138,000 each year for 10 years. The company uses a 12% discount rate in evaluating capital investments.

What is the Net present value and ARR?

Answer 1

Year	Amount	Present Value = Amount/(1+discount rate)^Year
0	(600,000.00)	(600,000.00)
1	138,000.00	123,214.29
2	138,000.00	110,012.76
3	138,000.00	98,225.67
4	138,000.00	87,701.49
5	138,000.00	78,304.91
6	138,000.00	69,915.09
7	138,000.00	62,424.19
8	138,000.00	55,735.89
9	138,000.00	49,764.18
10	138,000.00	44,432.31
	NPV = Sum of Present Value	179,730.78

Depreciation = (Asset Cost - Salvage Value) / Useful Life

Depreciation = (600000-0)/10

Depreciation = 60000

Average Annual Profit = $138,000 - $60,000 (Depreciation)

Average Annual Profit = $ 78,000

Average Investment = (Initial Investment + Salvage Value)/2

Average Investment = ($600,000 + 0)/2

Average Investment = $ 300,000

ARR = Average Annual Profit *100/Average Investment

ARR = 78,000*100/300000

ARR = 26%