Answer each independent question, (a) through (e), below. (Use Table 1 and Table
ID: 2485815 • Letter: A
Question
Answer each independent question, (a) through (e), below. (Use Table 1 and Table 2.)
a. Project A costs $9,000 and will generate annual after-tax net cash inflows of $3,600 for five years. What is the payback period for this investment under the assumption that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)
b. Project B costs $9,000 and will generate after-tax cash inflows of $800 in year one, $2,300 in year two, $4,100 in year three, $3,300 in year four, and $4,100 in year five. What is the payback period (in years) for this investment assuming that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)
c. Project C costs $9,000 and will generate net cash inflows of $4,250 before taxes for five years. The firm uses straight-line depreciation with no salvage value and is subject to a 30% tax rate. What is the payback period? (Round your answer to 2 decimal places.)
d. Project D costs $9,000 and will generate sales of $5,600 each year for five years. The cash expenditures will be $2,300 per year. The firm uses straight-line depreciation with an estimated salvage value of $400 and has a tax rate of 30%. (Round your answer to 2 decimal places.)
(2) What is the book rate of return based on the average book value?
e1. What is the NPV of project A? Assume that the firm requires a minimum after-tax return of 10% on investment. (Round discount factor(s) to 3 decimal places. Round your answer to the nearest whole dollar amount.)
e2. What is the NPV of project B? Assume that the firm requires a minimum after-tax return of 10% on investment. (Round discount factor(s) to 3 decimal places. Round your answers to the nearest whole dollar amount.)
e3. What is the NPV of project C? Assume that the firm requires a minimum after-tax return of 10% on investment. (Round discount factor(s) to 3 decimal places. Round your answer to the nearest whole dollar amount.)
e4. What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 10% on investment. (Round discount factor(s) to 3 decimal places. Round your answer to the nearest whole dollar amount.)
d. Project D costs $9,000 and will generate sales of $5,600 each year for five years. The cash expenditures will be $2,300 per year. The firm uses straight-line depreciation with an estimated salvage value of $400 and has a tax rate of 30%. (Round your answer to 2 decimal places.)
Explanation / Answer
a. The payback period for the project A is as under: Pay back period=Net cash outflow/Net cash inflow yearly '=$9,000/$3,600 '=2.5 years b. The payback period for the project B is as under: Pay back period=the number of years when net cash inflow equals to Net cash outflow Net cash outflow for the project=$9,000 Year Cash inflow Cumulative cash inflow 1 $ 800 $ 800 2 $ 2,300 $ 3,100 3 $ 4,100 $ 7,200 4 $ 3,300 $ 10,500 Net cash inflow= $800+$2,300+$4,100=$7,200 In the fourth year the cash inflow = $3,300 Total cash outflow=9,000 Net cash inflow in fourth year to recover the total cash outflow=($9,000-$7,200)=$1,800 No. of months=($1,800/$3,300)*12 '=6.5 months The payback period for the project B= 3 years and 6.5 months. c. The payback period of project C is calculated as under; Net cash outflow=$9,000 Net cash inflow after tax=$4,250(1-0.30) '=$2,975 Payback period= Net cash outflow/net cash inflow '=$9,000/$2,975 '=3.03 years The payback period of the project C is 3.03 years. d. The book rate of return based on original investment is calculated as under: Book rate of return=Net income/Investment Net Income=Sales-cash expenditures-depreciation Depreciation=(Cost-scrap value)/useful life of asset '=($9,000-$400)/5 '=$1,720 Net income=$5,600-$2,300-$1,720 =1580 Book rate of return=$1,580/$9,000 '=17.56% The book rate of return of project D is 17.56%. 2. Book rate of return based on the average book value is calculated as under: Book rate of return=Average profit/Average investment Average profit=$1,580 Average investment=$9,000 Book rate of return=($1,580/$9,000)*100 '=17.56% The book rate of return based on average book value for project D is 17.56%. e. The net present value of project A calculated as under: Net present value= present value of cash inflow-present value of cash outflow Present value of cash outflow=$9,000 Present value of cash inflow for 5 years at a discounting rate of 10% = $3,600×3.791 '=$13,648 The net present value of project A=$13,648-$9,000 '=$4,648 The net present value of project A is $4,648. f. The net present value of project B calculated as under: Net present value= present value of cash inflow-present value of cash outflow Present value of cash outflow=$9,000 Present value of cash inflow for 5 years at a discounting rate of 10% is calcualted as under: Year Cash inflow Present value for $1 Present value 1 $ 800 0.909 $ 727 2 $ 2,300 0.828 $ 1,904 3 $ 4,100 0.751 $ 3,079 4 $ 3,300 0.683 $ 2,254 5 $ 4,100 0.621 $ 2,546 Total present value $ 10,511 The net present value of project B=$10,511-$9,000 '=$1,511 The net present value of project B is $1,511. g. The net present value of project C calculated as under: Net present value= present value of cash inflow-present value of cash outflow Present value of cash outflow=$9,000 Present value of cash inflow for 5 years at a discounting rate of 10% =$4,250×3.791 Pesent value of cash inflow '=$16,112 The net present value of project C=$16,112-$9,000 '=$7,112 The net present value of project C is $7,112. h. The net present value of project D calculated as under: Net present value= present value of cash inflow-present value of cash outflow Present value of cash outflow=$9,000 Cash inflow= sales-cash expenditure Cash inflow=$5,600-$2,300 '=$3,300 Present value of cash inflow for 5 years at a discounting rate of 10% =$3,300×3.791 Pesent value of cash inflow '=$12,510 The net present value of project D=$12,510-$9,000 '=$3,510 The net present value of project D is $3,510.
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