P25-39B Playtime, Inc. is considering purchasing an amusement park in El Paso, T
ID: 2592569 • Letter: P
Question
P25-39B Playtime, Inc. is considering purchasing an amusement park in El Paso, Texas, for S2,000,000. The new facility will generate annual net cash inflows of SS20,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have a residual value of $200,000. The company uses straight-line depreciation, and its stockholders demand an annual return of 12% on investments of this nature. Requiremerts 1. Compute the payback period (p. 1267), the accounting rate of return (p. 1269), and the net present value (pp. 1270-1273) of this investment. 2. Make a recommendaion whether che cmnyvest in this project. (p. 1262)Explanation / Answer
Answer 1. Payback Period = Intial Invetsment / Annual Cash Inflows Payback Period = $2,000,000 / $520,000 Payback Period = 3.85 Years (approx.) Accounting Rate of return = Average Profit / Average Investment Depreciation per Annum = ($2,000,000 - $200,000) / 8 Years Depreciation per Annum = $225,000 per annum Net Income = $520,000 (Net Cash Inflow) - $225,000 (Depreciation) Net Income = $295,000 Average Investment = $2,000,000 / 2 = $1,000,000 Accounting Rate of return = $295,000 / $1,000,000 Accounting Rate of return = 29.50% Net Present Value Calculation of NPV of Project Particulars Year 12% Factor Amount Present value D C C X D Cash Inflow Annual Net Cash Inflow 1-8 4.96764 520,000 2,583,173 Salvage Value 8 0.40388 200,000 80,776 A. Total Cash Inflow - PV 2,663,949 Cash Outflow Cost of Amusement Park 0 1.000 2,000,000 2,000,000 B. Total Cash Outflow - PV 2,000,000 NPV (A - B) 663,949 Answer 2. The Company should invest in Amusement Park, since NPV is positive.
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