Discounted payback: Nugent Communication Corp. is investing $9,090,606 in new te

Question

Discounted payback: Nugent Communication Corp. is investing $9,090,606 in new technologies. The company expects significant benefits in the first seven years after installation (as can be seen by the cash flows). Assuming a discount rate of 10 percent, the discounted payback period for the project is ____ years.

Years 1 2 3 4 5 6 7
Cash Flows $1,819,143 $5,545,684 $2,941,004 $1,207,125 $1,506,000 $1,319,625 $398,415



Net present value: Emporia Mills is evaluating two heating systems. Costs and projected energy savings are given in the following table. The firm uses 10.57 percent to discount such project cash flows. The NPV of System 100 is $ ________, the NPV of System 200 is $_________, and Emporia should choose System A.100System B.200 C. both systems D. neither system.

Year System 100 System 200
0 $-1,338,750 $-1,302,638
1 $246,352 $724,050
2 $474,063 $701,313
3 $572,091 $429,803
4 $735,263 $358,560




Average accounting rate of return (ARR): Capitol Corp. is expecting to generate aftertax income of $51,315 over each of the next three years. The average book value of their equipment over that period will be $246,920. The project

Explanation / Answer

year Cf discounted CF cum CF
1 1819143 1653766 1653766
2 5,545,684 4583209.917 6236975.917
3   2,941,004 2209619.835 8446655.752
4   1,207,125 824482.6173 9271138.369

discounted payback period= 3+ [(9,090,606-8446655.752)/824482.6173]= 3.78 years

NPV of System 100= $186936.6428

NPV of System 200= $483672.4817

Emporia should choose System B.200

ARR= 51,315 /246,920= 20.78%

The firm should reject the project since ARR is less than the required ARR of 37.5%

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