8. Ellie Company is considering purchasing a new vehicle at a cost of $89,700 wh
ID: 2592724 • Letter: 8
Question
8. Ellie Company is considering purchasing a new vehicle at a cost of $89,700 which will result in an increase in net income of $7,000 per year. Depreciation on the vehicle will be $6,000 per year. What is the cash payback period? a. 3.2 years b. 6.9 years c. 8.4 years d. 12.8 years 9, A company requires a minimum rate of return of 10%. It is considering a project which costs $375,000 and is expected to generate cash inflows of $175,000 at the end of each year for 3 years. The Net Present Value of the project is: Use the table below to calculate your answer: 900 | 10% | 1290 917909 893 1.759 1.736 1.690 2 32.5312.4872.402 a. $200,000 b. $125,000 c. $340,875 d. $60,225Explanation / Answer
Answer 8.
Cost of Vehicle = $89,700
Net Income = $7,000
Depreciation = $6,000
Annual Cash flows = Net Income + Depreciation
Annual Cash flows = $7,000 + $6,000
Annual Cash flows = $13,000
Payback Period = Cost of Vehicle / Annual Cash flows
Payback Period = $89,700 / $13,000
Payback Period = 6.9 years
Answer 9.
Cost of Project = $375,000
Annual Cash Inflows = $175,000
Life of Project = 3 years
NPV = -$375,000 + $175,000 * PVA of $1 (10%, 3)
NPV = -$375,000 + $175,000 * 2.487
NPV = $60,225
Answer 10.
Initial Cost = $980,000
Salvage Value = $20,000
Annual Net Income = $60,000
Average Investment = (Initial Cost + Salvage Value) / 2
Average Investment = ($980,000 + $20,000) / 2
Average Investment = $500,000
Annual Rate of Return = Annual Net Income / Average Investment
Annual Rate of Return = $60,000 / $500,000
Annual Rate of Return = 12%
Answer 11.
Initial Cost = $980,000
Salvage Value = $0
Annual Net Income = $60,000
Average Investment = (Initial Cost + Salvage Value) / 2
Average Investment = ($980,000 + $0) / 2
Average Investment = $490,000
Annual Rate of Return = Annual Net Income / Average Investment
Annual Rate of Return = $60,000 / $490,000
Annual Rate of Return = 12.24%
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