An investment costing $50,000 promises an after tax cash flow of $18,000 per yea

Question

An investment costing $50,000 promises an after tax cash flow of $18,000 per year for 6 years. Respond to each of the following using the given scenario.

a. Find the investment's accounting rate of return and its payback period.

b. Find the invesment's net present value at a 15% discount rate.

c. Find the investment's profitability index at a 15% rate.

d. Find the investment's internal rate of return.

e. Assuming the required rate of return on the investment is 15%, which of the above figures of merit indicate the investment is attractive? Which indicate it is unattractive?

PLEASE SHOW THE WORK SO THAT I CAN UNDERSTAND HOW YOU CALCULATED THE ANSWERS. THANK YOU VERY MUCH!

Explanation / Answer

Details Amt $ Investment                50,000 Salvage                         -   Average Investment=(Investment+salvage)/2=              25,000 Total Post Tax Cash flow in 6 years =18000*6=            108,000 Less : Depreciation of investment that added back to derive cash flow =            (50,000) Total Accounting return in 6 years=              58,000 Yearly Accounting rate of returns = $      9,666.67 a So Accounting rate of return =9666.67/25000= 38.67% Annual Post Tax cash flow =              18,000 Investment                50,000 Payback period =50000/18000=                   2.78 Years b NPV Calculation : Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Investment              (50,000) Post Tax Cash flows          18,000         18,000        18,000            18,000        18,000          18,000 PV factor @15%                         1            0.870            0.756          0.658              0.572          0.497            0.432 PV of net cash flows            (50,000)      15,652.2      13,610.6    11,835.3        10,291.6      8,949.2        7,781.9 Net Present Value = $    18,120.69 c PV of Cash inflows = $    68,120.69 Investment PV = $    50,000.00 Profitability Index=PV of Cash inflows/Net Investment =                   1.36 d IRR Calculation : NPV Calculation : Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Investment              (50,000) Post Tax Cash flows          18,000         18,000        18,000            18,000        18,000          18,000 PV factor @27.7%                         1            0.783            0.613          0.480              0.376          0.294            0.231 PV of net cash flows            (50,000)      14,095.5      11,038.0       8,643.7          6,768.8      5,300.5        4,150.8 Net Present Value = $            (2.73) So at required return of 27.7% , the NPV is close to 0,   so IRR is 27.7% e As the required rate of return is 15% , the IRR 27.7%   indicates that the investment is attractive. The positive NPV , The PI above 1 and short payback period all indicate attractiveness of the investment.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.