T-Mobile Wi-FI 5:44 AM angie 2017 Test IV 4. (15 Points) Williams Company is eva
ID: 2590703 • Letter: T
Question
T-Mobile Wi-FI 5:44 AM angie 2017 Test IV 4. (15 Points) Williams Company is evaluating a project requiring a capital expenditure of S480,000. The project has an estimated life of 4 years and salvage value at the end of year 4 is $20,000. The estimated net income and net cash flow from the project are as follows: 1 $90,000 $210,000 2 80,000 200,000 3 60,000 60,000 -30000 150000 $260,000 $720,000 The company's minimum desired rate of return (hurdle rate) for net present value analysis is 15%. Determine (a) the accounting rate of return on investment, and (b) the net present value. Use the following factors for years 1 through 4 respectively:.870,.756,.658, 572.Explanation / Answer
Solution:
Part 1 --- Accounting Rate of Return
Accounting Rate of Return (ARR)
Net Income means Average Annual Net Income after Depreciation and Taxes
ARR =
Net Income is given in the question.
Average Annual Net Income = $260,000 / Life 4 years = $65,000
Accounting Rate of Return = Average Annual Net Income 65,000 / Initial Investment $480,000 x 100 = 13.54%
Part 2 --- Net Present Value
Year
Item
Cash Flow
PV factor @ 15%
Present Value of Cash Flow
(A)
(B)
(A*B)
0
Cash Outflow needed
($480,000)
1.000
-$480,000
1
Annual Cash Inflow
$210,000
0.870
$182,700
2
Annual Cash Inflow
$200,000
0.756
$151,200
3
Annual Cash Inflow
$160,000
0.658
$105,280
4
Annual Cash Inflow
$170,000
0.572
$97,240
Net Present Value
$56,420
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Year
Item
Cash Flow
PV factor @ 15%
Present Value of Cash Flow
(A)
(B)
(A*B)
0
Cash Outflow needed
($480,000)
1.000
-$480,000
1
Annual Cash Inflow
$210,000
0.870
$182,700
2
Annual Cash Inflow
$200,000
0.756
$151,200
3
Annual Cash Inflow
$160,000
0.658
$105,280
4
Annual Cash Inflow
$170,000
0.572
$97,240
Net Present Value
$56,420
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