Roberts Company is considering an investment in equipment that is capable of pro
ID: 2452514 • Letter: R
Question
Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Compute the project's payback period. If required, round your answer to two decimal places. Compute the project's accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box). Compute the project's net present value, assuming a required rate of return of 10 percent. When required, round your answer to the nearest dollar. Compute the project's internal rate of return. Enter your answers as whole percentage values (for example, 16% should be entered as "16" in the answer box).Explanation / Answer
cash flow from year 1 to year 5 = 2,981,160 - 2,293,200 = 687,960
payback period:
687,960 / 2,293,200
Payback period = 3.33 years
Accounting rate of return = average income / average investment
Average income = ( 687,960 * 5) / 5
Average income = 687,960
Averge initial investment = (2,293,200 - 0) / 2
Averge initial investment = 1,146,600
Accounting rate of return = (687,960 / 1,146,600) * 100
Accounting rate of return = 60%
Net present value:
Net present value = present value of cash inflows - present value of cash outflows
Net present value = -2,293,200 + 687,960 / ( 1 + 0.10)1 + 687,960 / ( 1 + 0.10)2 + 687,960 / ( 1 + 0.10)3 + 687,960 / ( 1 + 0.10)4 + 687,960 / ( 1 + 0.10)5
Net present value = $314,710
Internal rate of return:
IRR using a financial calculator is 15.24%
Keys to use in financial calculator: CF0 = -2,293,200, CF1 = 687,960, F01 = 5, IRR CPT
IRR is between 15 and 16
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