Help with Managerial Accounting? Hello, can someone help me solve this problem a

Question

Help with Managerial Accounting?

Hello, can someone help me solve this problem and possibly explain? I'm studying for an upcoming exam. Thanks in advance!

P12-56A Evaluate an investment using all four methods earning objectives 2 & 4) Splash World is considering purchasing a water park in Charlotte, North Carolina, for $2,000,000. The new facility will generate annual net cash inflows of $520,000 for ten years. Engineers estimate that the facility will remain useful for ten years and have no residual value. The company uses straight-line depreciation. Its owners want payback in less than five years and an ARR of 12% or more. Management uses a 14% hurdle rate on investments of this nature. Requirements 1. Compute the payback period, the ARR, the N and the approximate IRR of this investment. (If you use the tables to compute the IRR, answer with the closest interest rate shown in the tables.) 2. Recommend whether the company should invest in this project.

Explanation / Answer

Pay back period of A =Initial investment/Annual cash flow=8,440,000/1,600,000=5.275years

Pay back period of B =Initial investment/Annual cash flow=8,240,000/1,250,000=6.592years

ARR of A:

Annual Depreciation = (Initial Investment Scrap Value) ÷ Useful Life in Years
Annual Depreciation = ($8,440,000 $0) ÷ 9 $937,778
Average Accounting Income = $1,600,000 $937,778 = $662222

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