Could you please explain me this? I don\'t know how to get these answers. Thanks
ID: 2585584 • Letter: C
Question
Could you please explain me this? I don't know how to get these answers. Thanks!
Rapid Wave is considering purchasing a water park in Charlotte, North Carolina, for $1,950,000. The new facility will generate annual net cash inflows of $500,000 for eight 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 payback in less than five years and an ARR of 12% or more. Management uses a 14% hurdle rate on investments of this nature. 8 (Click the icon to view the present value annuity table.) g(Click the icon to view the present value table.) 8 (Click the icon to view the future value annuity table.) 9 (Click the icon to view the future value table.) Read the requirements. Requirement 1. Compute the payback period, the ARR, the NPV, 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.) (Round the payback period to one decimal place.) The payback period is 3.9 years. (Round the percentage to the nearest tenth percent.) The ARR (accounting rate of retum) is 13,1 %. (Round your answer to the nearest whole dollar.) Net present value $ 369,500 The IRR (intermal rate of return) is between 18% and 20%. Requirement 2. Recommend whether the company should invest in this project. Recommendation: Invest in the new facility.Explanation / Answer
Payback period = initial investment/Annual cash flows
Payback period = $1,950,000/500,000 =>3.9 Years
ARR = Annual income/initial investment
ARR = (500000-243750*)/1950000 =>13.1%
*1950000/8 = 243750
Net present value = annual cash flows* (P/A,14%,8) – initial cash outflows
Net present value = 500000* 4.639 – 1950000 => $369,500
Internal rate of return: based on payback 3.9 we would look this factor in present value of annuity table under row(period) 8 and this value is coming between column 18% and 20%
Since all the values are more than expected so project is beneficial and should invest in new project.
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