of the $205,000 withdrawals.) 2. How does this amount compare to the total amoun
ID: 2576053 • Letter: O
Question
of the $205,000 withdrawals.) 2. How does this amount compare to the total amount you will draw out of the invest- ment during retirement? How can these numbers be so different? How much must you pay into the investment each year for the first ten years? (Hint: Your answer from Requirement 1 becomes the future value of this annuity.) 4. How does the total out-of-pocket savings compare to the investment's value at the end of the ten 10-year savings period and the withdrawals you will make during retirement? Objectives 2&4 Blue Water World is considering purchasing a water park in Columbus, Ohio, for P12-57A Evaluate an investment using all four methods (Learning e new facility will generate annual net cash inflows of $515,000 for eight S2,050,000. Th years. Engineers estimate that the facility will remain useful for eight years and have no residual value. The company uses straight-line depreciation. Its owners want payb less than five years and an ARR of 12% or more. Management uses a 1 investments of this nature 4% hurdle rate on Requirements 1. Compute the payback period, the ARR, the NPV, and the approximate IRR of this in- 0 vestment. (If you use the tables to compute the IRR, answer with the closest interest rate shown in the tables.) 9 commend whether the company should invest in this project. Compare investments with different cash flows and residual values 2. Re P12-58A (Learning Objectives 2 & 4) Scribbles Inc. operates a chain of coffee shops. The company is considering two pos- sible expansion plans. Plan A would open eight smaller shops at a cost of Expected annual net cash inflows are $1,400,000 with zero residual value at the end of ten years. Under Plan B, Scribbles would open three larger shops at a cost of $8,340,00Explanation / Answer
1. Payback period = Initial Investment / Annual Cash Inflows = $ 2,050,000 / 515,000 = 3.98 years.
ARR = Accounting Income / Average Investment = ( Annual Cash Inflows - Annual Depreciation ) / Initial Investment = $ ( 515,000 - 256,250) / $ 2,050,000 = 12.62 %
NPV = Annual Cash Inflows x PVA 14%, 8 years - Initial Investment = $ 515,000 x 4.6389 - $ 2,050,000 = $ 339,034
IRR = 19 %
2. Yes, the company should invest in the project.
Payback period of 3.98 years is within the company's policy of 5 years. The ARR also exceeds the cut-off of 12 % set by the company. Most importantly, the the NPV at a hurdle rate of 14% is positive. Moreover, the IRR of the investment at 19% is considerably higher than the hurdle rate.
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