Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return F

Question

Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return

Follow the format shown in Exhibit 14B-1 and Exhibit 14B-2 as you complete the requirements below.

1. Compute the payback period for the NC equipment. Round your answer to two decimal places.
years

2. Compute the NC equipment's ARR. Round your answer to one decimal place.
%

3. Compute the investment's NPV, assuming a required rate of return of 10 percent. Round present value calculations and your final answer to the nearest dollar.
$

Explanation / Answer

Hi,

Please find the answers as follows:

Annual Cash Inflows = 850000 - 600000 = 250000

Part A:

Payback Period = Initial Investment/Annual Cash Inflows = 640000/250000 = 2.56 years

Part B:

ARR = Average Income/Average Initial Investment = 250000/640000/2 = 78.13% (assuming cash flow is equal to net income)

Part C:

NPV = - 640000 + 250000*(3.791) = 307750.

Thanks.

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