Question

please show all working out and without using ecxel

Quasar Tech Ltd. is investing $6 million in new machinery that will produce the next-generation routers. Sales to its customers will amount to $1 750 000 for the next 3 years and then increase to $2.4 million for 3 more years. The project is expected to last 6 years and cost the company annually $898 620 (excluding depreciation). The machinery will be depreciated to zero by year 6 using the straight-line method. The company’s tax rate is 30 per cent, and its cost of capital is 16 per cent.

a. What is the payback period?

b. What is the average accounting return (ARR)?

c. Calculate the project NPV.

d. What is the IRR for the project?

Answer 1

Calculation of the depreciation = Cost of machine / life of machine = 6,000,000 / 6 = $ 1,000,000 per years.

Calculation of the free cash flows :-

Particulars	year 1	year 2	year 3	year 4	year 5	year 6
Sales	1,750,000	1,750,000	1,750,000	2,400,000	2,400,000	2,400,000
less-cost	898,620	898,620	898,620	898,620	898,620	898,620
Less- Depreciation	1,000,000	1,000,000	1,000,000	1,000,000	1,000,000	1,000,000
Profit before tax	-148,620	-148,620	-148,620	501,380	501,380	501,380
Less- Tax@30%	-44586	-44586	-44586	150414	150414	150414
Profit after tax	-104,034	-104,034	-104,034	350,966	350,966	350,966
Add-Depreciation	1,000,000	1,000,000	1,000,000	1,000,000	1,000,000	1,000,000
Free cash flows	895,966	895,966	895,966	1,350,966	1,350,966	1,350,966

a) Calculation of the Payback period :-

Cumulative cash flows :-

Years	Cash flows	Cumulative cash flows
0	-6,000,000	-6,000,000
1	895,966	-5,104,034
2	895,966	-4,208,068
3	895,966	-3,312,102
4	1,350,966	-1,961,136
5(X)	1,350,966	-610,170(Y)
6	1,350,966(Z)	740,796

payback period = X + Y/Z

· In this calculation:

· X = is the last time period where the cumulative cash flow (CCF) was negative

· Y = is the absolute value of the CCF at the end of that period X

· Z = is the value of the DCF in the next period after X

Payback period = 5 years + 610,170 / 1,350,966 = 5 years + 0.45165

payback period = 5.45165 years

b) Average accounting return :-

Accounting return = Average net income / initial investment

Average net profits = -104,034 - 104,034 - 104,034 + 350,966 + 350,966 + 350,966 / 6 = 740,796 / 6 = $ 123,466

Accounting return = 123,466 / 6,000,000 = 2.06%

c) NPV :-

Years	Cash flows	PVF@16%	PV of Cash flows
1	895,966	0.862069	772384.4828
2	895,966	0.743163	665848.692
3	895,966	0.640658	574007.4931
4	1,350,966	0.552291	746126.4953
5	1,350,966	0.476113	643212.496
6	1,350,966	0.410442	554493.531
PV of cash inflows	3956073.19

NPV = present value of cash inflows - initial investment = $ 3,956,073.19 - 6,000,000 = - $ 2,043,926.81

d ) IRR :-