Roberts Company is considering an investment in equipment that is capable of pro
ID: 2416015 • Letter: R
Question
Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $1,638,000. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows:
Year
Cash Revenues
Cash Expenses
1
$2,129,400
$1,638,000
2
$2,129,400
$1,638,000
3
$2,129,400
$1,638,000
4
$2,129,400
$1,638,000
5
$2,129,400
$1,638,000
Required:
a. Compute the project’s payback period
b. Compute the project’s accounting rate of return
c. Compute the project’s net present value, assuming a required rate of return of 10 percent
d. Compute the project’s internal rate of return.
Year
Cash Revenues
Cash Expenses
1
$2,129,400
$1,638,000
2
$2,129,400
$1,638,000
3
$2,129,400
$1,638,000
4
$2,129,400
$1,638,000
5
$2,129,400
$1,638,000
Explanation / Answer
a. Compute the project’s payback period = $1,638,000 / 491400 = 3.34 years
Cash Inflow per year = 2129400 - 1638000 = 491400
b. Compute the project’s accounting rate of return = $163800 / 1638000 = 10%
Yearly depreciation = 1638000 /5 = 327600
Net Income per year = 2129400 - 1638000 - 327600 = $163800
c. the project’s net present value = $1,862,897.40 - $1638000 = $224,987.40
Cash Inflow per year = 2129400 - 1638000 = $491400
Present value of future cash flow = $491400 * PVIFA(10%,5)3.791 = $1,862,897.40
Initial Investment = $1638000
d. the project’s internal rate of return= 10% + (1862897.4 - 1638000) / (1862897.4 - 1536607.8) * 8%
IRR = 10% + 5.52% = 15.52%
Present value of future cash flow = $491400 * PVIFA(10%,5)3.791 = $1,862,897.40
Present value of future cash flow = $491400 * PVIFA(18%,5)3.127 = $1536607.8
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