Respuesta :
Answer:
1) Accounting rate of return is 8.2%
2) Payback period is 5.95 years
3) Net present value (NPV) is ($88,643.26)
4) Option B
Explanation:
Initial Investment = $720,000 , Useful life = 10 years , Salvage Value = $100,000
Annual Net Income generated = $59,040 , Cost of capital = 14%
Depreciation = ($720,000 - $100,000) ÷ 10 = $62,000
Annual Cash flows = $59,040 + $62,000 = $121,040
1) Accounting rate of return = (Annual Net Income ÷ Average Investment) × 100
= (59,040 ÷ 720,000) × 100
= 8.2%
2. Payback Period = Initial Investment ÷ Annual Cashflows
= 720,000 ÷ 121,040
= 5.95 years.
3. PV of cash flows = 121,040 × PVAF(14% for 10 years)
= 121,040 × 5.2161
= $631,356.74
Less: PV of cash outflow = $720,000
Net present value (NPV) = (88,643.26)
4. If IRR = Discount rate, then NPV = 0
If IRR < Discount Rate, Then NPV is negative
If IRR > Discount Rate, Then NPV is positive
Here NPV is negative, so IRR is less than discount rate i.e.14%
1. The Accounting rate of return is 8.20%.
2.The Payback period of the project is 5.9 years.
3.The NPV of the project is $-88,641.36
4. The IRR of the project is less than 14%
Accounting rate of return = (Annual Net Income ÷ Average Investment) × 100
($59,040 / $720,000) x 100 = 8.20%
In order to determine the payback and net present value, the cash flow of the investment has to be determined.
Cash flow = net income + depreciation
Deprecation = (cost of asset - salvage value) / useful life
($720,000 - $100,000) / 10 = $62,000
Cash flow = $62,000 + 59,040 = $121,040
Payback period = Amount invested / cash flow
$720,000 / $121,040 = 5.9 years
Net present value would be determined using a financial calculator
Cash flow in year 0 = $-720,000
Cash flow in year 1 - 10 = $121,040
I = 14%
NPV = $-88,641.36
The IRR is less than 14% because the NPV is negative.
To learn more about the internal rate of return, please check: https://brainly.com/question/24172627
