Question
In: Accounting
Calculate the following from the chart below. 1. Net present value 2. Accounting rate of return...
Calculate the following from the chart below.
1. Net present value
2. Accounting rate of return
3. Internal rate of return (using average annual cash flows)
4. Present value index
5. Payback
Use 8% as the hurdle rate, and assume a salvage value of $50,000.
| Alternative A | Alternative B | Alternative C | |
| Cost | $4,200.00 | $4,400.00 | $4,600.00 |
| Setup Costs | $50,000.00 | $22,000.00 | $30,000.00 |
| Training Costs | $22,000.00 | $25,000.00 | $30,000.00 |
| Annual Maintenance Costs | $32,000.00 | $10,000.00 | $15,000.00 |
| Anticipated annual savings | $535,000.00 | $475,000.00 | $495,000.00 |
| Annual Labor savings | $20,000.00 | $0.00 | $40,000.00 |
| Expected useful life in years | $9.00 | $9.00 | $8.00 |
| Overhaul costs in year 4 | $10,000.00 | $18,000.00 | $30,000.00 |
| Annual Operating costs | $22,000.00 | $25,000.00 | $27,000.00 |
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| A | B | C | ||||||||
| Intial Investment: | ||||||||||
| Cost | -4200 | -4400 | -4600 | |||||||
| Set Up Cost | -50000 | -22000 | -30000 | |||||||
| Training Cost | -22000 | -25000 | -30000 | |||||||
| Initial Investment at period 0 | -76200 | -51400 | -64600 | |||||||
| Annual Net Cash Flow: | ||||||||||
| Period | A | B | C | |||||||
| Annual Maintenance Cost | Full Life | -32000 | -10000 | -15000 | ||||||
| Annual Operating Cost | Full Life | -22000 | -25000 | -27000 | ||||||
| Anticipated Labor Saving | Full Life | 20000 | 0 | 40000 | ||||||
| Anticipated Annual Saving | Full Life | 535000 | 475000 | 495000 | ||||||
| Annual Net Cash inflow | 501000 | 440000 | 493000 | |||||||
| 1. Net Present Value | ||||||||||
| A | B | C | ||||||||
| Actual Cash Flow | PV Factor | Present Value | Actual Cash Flow | PV Factor | Present Value | Actual Cash Flow | PV Factor | Present Value | ||
| Initial Investment | -76200 | 1 | -76200 | -51400 | 1 | -51400 | -64600 | 1 | -64600 | |
| Annual Net Cash Inflow | Full Life | 501000 | 6.2469 | 3129697 | 440000 | 6.2469 | 2748636 | 493000 | 5.7466 | 2833074 |
| Overhaul Cost | Period 4 | -10000 | 0.735 | -7350 | -18000 | 0.735 | -13230 | -30000 | 0.735 | -22050 |
| Salvage Value | 9 and 8 | 50000 | 0.5002 | 25010 | 50000 | 0.5002 | 25010 | 50000 | 0.5402 | 27010 |
| Net Present Value | 3071157 | 2709016 | 2773434 | |||||||
| 2. Accounting Rate of Return | Net Profit/Investment | |||||||||
| Net Profit: | ||||||||||
| Anticipated Labor Saving | Full Life | 20000 | 0 | 40000 | ||||||
| Anticipated Annual Saving | Full Life | 535000 | 475000 | 495000 | ||||||
| Annual Maintenance Cost | Full Life | -32000 | -10000 | -15000 | ||||||
| Annual Operating Cost | Full Life | -22000 | -25000 | -27000 | ||||||
| Overhaul Cost | -10000 | -18000 | -30000 | |||||||
| Net Profit | A | 491000 | 422000 | 463000 | ||||||
| Investment | B | 76200 | 51400 | 64600 | ||||||
| Accounting Rate of Return | A/B | 644% | 821% | 717% | ||||||
| 3. Internal Rate of Return | ||||||||||
| A | B | C | ||||||||
| -76200 | -51400 | -64600 | ||||||||
| 501000 | 440000 | 493000 | ||||||||
| -10000 | -18000 | -30000 | ||||||||
| 50000 | 50000 | 50000 | ||||||||
| =IRR(C47:C50) | =IRR(D47:D50) | =IRR(E47:E50) | ||||||||
| 557% | 753% | 658% | ||||||||
| 4. Present Value Index | (NPV+Initial Investment)/Intial Investment | |||||||||
| A | B | C | ||||||||
| Intial Investment | A | 76200 | 51400 | 64600 | ||||||
| NPV | 3071157 | 2709016 | 2773434 | |||||||
| Total | B | 3147357 | 2760416 | 2838034 | ||||||
| Present Value INDES | B/A | 41.30 | 53.70 | 43.93 | ||||||
| 5. Payback Period | ||||||||||
| A | B | C | ||||||||
| Intial Investment | A | 76200 | 51400 | 64600 | ||||||
| Annual Net Cash Flow (with overhaul cost) | B | 491000 | 422000 | 463000 | ||||||
| Payback Period | A/B | 0.16 | 0.12 | 0.14 | ||||||
| Year | Year | Year | ||||||||
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