1. Determine the payback period for an investment. 2. Evaluate the acceptability

Question

1. Determine the payback period for an investment. 2. Evaluate the acceptability of an investment project using the net present value method. 3. Evaluate the acceptability of an investment project using the internal rate of return method. 4. Compute the simple rate of return for an investment. Comparison of Capital Budgeting Methods - Excel FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEWV VIEW Sign In Calibri H Paste B I U |..|:1 Alignment Number Conditional Format as Cell Cells Editing Formatting" Table" Styles Styles Clipboard Font A21 1 Laurman, Inc. is considering the following project: 2 Required investment in equipment 3 Project life 4 Salvage value 2,205,000 225,000 6 The project would provide net operating income each year as follows 7 Sales 8 Variable expense:s 9Contribution margin 10Fixed expenses: 11Salaries, rent and other fixed out-of pocket costs 12Depreciation 13 Total fixed expenses 14Net operating income 15 16 Company discount rate 17 18 1. Compute the annual net ca sh inflow from the project. 19 2,750,000 1,150,000 520,000 350,000 1896

Explanation / Answer

1)

Payback period=Initial Investment/Operating Income=2205000/280000=7.875 years

2)

NPV=-2205000-280000*Annuity factor(7 years and 18%)+225000/1.18^7

NPV=-2205000-280000*3.812+225000/1.18^7

NPV=-3201726.868

Since NPV is negative, Project is not acceptable

3)

Let IRR=r

Project NPV=-2205000-280000*Annuity factor(7 years and 18%)+225000/1.18^r

Project NPV=-2205000-280000*(1/r)*(1-1/(1+r)^7)+225000/(1+r)^7

For IRR, NPV=0

=-2205000-280000*(1/r)*(1-1/(1+r)^7)+225000/(1+r)^7

c)

Simple rate of return=280000/2205000=12.69%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.