1) World Domination Enterprises is considering the purchase of equipment with a
ID: 2471184 • Letter: 1
Question
1) World Domination Enterprises is considering the purchase of equipment with a cost of $800,000, a salvage value
of $100,000, and an estimated useful life of 5 years. World Domination depreciates all equipment using the
straight-line method. Additionally, it expects to be subject to a tax rate of 25% in all 5 years.
World Domination projects the following gross cash flows directly resulting from equipment operations:
Year 1 $ 260,000
Year 2 370,000
Year 3 310,000
Year 4 270,000
Year 5 190,000
World Domination uses a time value of money rate of 9% for decision-making purposes.
A) Calculate the payback period of the investment in the equipment.
B) Calculate the net present value of the investment in the equipment.
C) Calculate the profitability index of the investment in the equipment.
Explanation / Answer
SOLUTION :
1.PBP
1
2
3
4
5
gross cash flows
260000
370000
310000
270000
190000
Less : Depreciation
-140000
-140000
-140000
-140000
-140000
PBT
120000
230000
170000
130000
50000
PAT
90000
172500
127500
97500
37500
PAT+DEP
230000
312500
267500
237500
177500
ADD : AFTER TAX SALVAGE
75000
NET CASH FLOW
230000
312500
267500
237500
252500
CUMULATIVE
230000
542500
810000
1047500
1300000
PBP
2.96
YEARS
2+(800000-542500)/(810000-542500)
2.NPV
1
2
3
4
5
NET CASH FLOW AS ABOVE
230,000.00
312,500.00
267,500.00
237,500.00
252,500.00
Discount factor @ 9% (1/(1+r)^n)
0.917431193
0.841679993
0.77218348
0.708425211
0.649931386
Present value of net cash flow
211,009.17
263,025.00
206,559.08
168,250.99
164,107.68
Total of present value
1,012,951.92
Less : Present value of investment
- 800,000.00
NPV
212,951.92
3.profitability index = NPV+Initial investment/initial investment
1.27
(212951.92+800000)/800000
1.PBP
1
2
3
4
5
gross cash flows
260000
370000
310000
270000
190000
Less : Depreciation
-140000
-140000
-140000
-140000
-140000
PBT
120000
230000
170000
130000
50000
PAT
90000
172500
127500
97500
37500
PAT+DEP
230000
312500
267500
237500
177500
ADD : AFTER TAX SALVAGE
75000
NET CASH FLOW
230000
312500
267500
237500
252500
CUMULATIVE
230000
542500
810000
1047500
1300000
PBP
2.96
YEARS
2+(800000-542500)/(810000-542500)
2.NPV
1
2
3
4
5
NET CASH FLOW AS ABOVE
230,000.00
312,500.00
267,500.00
237,500.00
252,500.00
Discount factor @ 9% (1/(1+r)^n)
0.917431193
0.841679993
0.77218348
0.708425211
0.649931386
Present value of net cash flow
211,009.17
263,025.00
206,559.08
168,250.99
164,107.68
Total of present value
1,012,951.92
Less : Present value of investment
- 800,000.00
NPV
212,951.92
3.profitability index = NPV+Initial investment/initial investment
1.27
(212951.92+800000)/800000
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