Determine the formula and calculate the Accounting Rate of Return (ARR) (round t

Question

Determine the formula and calculate the Accounting Rate of Return (ARR) (round the percentage to the nearest tenth percent)

Below are the options for the ARR calculation

Splash Planet is considering purchasing a water park in Atlanta, Georgia, for $1,950,000. The new facility will generate annual net cash inflows of $487,000 for eight years. Engineers estimate that the new facilities will remain useful for eight years and have no residual value. The company uses straight-line depreciation, and its stockholders demand an annual return of 10% on investments of this nature. e) (Click the icon to view the Present Value of $1 table.) ( )(Click the icon to view the Present Value of Annuity of $1 table.) Requirements 1. Compute the payback, the ARR, the NPV, the IRR, and the profitability index of this investment. 2. Recommend whether the company should invest in this project. Requirement 1. Compute the payback, the ARR, the NPV, the IRR, and the profitability index of this investment. First, determine the formula and calculate payback. (Round your answer to one decimal place, XX.) Amount invested Expected annual net cash inflowPayback 1,950,000 487,000 4.0 years Next, determine the formula and calculate the accounting rate of return (ARR). (Round the percentage to the nearest tenth percent, X.XY6) ARR

Explanation / Answer

Pay Back Period will be calculated as follow

Year

Cash Flow

Accumulated cash flow

1

487000

487000

2

487000

974000

3

487000

1461000

4

487000

1948000

5

487000

2437000

6

487000

2922000

Pay back period is as follow

we generate 1948000 out of 1950000 in 4 year ans remaining 2000 we will generate in 5 th year

1950000-1948000

=2000

487000 in 1year,so 2000 in what (?) period

2000*1year/487000

=1.50 days

So payback period is 4 year and 1.5 days

NPV

Calculation of Npv is as follow

Year

Cash Flow

0

(1950000)

1

487000

2

487000

3

487000

4

487000

5

487000

6

487000

7

487000

8

487000

Total Cash Flow

(1950000)

3896000

Amount  

Amount

PV Factor

Net Amount

1950000

1

(1950000)

487000

5.335

2598145

Net CF

648145

NpV = 648,145 so project should accepted

ARR

ARR will be as Follow

Annual cash flow- Depriciation

Annual cash flow =487000                                                  

Depriciation =1950000/8

=243750

Net annual Cf=487000-243750

                 =243250

ARR =243250/1950000

    =12.47 %

IRR will be calculated as follow

=(1950000)+487000/(1+r)1+487000/(1+r)2+487000/(1+r)3+487000/(1+r)4+487000/(1+r)5+487000/(1+r)6+487000/(1+r)+487000/(1+r)8

=18.59 %

IRR =18.59%

Recomandation : Company should invest in this project becaise NPV is positive and both IRR ans Arr is greater then Investor required rate of return

Year

Cash Flow

Accumulated cash flow

1

487000

487000

2

487000

974000

3

487000

1461000

4

487000

1948000

5

487000

2437000

6

487000

2922000

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