Company considering $200,000 investment in equip which will depreciate on a stra

Question

Company considering $200,000 investment in equip which will depreciate on a straight-line basis(8 year life no salvage value). The expected annual revenues and costs of the new product that will be produced from the equip are as followed:

sales 292,000

Less cost and expenses

Manufacturing costs 200,000

Equipment depreciation 25,000

Selling and administrative 43,900 268,900

Income before income taxes 23,100

Income tax expense (30%) 6,930

Net Income 16,170

a.)Compute the cash back period

b.)Compute the net present value assuming a 12% required rate of return

c.)Determine the internal rate of return

d.)Compute the annual rate of return.

Explanation / Answer

Dep Cash flow after tax before deprication 0 200000 cumulative cash PV @12% Present value of cash flow 1 16170 25000 41170 41170 0.892857 36758.93 2 16170 25000 41170 82340 0.797194 32820.47 3 16170 25000 41170 123510 0.71178 29303.99 4 16170 25000 41170 164680 0.635518 26164.28 5 16170 25000 41170 205850 0.567427 23360.96 6 16170 25000 41170 0.506631 20858 7 16170 25000 41170 0.452349 18623.22 8 16170 25000 41170 0.403883 16627.87 Sum of total cash inflow 204517.7 Sum of cash outflow 200000 NPV @12% 4517.729 cash back priod 4 0.142094 4.14 Years IRR of the project = (lower rate )+ lower rate NPV/( lower rate NPV - Higher rate NPV) * difference in rates 10.519% approx annual rate of return = average return/ average investment *100 41.17 Rough work for IRR Calculation of IRR 1 41170 0.666667 27446.67 2 41170 0.606061 24951.52 3 41170 0.550964 22683.2 4 41170 0.500877 20621.09 5 41170 0.455342 18746.44 6 41170 0.413948 17042.22 7 41170 0.376316 15492.93 8 41170 0.342105 14084.48 161068.5 200000 -38931.5 4517.72 43449.18 0.519885 10 10.51989

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