Please help me answer the questions. Please show me your work. Our company is co

Question

Please help me answer the questions. Please show me your work.

Our company is considering a capital budgeting project that would require a $4,900,000 investment in equipment with a useful life of five years and no salvage value. Our discount rate is 20%. The project would provide net operating income each year for five years as follows: What is the project's net present value? What is the project's simple rate of return? What is the project's payback period? Should we pursue this investment opportunity? Why or why not ?

Explanation / Answer

Solution:

1.

2.

Rate of Return = Net Annual Income / Initial Investment * 100

Rate of Return = $ 720,000 / $ 4,900,000 * 100

Rate of Return = 14.70%

3.

Payback period = Initial Investment / Annual Cash inflow

Payback period = $ 4,900,000 / $ 1,700,000

Payback period = 2,88 years

4.

Yes, we should pursue the oppurtunity as the project's NPV is positive which means, there will be positive return from the project.

NPV Year 0 Year 1 to 5 Initail Investment 4,900,000 Net income 720,000 Add: Depreciation 980,000 Net Cashflows 1,700,000 PVAF @ 20 % for 5 years 2.991 Present value of cashflows    5,084,040.64 NPV = Present value of cashflows - Initial Investment 184,040.64

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