An investment costing $100,000 promises an after-tax cashflow of $36,000 per yea

Question

An investment costing $100,000 promises an after-tax cashflow of $36,000 per year for 6 years.
a. Find the investment's accounting rate of return and its payback period.
b. Find the investment's net present value at a 15 percent discount rate.
c. Find the investment's benefit-cost ratio (profitability index) at a 15 percent discount rate.
d. Find the investment's internal rate of return.
e. Assuming the required rate of return on the investment is 15 percent, which of the above figures of merit indicate the investment is attractive? Which indicate it is unattractive?

Explanation / Answer

a. Payback Period = 100000/36000 = 2.78 years 100000 = 36000 ( 1 + R/100)^2.78 Rate = R = 44.41 % b. NET Present Value : Year 1 : 36000/1.15 = Year 1 : 36000/1.15^2 = Year 1 : 36000/1.15^3 = Year 1 : 36000/1.15^4 = Year 1 : 36000/1.15^5 = Year 1 : 36000/1.15^6 = Adding them up, Net Present Value = 136241.377 $ - 100,000 = 36241.377 $ c. Benefit cost ratio = 100000/36241 = 2.759 d. IRR = 36.34 % percent approx

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