In: Accounting
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?
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%