Tom Bat became a baseball enthusiast at a very early age. All of his baseball ex

Question

Tom Bat became a baseball enthusiast at a very early age. All of his baseball experience has provided him valuable knowledge of the sport, and he is thinking about going into the batting cage business. He estimates that the construction of a state-of-the-art building and the purchases of necessary equipment will cost $630,000. Both the facility and the equipment will be depreciated over 12 years using the straight-line method and are expected to have zero salvage values. His required rate of return is 10%. Estimated annual net income and cash flows are $49,000 and $101,500, respectively.
For this investment, calculate:
(A) The net present value
(B) The internal rate of return
(C) The payback period

Explanation / Answer

If we check an annuity table the present value of a cash flow stream for 12 yrs at 10% is 6.81369. So the net present value is 6.81369* 101,500- 630,000= 61,590 (rounded to nearest $). The ratio of investment to yearly payback is 630,000/101,500= 6.20689 If we consult an annuity table at 12 years (and do a little interpolating) we find the internal rate of return is 11.96%. 101,500*6= 609,000 (630,000-609,000)/101,500= .207 So the payback period is 6.207 years

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