Bryant Company has obtained the following data about a possible planned investme

Question

Bryant Company has obtained the following data about a possible planned investment:

Cost $270,000
Terminal salvage value in 8 years $10,000
Additional annual revenues for 8 years $250,000
Additional annual cash expenses for 8 years $200,000
Estimated useful life in years 8
Minimum desired rate of return 10%
Present value of ordinary annuity, 10%, 8 periods 5.3349
Present value of one, 10%, 8 periods 0.4665

The company uses straight-line depreciation method. Ignore income taxes.

Required:
A) Compute the net present value of the investment.
B) Compute the payback period.
C) Compute the accounting rate of return using the initial required investment.

Explanation / Answer

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Year 0 Years 1-8 PV Factor Total


A.) Cost (270,000.00)                            -         0.4665       (125,955.00)



Revenues                                              -             250,000.00       5.3349      1,333,725.00



Expenses                                              -   (200,000.00)       5.3349 (1,066,980.00)



Depreciation                                              -             (32,500.00)       5.3349       (173,384.25)



NPV


        (32,594.25)










B.) Payback Period = Investment Required/Net Annual Cash Inflow




Investment Net Annual Cash Inflow Payback Period





                 270,000                                     17,500 15.43
   Years













*Net Annual Cash Inflow is the sum of the annual Revenue, Expenses, and Depreciation generated by the project.








C.) Accounting Rate of Return (ARR) = Average Accounting Profit/Initial Investment



Avg. Acct. Profit Initial Investment                    ARR





                   17,500                                   270,000 6.48%

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