LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO TEXT LI
ID: 2468637 • Letter: L
Question
LINK TO TEXT
LINK TO TEXT
LINK TO TEXT
LINK TO TEXT
LINK TO TEXT
LINK TO TEXT
LINK TO TEXT
LINK TO TEXT
LINK TO TEXT
Adrian Sonnetson, the owner of Adrian Motors, is considering the addition of a paint and body shop to his automobile dealership.Construction of a building and the purchase of necessary equipment is estimated to cost $800,000, and both the building and equipment will be depreciated over 10 years using the straight-line method. The building and equipment have zero estimated residual value at the end of 10 years.Sonnetson’s required rate of return for this project is 12 percent. Net income related to each year of the investment is as follows:Revenue $646,000 Less: Material cost 68,700 Labor 149,000 Depreciation 80,000 Other 10,000 Income before taxes 338,300 Taxes at 40% 135,320 Net income $202,980
Explanation / Answer
11. Computation of net present value
Year PAT Depreciation cash flows Discount@12% PVCF Discount@14% PVCF
1 202980 80000 282980 0.893 252701 0.877 248175
2 202980 80000 282980 0.797 225535 0.770 217896
3 202980 80000 282980 0.712 201482 0.675 191013
4 202980 80000 282980 0.636 179975 0.592 167525
5 202980 80000 282980 0.567 160450 0.519 146868
6 202980 80000 282980 0.507 143471 0.456 129040
7 202980 80000 282980 0.452 127907 0.399 112910
8 202980 80000 282980 0.404 114324 0.351 99327
9 202980 80000 282980 0.361 102156 0.308 87158
10 202980 80000 282980 0.322 91120 0.270 76405
Present value of cash flows 1599121 1476317
less: initial investment [800000] [800000]
NPV 799121 676317
NPV is positive so accepted the project
IRR = lower rate + lower npv / Lower npv - Higher NPV * difference in factor
= 12 + 799121 / 799121 + 676317 * 2
= 12 + 1.08 = 13.08%
IRR is less than 30%
Payback period:
Year Cash flows Cummulative cash flows
1 282980 282980
2 282980 565960
3 282980 848940
4 282980 1131922
5 282980 1414904
6 282980 1697886
7 282980 1980868
8 282980 2263850
9 282980 2546832
10 282980 2829814
Payback period = 2+234040 / 282980
= 2 + 0.83 = 2.83 years
Accounting rate of return :
ARR = average income / original investment
Year income
1 202980
2 202980
3 202980
4 202980
5 202980
6 202980
7 202980
8 202980
9 202980
10 202980
ARR = 202980 / 800000 * 100 = 25.37%.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.